Millions of UK workers are paying income tax for the first time, or paying more, because the tax-free personal allowance has been frozen for five years. The threshold – the amount you can earn before you start paying tax – has been stuck at £12,570 since 2021. As wages have crept up, more people have been dragged into tax, a phenomenon often called fiscal drag.
The personal allowance is the basic income tax allowance for most people. Normally it rises in line with inflation, but the government froze it in 2021 as a way of raising revenue without increasing tax rates. Since then, inflation has soared and average earnings have risen, meaning a growing number of people now earn above the threshold and pay tax on a larger portion of their income. The freeze is effectively a stealth tax increase.
“The personal allowance freeze is dragging millions into tax. Here's what it means and why change is hard.”
When Andy Burnham became prime minister in July 2026, he hinted at raising the personal allowance. He told the Times that “frustration about the personal allowance” he heard during the Makerfield by-election was “lodged in my mind”. But days later, he pulled back. Speaking to reporters on 21 July, he said “all of this will be looked at” in the next budget but admitted any change would be “difficult given the financial circumstances in which we find ourselves”. Sources close to Burnham later confirmed that raising the allowance is not part of his initial cost-of-living plan.
The Institute for Fiscal Studies has estimated that unfreezing the personal allowance would cost between £8.5 billion and £9 billion a year. Burnham has committed to Labour’s 2024 manifesto, which rules out increasing the basic, higher, or additional rates of income tax. That means he cannot offset the cost by raising top rates. Instead, the prime minister has announced other measures to ease the cost of living: a VAT cut on household electricity bills from 1 October, saving a typical household about £45 a year, and a £2 cap on single bus fares across England from January. The £850 million cost of the VAT cut is supposed to be funded by scrapping Sir Keir Starmer’s digital ID scheme, though former Chief Secretary Darren Jones has disputed that the ID scheme was funded.
For UK readers, the freeze directly hits household finances. If you’ve had a pay rise since 2021, you’re probably paying more tax even if your employer didn’t change your tax code. The personal allowance isn’t the only threshold frozen – other allowances and bands have been held too, amplifying the effect. The Office for Budget Responsibility has previously projected that the freeze would pull over 1 million people into paying tax for the first time.
Q: What is the personal allowance freeze? A: The personal allowance is the amount you can earn before paying income tax – currently £12,570. It has been frozen at that level since 2021 instead of rising with inflation. As wages increase, more people are paying tax or paying tax on more of their income, a process known as fiscal drag.
Q: Why can’t the government just increase the personal allowance? A: Unfreezing the threshold would cost the Treasury an estimated £8.5 billion to £9 billion a year. Prime Minister Burnham has said that the government’s finances are tight and that it must show “fiscal discipline”. He has also ruled out raising income tax rates to pay for it, so finding that scale of funding is extremely difficult.
Q: What is Andy Burnham doing about the cost of living instead? A: Burnham has announced a VAT cut on household electricity bills from October, saving around £45 a year for a typical household, and a £2 cap on single bus fares across England from January. He says these are funded by scrapping the digital ID scheme, though critics question whether that scheme had allocated funding.
The next major test will come with the autumn Budget, when the Treasury will set out its full fiscal plan. Burnham has said the personal allowance will be “looked at” then, but his officials have made clear it is not a priority. Meanwhile, on the international stage, Ireland’s deputy premier Simon Harris has said the country is “ready to support” closer UK-EU ties under Burnham, which could eventually affect trade and economic policy. For now, though, millions of households will continue to feel the squeeze of the frozen allowance with no immediate relief in sight.
