In his first interview as Labour’s presumptive Prime Minister, Andy Burnham told the Sunday Times that one issue kept coming up on the doorstep in Makerfield: the frozen £12,570 personal allowance. He called it a growing issue. Within days of walking into Downing Street he had told the Financial Times there was no commitment to do anything about it.
That is a let down for anyone earning near the threshold. It is also a gap in the defence, and we should run through it.
He raised the subject, then walked away from it
Politicians do not usually hand their opponents a grievance. Burnham did. He spent months telling voters that the freeze was unfair, that it was dragging people who are not well off into paying tax they should never have paid, and that Westminster was not listening. He was right. Westminster was not listening. Unfortunately, having become the boss himself, he has proved that it still is not.
What he offered instead was an £850 million package taking VAT off household electricity. It is worth about £45 off a typical annual bill, and rather more than that if you are wealthy enough to own a large house and use a lot of power. It is planned for this financial year only. And because the saving rises with the amount you use, it gives nobody any reason at all to take less from the grid. Alongside it came a cut in the bus fare cap to £2 and a month of free travel for under 15s.
Cheaper buses are good. Lower bills are good for households, even if they are not necessarily good for the environment. But set it against the freeze, which now runs to April 2031, and the sums do not work. Our own figures show 1.9 million more people being dragged into the higher rate between 2025 and 2030. Victoria Collins has costed the wider threshold freeze at £67 billion a year for ten million taxpayers by the end of the decade. Against that, £45 for one winter is a press release, not a plan.
Voters are perfectly capable of doing that arithmetic. They will do it in October when the bills arrive.
The policy is already ours
Here is the part we keep forgetting. We do not need to invent anything. What we need to do is stop saying five words: “when the public finances allow”.
That caveat kills the policy. It turns a principle into a wish. No number, no date, and no answer to the only question anyone ever asks.
Because the policy itself is strong. Raising the personal allowance is the single most successful thing we did in government. Between 2010 and 2015 we lifted more than three million people out of income tax altogether. Not by means testing. Not by a scheme people had to apply for. Just by letting people keep more of what they earned before the state took any of it.
Daisy Cooper has restated it since. She has called raising the tax free allowance the best and fairest way of cutting tax, before adding those five fatal words. Ed Davey has been clear that the freeze hits the lowest paid hardest. The analysis is done. The moral case is made. The record is there to point at. And then we hedge.
So we are not asking the party to adopt a new position. We are asking it to kill the caveat and cost the policy.
Burnham fell into the same hole
Because that is exactly what he did. He said the freeze was a problem, then said he could not fund fixing it, then found £3.5 billion for a separate tax break for young workers and £850 million for a one year VAT cut. The money exists. What was missing was the decision.
If we keep using the same formula, we will be standing in the same place he is, saying the same thing, and voters will not be able to tell us apart. Two parties agreeing that something would be nice is not a dividing line.
What running through the gap looks like
Briefly, because it deserves a piece of its own, and I will write one.
We should stop promising to raise the allowance and start promising to unfreeze it. A frozen threshold is a tax rise that nobody has to vote for. It arrives every April and no minister ever has to defend it. Make indexation the default, and make any Chancellor who wants to freeze thresholds legislate for it in the open and call it what it is.
Then pay for it honestly, by taxing income from assets more like income from work. A nurse pays more on her earnings than a landlord pays on his gains, and no liberal should be comfortable defending that.
That is a mechanism, a direction, and a named source of funds. It is not a complete costing and I will not pretend it is. But it is more than either of the other parties is offering, and it is more than we have offered for two years.
Gaps close
This will not stay open. He has deferred this, not abandoned it. He told his cabinet that the VAT cut points the way to further measures he hopes to take, and he has a Budget in which to take them. He is absorbing a small hit now, in July, when few people are watching, and buying himself the option of a funded announcement in the autumn when they are. If he does that having watched us say nothing specific for six months, he takes the credit for a policy that was ours first.
We got there first. That is not the same as owning it. Ownership goes to whoever is willing to say what it costs and stand behind the answer.
The gap is open now. Let us not stand around admiring it. Let us run through it.
* Tom Reeve is a Liberal Democrat councillor in Kingston upon Thames
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21 Comments
@Tom Reeve you sort of get it but lets be specific how we’d pay for raising the income tax threshold. We would tax the annual rental value of land. Its been our policy on and off for over a century but most recently our 2015 manifesto committed us to undertake research on how to do it (not whether!) within a single Parliament.
We’d start with replacing Business Rates with a Commercial Landowners Levy (CLL). That was approved by Conference in 2018. Conference Committee balked at doing similar with Council Tax but ALTER has developed a plan to do that- and more – without penalising the proverbial “poor widow” (Income-poor but asset-rich). See our website for more.
I just wrote to Andy Burnham offering help – published here yesterday. I live in hope!
Increasing the basic threshold by £1000 will make someone on £40,000pa £200 a year better off whilst doing nothing for someone on £12000 a year though.
“Voters are perfectly capable of doing that arithmetic. They will do it in October when the bills arrive.”
A questionable assumption. If people get a pay rise then they see their pay packets still go up. It is quite hard to work out the impact of non-indexation of the basic allowance. Contrast that with seeing an actual (albeit small) reduction in energy bills from October when the VAT goes (possibly not so much if they are on a price cap tarrif but (a) they shouldn’t be! and (b) they are people not likely to be this financial savvy.)
