Prime Minister Andy Burnham has come under pressure to raise the tax-free personal allowance by up to £3,000 at next month’s Budget – but economists say the idea is a “non-starter”.

Numerous reports suggest the government is considering raising the income threshold at which people start paying tax from £12,570 to £15,570.

The plan was suggested by Labour donor Dale Vince, who said: “Raising the personal allowance to £15,570 would give millions of people a meaningful boost, with the biggest benefit going to those on the lowest incomes.”

The Liberal Democrats also suggested raising the tax-free personal allowance to £15,000 at their most recent conference, while Reform UK has said it would raise the tax-free personal allowance from £12,570 to £15,000 in their first 100 days in government.

The allowance usually rises in line with inflation every year, but has been frozen at its current level since 2022, and under current policy, this freeze will continue until at least 2031.

Raising it now would come at a huge cost at a time when the government is already going to have to raise taxes or cut spending to pay for higher borrowing charges.

Below, we look at what raising the allowance would mean for you, what it would cost, and why economists believe it’s very unlikely to be possible.

What a rise to the personal allowance would mean

The personal allowance is currently set at £12,570, meaning anyone earning this amount or less does not pay income tax or NI.

If the allowance were raised by £3,000 to £15,570, then everyone earning above £12,570 would make a tax saving.

Exactly what tax saving would apply would depend on whether the government raised the threshold for both income tax and NI, or just one. Currently, the threshold for each tax is £12,570.

Here’s how a change would affect you annually, assuming both threshold rose in tandem.

Why experts don’t think the personal allowance will be increased

Experts believe a £3,000 increase to the personal allowance would cost between £20bn and £30bn a year.

“It’s a very significant tax cut and arguably unaffordable given the present state of the country’s finances,” said Nimesh Shah, CEO of accountancy and tax firm Blick Rothenberg.

He said to raise the money through spending cuts would cost “around a third of the schools or defence budget.”

Thomas Pugh, an economist at RSM UK, said a “realistic range” for the cost would be £25-30bn a year.

“That would basically be the same as 3 percenatge points on the basic rate of income tax [taking the rate from 20 per cent to 23 per cent]. Or roughly half the £57bn projected increase in welfare spending from 25/26 to 29/30,” he added.

Labour committed to raising the rates of income tax, national insurance, VAT or onshore corporation tax in its 2024 general election manifesto.

Burnham has also said he will stick to the ‘fiscal rules’ – a set of rules which govern the tax and spending decisions that can be made.

“Assuming large cuts to benefits are off the table, I don’t see a way of raising enough taxes to fund this whilst sticking to the manifesto commitments, the fiscal rules and without raising the cost of living,” Pugh added.

“I think it’s a non starter to be honest,” he concluded.

Robert Wood, chief UK economist at Pantheon Macroeconomics, said that a rise to the personal allowance was even less likely because the government was starting from a position of having to raise at least £10bn a year in taxes “just to put headroom back to where it was in the Spring.”

Fiscal headroom is the buffer the government has before it breaks its own self-imposed rules on borrowing, debt, or deficits – its fiscal rules.

Higher borrowing costs, partly due to an expected rise in inflation later in the year, have eroded some of this headroom.

“More spending commitments or tax cut pledges will only mean even more implausibly large tax hikes,” Wood added.

How can you cut your income tax bill now?

Even though the personal allowance is unlikely to rise by a significant amount in the near future, there are things you can now to try and limit your tax bill.

• Use pension contributions. You are entitled to income tax relief on your pension contributions, meaning a 20 per cent taxpayer gets 20 per cent relief and a 40 per cent taxpayer gets 40 per cent relief, plus 45 per cent relief for 45 per cent payers. In some schemes, you will get all your tax relief automatically, while in others you will need to claim higher or additional-rate tax relief from HMRC.
• Use the marriage allowance. If you are married or in a civil partnership, you may be entitled to a tax break. One of you needs to earn under the £12,570 personal allowance, and the other partner needs to be a basic 20 per cent rate taxpayer, earning less than £50,270 in England, or if you live in Scotland, it is £43,662. The lower earner can effectively transfer £1,260 of their personal allowance to their partner. If the lower earner earns £11,310 or less, this means a saving of up to £252 – 20 per cent of the £1,260 difference – though if the lower earner earns more, they will be able to transfer less of their allowance for a smaller saving.
• Use salary sacrifice. A salary sacrifice arrangement is an agreement to reduce your entitlement to cash pay, usually in return for a non-cash benefit. The arrangement will reduce your total pay, which will reduce your tax bill. You will need to contact your employer directly to find out what non-cash benefits it offers.