Submitted by Bill Fernie
19th October 2026
With household bills continuing to put pressure on family budgets, the Government faces a difficult question. How can it help people feel better off, encourage spending and support economic growth without placing an unsustainable burden on public finances?
One possibility is to reconsider the balance between personal tax allowances, higher income tax rates and Capital Gains Tax. Rather than simply cutting taxes or increasing them across the board, could a different approach leave more money with ordinary households while asking those with greater financial means to contribute more?
The case for raising personal allowances
The standard personal allowance, the amount someone can earn before paying income tax, remains £12,570 in the 2026–27 tax year. It has been frozen at this level since April 2022 and is due to remain frozen until April 2031 under current policy.
As wages and pensions rise, more income becomes subject to tax. Some people also find themselves moving into higher tax bands. This process, known as fiscal drag, increases tax revenue without the Government having to announce an increase in tax rates.
Raising the personal allowance would allow people to keep more of their income. For pensioners on modest incomes, working households and people trying to meet rising food, transport and energy costs, that extra money could provide welcome relief.
It could also benefit businesses. When people have more money available, some will spend it in local shops, cafés, garages and other businesses. That spending supports sales, wages and employment.
However, increasing the allowance is expensive for the Treasury and does not help everyone equally. People whose income is already below the allowance gain nothing, while higher earners can also benefit. Targeted assistance may therefore be needed alongside a general increase.
Should higher earners pay more?
One way to help finance a higher personal allowance would be to review the taxes paid by people on higher incomes.
There is a case for asking those with greater financial resources to contribute more, particularly if the revenue helps households under the greatest pressure. But the details matter. Higher rates can influence decisions about additional work, bonuses, business activity and where people choose to invest.
Scotland already has a different income tax structure from the rest of the UK for most earnings and pension income. Any changes would need to recognise the respective responsibilities of the UK and Scottish governments.
The objective should be to consider the overall tax burden, rather than assume that increasing a particular rate will automatically produce more revenue or improve living standards.
Why tax the gains from wealth differently from earnings?
Capital Gains Tax presents another question of fairness. It applies to profits made when certain assets, including shares and second properties, are sold.
Capital gains are generally taxed at lower rates than earnings. This raises a reasonable question: why might someone receiving additional income from work face a higher tax rate than someone making a similar taxable gain from an investment?
The Institute for Fiscal Studies has argued that there is a case for reforming Capital Gains Tax to reduce differences between the taxation of earnings and gains. It has also warned that simply increasing rates without changing the way gains are calculated could discourage saving, investment and business activity.
A carefully designed reform could bring the rates closer together while considering inflation, genuine business investment and the circumstances in which gains arise.
The aim would be to make the tax system more consistent without discouraging the investment needed to create jobs and expand businesses.
Would the economy benefit?
The attraction of this approach is that it connects household finances with the wider economy. People who have more disposable income may spend more, helping businesses maintain sales and employment. A fairer distribution of the tax burden could also strengthen confidence that everyone is contributing appropriately.
But there are no guarantees. Some households would save additional income or pay off debts. Higher taxes on investments could change investors' behaviour, while unfunded tax cuts could increase government borrowing and the cost of servicing national debt.
Tax policy also cannot solve every cause of the cost-of-living problem. Housing shortages, high energy costs, transport difficulties and weak productivity require other measures. Investment in skills, infrastructure and affordable housing must form part of the wider economic strategy.
A debate worth having
A balanced package could include gradually increasing the personal allowance, reviewing higher income tax rates and reforming Capital Gains Tax. The Government would need to publish credible costings showing who would gain, who would pay more and how the changes would affect borrowing and public services.
For Scotland and rural communities such as Caithness, the practical test is whether households are left with more money after essential bills and whether local businesses benefit from increased spending.
People want to see tangible improvements in their living standards, not simply hear that the economy is growing. A tax system that rewards work, treats different sources of income consistently and helps households manage rising costs deserves serious consideration.
The challenge is to achieve that without undermining investment or public services. The question is not simply whether taxes should rise or fall, but whether the overall system can be redesigned to give people greater financial security while helping the economy grow.