Calls are intensifying for the UK government to raise the personal income tax allowance as a means of easing the financial burden on lower- and middle-income earners. The personal allowance, currently set at £12,570—the threshold above which individuals begin paying the basic 20% income tax—has been frozen for five years and is scheduled to remain unchanged until 2031.
The Liberal Democrats recently proposed increasing the allowance to £15,000, a move that would exempt approximately 2.5 million workers from paying any income tax. Reform UK has made a similar pledge, while prominent Labour donor Dale Vince has supported the idea, suggesting that the government could fund the rise by increasing capital gains tax rates in the forthcoming budget. Vince emphasized that the change would provide meaningful financial relief, particularly for those on the lowest incomes.
Despite political backing, economists caution about the practicality and fiscal implications of such a move. The National Institute of Economic and Social Research (NIESR) estimates that raising the allowance by £3,000 could leave the lowest fifth of earners around £600 better off annually. However, it would come at a substantial cost to the public finances—around £20 billion in the first year, increasing to £24 billion in the second. These figures represent a significant portion of the UK's defence spending, underscoring the challenge of financing the policy in a constrained fiscal environment.
Analysis further suggests that while increasing the personal allowance may boost incomes for some, it would benefit middle earners more than the poorest households. Isaac Delestre of the Institute for Fiscal Studies explained that raising the allowance tends to help those in the middle income brackets, as many low-income individuals either do not pay income tax or risk reduced government benefits if their post-tax income rises. Additionally, households with multiple earners stand to gain more, receiving a larger overall tax advantage.
The concept of fiscal drag—whereby income tax thresholds remain fixed while wages rise, effectively pushing more workers into higher tax brackets without official tax rate increases—has also drawn attention. The current freeze exacerbates this effect, with an expected 75% of workers paying income tax by 2030, up from around 55% in the 1990s.
International comparisons reveal that the UK's tax-free allowance is relatively generous. It stands notably higher than allowances in countries like Spain, Denmark, and Poland, and is broadly comparable to those in Germany, France, Portugal, and Austria, though structural differences in tax systems complicate direct comparisons.
Economic commentators point out that the personal allowance has increased substantially over the past three decades, rising from £3,005 in 1990 to £12,570 today. Adjusted for inflation, it would be worth around £16,070 if it had kept pace. Still, the freeze since 2018 effectively reduces its real value over time.
Critics highlight the difficulty of funding a rise in the allowance. Robert Salter of accountancy firm Blick Rothenberg noted that while increasing the threshold to £15,000 could result in substantial tax savings for many, it remains uncertain whether the government can offset the fiscal cost without introducing higher taxes or spending cuts elsewhere. Options such as raising capital gains tax or income tax rates on higher earners have shown limited potential to generate the necessary revenue.
Prime Minister Andy Burnham, who took office in the summer, has acknowledged concerns about the frozen thresholds, stating that the issue has been a recurring theme among constituents. He has pledged to address the cost-of-living pressures facing households, though no concrete measures have yet been announced.
Overall, while there is growing support for increasing the personal allowance to deliver tax relief, the debate centers on balancing the desire to support households against the realities of public finances and the equitable distribution of tax benefits.