Submitted by Bill Fernie
29th July 2026
Giving people more of their own earnings to spend sounds attractive. But there is an unavoidable question behind any proposal to increase the Personal Allowance: where does the money come from?
That question becomes particularly important if the allowance were increased substantially from its current £12,570.
As we considered in our earlier article, raising the allowance to £15,000 would mean an additional £2,430 of income becoming tax-free.
For a basic-rate taxpayer, that could be worth up to approximately £486 a year, or £40.50 a month.
For someone on a modest income, that is meaningful money.
But if millions of taxpayers receive a tax reduction, the Treasury faces a substantial reduction in revenue.
And governments cannot simply wish that money back into existence.
The Treasury would have to find a balance
There are essentially four ways a government can deal with the cost of a tax reduction:
collect less tax and accept a larger deficit;
reduce government spending;
raise additional revenue somewhere else;
or generate enough economic growth to recover some of the lost revenue.
In practice, the answer would probably involve a combination of all four.
The interesting question is therefore not simply whether Andy Burnham could increase the Personal Allowance.
It is how he could do it without creating another hole in the public finances.
Option 1: Let higher earners pay more through fiscal drag
One of the simplest possibilities would actually be to leave the higher tax thresholds frozen.
Suppose the Personal Allowance increased to £15,000 while the higher-rate thresholds remained unchanged.
People on lower and modest incomes would receive a direct benefit from the higher allowance.
But as wages continued to rise, more people would gradually move into higher tax bands.
That would allow the Treasury to recover some of the revenue it had given up at the bottom.
It would not be especially attractive politically because it means some taxpayers would receive a tax cut with one hand while gradually paying more tax through fiscal drag with the other.
Nevertheless, it is a mechanism that already exists.
Option 2: Target the increase rather than giving it to everyone
This may be the more interesting solution.
Instead of increasing the allowance for everybody, the Government could target the increase.
For example:
Standard Personal Allowance: £12,570
Higher allowance for pensioners: £15,000
A pensioner with £15,000 of taxable income could potentially save around £486 a year compared with the present allowance.
But somebody earning £15,000 from employment would not receive the same benefit.
This would dramatically reduce the cost compared with giving £2,430 of additional tax-free income to every taxpayer.
The same principle could theoretically be applied to parents or other groups.
But there is a price.
The more targeted the tax system becomes, the more complicated it becomes.
And that brings us back to the administrative argument in our previous article.
Option 3: Increase the allowance but taper the benefit for higher incomes
There may be a better compromise.
The Government could raise the Personal Allowance to £15,000 but gradually withdraw the additional benefit from higher earners.
This would mean:
low earners receive the full benefit;
middle earners receive the full or substantial benefit;
very high earners receive little or none of the additional allowance.
There is already a tapering mechanism in the tax system.
The current Personal Allowance begins to disappear when adjusted net income exceeds £100,000, at a rate of £1 of allowance lost for every £2 of additional income.
The principle could therefore be adapted to a new allowance.
The advantage is that it would retain a relatively simple tax system without giving the same tax reduction to someone earning £100,000 or more as someone earning £15,000.
Option 4: Reduce tax reliefs elsewhere
The Treasury could also look for additional revenue elsewhere.
This is where things become politically difficult.
There are numerous tax reliefs and exemptions across the UK tax system, including those affecting pensions, capital gains, businesses and inheritance.
Removing or reducing one of these could help finance a higher Personal Allowance.
But there is a problem.
Every tax relief has somebody who benefits from it.
The moment a government proposes reducing a relief, the people affected are likely to argue that it isn't a loophole at all but an important part of the tax system.
So although this looks simple on paper, it can become politically explosive very quickly.
Option 5: Government spending cuts
Another possibility would be to reduce government spending.
In theory, if the Government could find £5 billion or £10 billion of permanent savings, that money could be used to finance a tax reduction.
But governments have discovered repeatedly that finding genuine savings is much harder than announcing them.
Most government spending is already committed to:
pensions;
health;
education;
defence;
social care;
benefits;
local government;
infrastructure.
Cutting waste sounds easy.
Finding spending that can actually be removed without reducing services is much harder.
Option 6: Hope that economic growth pays for some of it
There is another possibility, and this is the one governments often like most.
Give people more disposable income and they spend some of it.
That additional spending can generate:
more VAT receipts;
more corporation tax;
more business activity;
more employment;
more income tax from additional earnings.
