Raising the £12,570 personal allowance would be the worst tax cut Burnham could make

Andy Burnham says the thing he “heard the most on the doorsteps” while campaigning to be an MP concerned the frozen income tax thresholds, adding that the issue is “lodged” in his mind.

The new Prime Minister has led many to believe that one of his first acts could be to announce a rise in the £12,570 personal allowance (PA) which people can earn before paying 20 per cent income tax.

The PA has stood at that amount since 2021, and is due to remain there until 2031 – even though it would be more than £16,000 if it had kept pace with inflation.

But while it’s not surprising the issue has come up among voters – is there anyone who wouldn’t ideally like an effective tax cut? – an increase would be badly targeted and force his administration into making the same mistakes Rachel Reeves and Sir Keir Starmer did.

Firstly, although the personal allowance is lower than it was five years ago (once inflation is factored in), it is still historically very high. For context, in 2010 it sat at £6,475 – about £10,300 in today’s money – and is only at its current level thanks to years of incremental increases under the Tory/Lib-Dem Coalition government until 2015.

When compared internationally, it is still generous. Germany’s personal allowance is around £10,500. In Sweden it varies – but is up to about £3,500 for most working age people. In the US, though a slightly different system, single people can broadly only get £12,000 tax-free on a national level.

The second issue is the cost-benefit of raising the personal allowance. Let’s imagine a part-time worker on £13,000. At the moment they pay around £7 a month in income tax and £2.80 in national insurance (NI).

You can raise the personal allowance to £13,000, and it will save them about £10 per month.

But crucially, you won’t just be helping people like them.

You’ll help everyone with a personal allowance – including those earning £80,000, £90,000 or £100,000 – because a rise means they’ll pay tax on a smaller portion of their income.

There’s also a cost to the government. Because so many people pay income tax, even minor changes will set Labour back vast sums. An increase to £13,000 would cost around £4.5bn next year alone.

To give a sense of scale, that’s close to three times what the party’s policy to subject private school fees to VAT raises.

To give people meaningful savings, it’s going to cost billions more – money you have to find elsewhere.

And this is the headache that hasn’t gone away for Labour since it came to power in 2024.

It has been steadfast in its commitment to not raise the headline rate of income tax or national insurance – broad base taxes that tens of millions of people pay.

As a result, it has had to tweak multiple nicher taxes to raise needed revenue – think inheritance tax on pensions, dropping agricultural relief for farmers and cutting NI savings on salary sacrifice schemes.

These tax rises are technical, the income you’ll gain is harder to forecast, and you have to do lots of them to raise the same amount as one swoop on one of the big taxes.

For Labour, this has meant successive Budgets where the narrative has been multiple tax rises – often affecting small groups of people very significantly, and angering them.

If Burnham and his chancellor John Healey immediately cut the revenue from income tax – for a relatively small bit of breathing space for low earners – then he may find himself perpetuating that cycle if there is a need to raise revenue in the future.

Perhaps then, he should swerve messing with the PA for now so that Labour can leave its government-by-spreadsheet approach.

For people who raised the issue of PA when Burnham was out campaigning, he may need to point to other areas where he’s cutting the cost of living – think Tuesday’s announcement on energy bills – and stress the importance of the public coming together and paying their fair share during a tricky economic time for the country.

He’s got an advantage, though, as the political hit to extending the threshold freeze has already been largely taken by his predecessors.

If Burnham wants to look at larger tax reform – alterations to council tax or the introduction of a land value tax – then this could be done on a longer timescale with proper design and strategy, rather than rushing from one Budget to the next with the only question being: how can we make the numbers add up?