The UK government is considering raising the personal income tax allowance from £12,570 to £15,570, a move that could benefit millions of workers and prevent most state pensioners from paying tax on part of next year’s pension increase. This proposal, reported by Sky News, would be the first increase in the personal allowance in five years, as the threshold has remained frozen since 2021.
If implemented, the new threshold would be close to the level the allowance might have reached had it continued rising instead of being frozen. Chancellor John Healey and Prime Minister Andy Burnham are reportedly considering the proposal, which was suggested by Labour donor and Ecotricity owner Dale Vince. Vince argued that increasing the personal allowance would give millions of people a meaningful boost, with the biggest benefit going to those on the lowest incomes.
Dale Vince proposed funding the measure through changes to capital gains tax and by ending interest payments on Bank of England reserves. He stated that the tax system could be made fairer by making changes to capital gains and stopping interest payments to banks. However, the government has not confirmed that the proposal will be included in the upcoming Budget, with a Treasury spokesperson saying that taxation decisions would be announced by the Chancellor at fiscal events.
The proposed increase could address an issue facing pensioners, as the UK’s state pension is expected to rise by 3.9% next April under the government’s triple lock system. This increase would put the state pension above the current £12,570 personal allowance, potentially resulting in a tax bill for pensioners. Increasing the personal allowance to £15,570 would place the projected state pension below the new threshold, meaning pensioners would not pay income tax on the state pension itself.
The proposal comes as the government faces pressure over its finances ahead of the next Budget. Official figures showed that the UK public sector borrowed £18.3bn in August, the second-highest borrowing figure recorded for the month. Borrowing for the financial year so far is also £8.1bn above the level forecast by the Office for Budget Responsibility.
The government is expected to face difficult decisions over taxation and spending when the Chancellor delivers the Budget. Other possible tax changes under discussion include changes to capital gains tax and the proposed high-value council tax surcharge on expensive properties. No decision on the personal allowance has been announced, and the final policy will depend on the Chancellor’s Budget decisions.
The consideration of the personal allowance increase is part of a broader discussion on taxation and economic growth. As the government weighs its options, it must balance the need to support workers and pensioners with the need to manage public finances. The outcome of these discussions will likely have significant implications for millions of people across the UK.
Key points
- The UK government is considering raising the personal income tax allowance to £15,570.
- The proposal could benefit millions of workers and prevent most state pensioners from paying tax on part of next year’s pension increase.
- The government faces pressure over its finances ahead of the next Budget, with public sector borrowing £18.3bn in August.
