How much better off you’ll be if Burnham reverses stealth income tax hikes

New Prime Minister Andy Burnham has hinted he could look to raise the threshold at which people start owing income tax. Burnham has said that the fact that the tax-free allowance had been frozen at £12,570 for five years was the thing he “heard the most on the doorsteps”. The thresholds at which people start owing income tax have each been frozen since 2021. Shorts The freeze was instigated by the Conservatives, but at the last Budget, Labour opted to extend it from 2028 – when it was due to end – to 2031. While we do not yet know if Burnham will make changes – or, if he does, the nature of such changes – any alteration to tax thresholds could adjust your take-home pay. How the thresholds work – and the current plan to freeze them At the moment, people in England, Wales and Northern Ireland start paying income tax at a rate of 20 per cent, and national insurance (NI) at a rate of 8 per cent, once they earn £12,570. They then start paying higher-rate income tax of 40 per cent once they earn £50,270, but at this point, their NI rate is lowered to 2 per cent. A 45 per cent additional rate of income tax is applied to all taxable income over £125,140 – this threshold was reduced from £150,000 in 2023. Scotland has its own separate income tax system with different thresholds. Before 2021, tax thresholds were generally raised with inflation each year. This meant that as people’s pay rose to keep up with the cost of living, their tax bill would not increase. But this was changed in 2021, as the government began freezing thresholds. The freeze is now not due to end until 2031. Estimates by investment firm AJ Bell suggest that by then, the average taxpayer will be paying an extra £960 in tax each year compared with the scenario where thresholds had risen every year in line with inflation. The freezes raise a large amount of money for the exchequer, with the budget watchdog, the OBR, estimating that the cumulative impact will be an additional £55.5bn in 2030/31. At this point AJ Bell estimates the personal allowance would be £17,380 had none of the freezes since 2021 been implemented. Could Burnham change the thresholds? In an interview with The Times, Andy Burnham said that the frozen personal allowance threshold of £12,570 was the thing he heard “most” on the doorsteps. He added: “So when people, they’re just characterising me as a tax-raiser, well again it’s never that simplistic is it? The breathing space point is a really serious one. How do we just make people feel better?” Experts have warned that even if Burnham does raise the thresholds, it is extremely unlikely he would be able to reverse the impact of the freezes in full. “If they’re going to do it, a small uplift amongst a package of other cost of living measures seems more likely than a full reindexing to inflation,” said Thomas Pugh, an economist at RSM UK. How much could a rise in personal allowance save you? If Burnham were to raise the personal allowance threshold, the earliest any change would be likely to come would be April 2027, when the new tax year begins. How much you would save would depend on how the threshold were changed. The table below shows take-home pay at various salary levels, and how this would change if Burnham were to increase the personal allowance to £12,800, £13,000 and £13,200 – with no adjustments to any of the other tax thresholds. The table assumes the £12,570 threshold at which people start paying NI is also changed. What if Burnham has to cut higher-rate threshold to recoup cash? Any increase to the personal allowance would cost the Exchequer billions of pounds in lost income. “Given that Andy Burnham has pledged to stick with the fiscal rules, it means that if the personal allowance was raised, additional money would need to come from somewhere else. And there are no easy decisions,” said Sarah Coles, head of personal finance at AJ Bell. One way he could make up the shortfall would be to reduce the threshold at which people start paying the higher rate of income tax at 40 per cent. “If the Government chose to increase higher or additional-rate tax, it would mean even more of the tax burden falls on higher earners,” said Coles. If Burnham were to raise the personal allowance to £13,200 and drop the higher-rate threshold to £48,270 – a reduction of £2,000 – here’s how people at different salaries would be affected: What if Burnham announces early end to threshold freezes? Another way the new Prime Minister could tackle the issue is by reversing Labour’s extension to the threshold freezes. They were due to end in 2028, but in last year’s Budget, Labour allowed them to continue for an extra three years Reversing the extension would not save anyone any money now, but by 2031, it could save some people hundreds of pounds – depending on the rate of wage rises and the level of inflation. Here’s how people at different salaries would be affected if this change were made: Tom Archer, tax and financial planning expert at Quilter, said that even with the changes, people would be likely to be paying more than they were before the thresholds were first frozen. “After several years of frozen thresholds, the tax landscape has already shifted significantly, with more people paying tax on a greater share of income, often at higher rates,” he added. “As a result, even with some easing of the freeze, many households will still be paying considerably more tax thanks to the fiscal-drag impact of the freeze.”