There could therefore be a partial feedback effect.
But there is a big warning.
The tax reduction happens immediately. The economic growth is uncertain.
A Chancellor cannot responsibly assume that every pound of tax reduction will generate enough economic growth to replace the lost revenue.
Growth can help pay for a tax cut.
It cannot safely be treated as a guaranteed source of funding.
There is another option: accept a larger deficit
Governments can simply borrow the money.
If the Personal Allowance were increased and nothing else changed, the difference could be added to government borrowing.
That would put the cost onto future budgets.
Whether that is sensible depends on the size of the tax cut, the state of the economy and the cost of government borrowing.
There are times when borrowing to support the economy can make sense.
But borrowing to finance permanent tax cuts is much harder to justify when government debt and interest costs are already high.
The Treasury therefore faces a trade-off
Imagine a government decided that £15,000 was the appropriate Personal Allowance.
It would have to decide whether the additional £2,430 tax-free income should go to:
Everybody
or
Only selected groups
or
Everybody initially, with the benefit reduced for higher earners.
Each has a different cost.
A universal allowance is easiest to understand.
A targeted allowance is cheaper.
A tapered allowance may offer the best compromise between the two.
But every additional rule increases complexity.
And this brings us back to the problem of small amounts of tax
There is a wider issue here that is rarely discussed.
The Treasury is currently collecting income tax from an increasing number of people because thresholds have been frozen while earnings rise.
For some taxpayers, the initial amounts involved are relatively small.
The Government therefore faces an unusual calculation.
Is it worth bringing another large group of people into the tax system to collect relatively modest amounts from each of them?
There is not necessarily a simple answer.
PAYE is highly automated, so the cost of collecting tax from an employee is far lower than it once was.
But every additional taxpayer still creates some administrative activity.
And the more complicated the tax rules become, the greater the potential burden.
That is why a higher Personal Allowance could potentially be about tax simplification as much as tax reduction.
The £15,000 option may therefore be a useful middle ground
An increase from £12,570 to £15,000 is large enough to make a genuine difference without pushing the tax-free threshold to an extraordinary level.
A basic-rate taxpayer could potentially save up to:
£486 a year
£40.50 a month
£9.35 a week
That is not going to transform the finances of a household.
But for somebody working on a low wage, it could make a noticeable difference.
And for millions of households, the combined effect could be substantial.
The Treasury's challenge would be to ensure that the policy does not simply create an equally substantial hole in the public finances.
What might a realistic package look like?
A possible compromise could be:
Personal Allowance: £15,000
Basic principle: give the full increase to ordinary taxpayers.
Higher earners
Don't automatically increase the higher-rate thresholds at the same time.
Very high earners: consider tapering the benefit.
Pensioners
Consider whether a separate higher allowance is justified, but avoid creating a whole series of special categories.
Funding: combine some fiscal drag at higher incomes with spending efficiencies and carefully selected tax-relief changes.
Growth: treat additional economic activity as a bonus rather than assuming it will pay for the entire tax cut.
That would be far more credible than simply announcing a large tax-free allowance and leaving the Treasury to find the money afterwards.
But there is a bigger political question
This debate ultimately comes down to what a government thinks the tax system is for.
If the objective is simply to maximise revenue, keeping thresholds frozen is an extremely effective tool.
But if the objective is to encourage work, protect modest incomes and keep the tax system understandable, there is a strong argument for periodically increasing the Personal Allowance.
The current system has an uncomfortable feature.
As people's wages rise, they can find themselves paying more tax even when much of their apparent pay increase is simply compensation for higher prices.
That is fiscal drag.
And it can make people feel that they are being taxed more heavily without the Government ever announcing an increase in tax rates.
The Treasury cannot escape the arithmetic
This is perhaps the most important point.
There is no such thing as a free tax cut.
If the Personal Allowance is increased, somebody has to absorb the cost.
It could be:
the Treasury through lower revenue;
taxpayers through higher taxes elsewhere;
public services through spending reductions;
future taxpayers through higher borrowing;
or the economy through the additional growth generated by the tax reduction.
The most realistic answer is probably a little of each.
And that is why the debate about Andy Burnham's suggestion could become much more interesting than simply arguing about whether £12,570 is enough.
The real question is:
Can the Government give working people more of their earnings without simply moving the cost somewhere else?
That is the question the Treasury will ultimately have to answer.
And it is also the question taxpayers should be asking.