Hi Tom,
Do you think Burnham is preparing the ground for a snap election? Lots of little goodies delivered each day for a couple of weeks then claim he needs a mandate to be more radical than the 2024 manifesto.
Might finally wake SirEd out of his invisibility.
Hywel 23rd Jul ’26 – 6:45pm:
Increasing the basic threshold by £1000 will make someone on £40,000pa £200 a year better off whilst doing nothing for someone on £12000 a year though.
It increases the incentive for them to work more hours, seek promotion or get a better paid job on which they will still pay no tax or pay less tax than they would have done. More generally, by putting additional spending money into the economy, tax cuts increase such extra earning opportunities.
Jeff 23rd Jul ’26 – 9:14pm……..It increases the incentive for them to work more hours, seek promotion or get a better paid job on which they will still pay no tax or pay less tax than they would have done…
Well done.. Straight from the Badenoch ‘bible’ about how people are poor because they are lazy and have no ambition…
“A nurse pays more on her earnings than a landlord pays on his gains, and no liberal should be comfortable defending that.” Is a sentiment I think we all can agree with but it also applies to “ A nurse pays more on her earnings than a pensioner pays on his income”.
We should move towards abolishing age discrimination from National Insurance. Might not go down well with most of us pensioners but how many of them would be voting LD anyway?
Also as a policy might be sensible to link the tax free allowance to the basic state pension until we get rid of TFA with UBI!
One of my team works 25 hours a week. Five years ago she paid no income tax. Now it is over £650 a year. Her pay rises mostly just covered rising prices (inflation) – so by adding tax she is simply poorer, and nobody ever voted for it. Isn’t this the story we should be telling, not the billions?
Healy is now saying that any pensioner with only a state pension will not have to pay tax. Presumably, if your bank pays you 6p interest on your current account, it will cost you 20% of the difference between the pension and tax threshold.
“Increasing the basic threshold by £1000 will make someone on £40,000pa £200 a year better off whilst doing nothing for someone on £12000 a year though.”
On this “logic”, for want of a better word, we should scrap the basic allowance altogether on the grounds that it doesn’t do anything at all for those who who have zero income. Also, what good is having a 20% tax rate for anyone earning less about £12,571. We may as well get rid of that, and all the other bands, too!
Raising the tax free allowance was probably the best thing the Lib Dems did, or pushed the Tories to do, when they were in coalition.
This proposed change is really not, @Expatj, not out of “the Badenoch Bible” at all. It’s fully compatible with a progressive view that those who earn more should pay a higher rate of income tax than those who earn less.
@Peter Davis “Presumably, if your bank pays you 6p interest on your current account, it will cost you 20% of the difference between the pension and tax threshold.”
Surely, if the basic pension isn’t taxable, at worst it would cost you 20% of 6p, i.e. 1.2p? (although there’s a tax-free interest amount as well, I note)
As anounced, the basic pension will remain taxable. In the past, this did not affect those whose only income was the state pension because they were below the threshold. Because the pension is triple locked while the allowance is frozen, it will exceed the tax threshold in 2027. By 2030, this will be a significant amount. Rather than raise the threshold they will be introducing a new cliff edge.
expatsj 24th Jul ’26 – 9:50am:
Straight from the Badenoch ‘bible’ about how people are poor because they are lazy and have no ambition…
I wouldn’t assume that those on a low income are “lazy and have no ambition”. They may be a busy single parent with limited time available for paid work or they could be working hard for 60 or 70 hours a week building up a business that is not yet profitable enough to take more out as an income.
@Jeff
There should then be a lot of evidence of people increasing working hours/finding better paid jobs in 2010-2015. How did that compare to people doing that who were already earning above the (then) thresholds
@Peter Davies You are right – maintaining the ‘not taxed if only the state pension’ will be increasing hard to sustain as the gap grows. One driver for that policy is there isn’t a setup for deducting tax from the state pension and it’s probably of debateable value to create one to take £40-60 a year from someone. But by 2030 it could be £1000 above the threshold and impossible to sustain an argument in favour of system that taxes someone on £12,900 but not £13,900
@ Hywel,
The period 2010 – 2015 was a period of economic difficulty following the 2008 GFC, so it will be quite hard to separate out all the factors influencing the desire of workers to work extra hours to cover their living costs. Post-2010 labour supply behaviour was probably driven much more heavily by real wage stagnation, and benefit changes than adjustments to the income tax threshold.
I would expect Jeff is right to say that higher taxation will act as a disincentive to working legitimately, but proving it for this particular case will be difficult, which is why I suspect you’ve made the challenge!
The main LibDem argument for raising the threshold in the first place wouldn’t, though, have been about labour supply. It would have been about wanting a progressive system of income tax. The argument now is that the thresholds need to be raised in-line with inflation to maintain the same progressive nature.
But, maybe you don’t agree that the taxation of income should be progressive?
WTF is TFA
@Jenny It’s a TLA for Tax Free Allowance
Thanks Peter.
Pointing out the long-term impact of frozen tax thresholds is a stronger fiscal critique than focusing on short-term relief measures, but any alternative should also explain how the resulting revenue gap would be funded.
“I would expect Jeff is right to say that higher taxation will act as a disincentive to working legitimately”
I was though wondering of the evidence base for this – particularly that it was a disincentive to not just working additional hourse but seeking different jobs or promotions. Every increase in salary produces an increase in tax home pay (well ignore the benefit trap impacts which is a different argument). The question is the scale of that effect. Certainly at a time when I had an income under the then tax threshold the impact of starting to pay tax was not something I weighed in to a calculation. Not has paying more tax ever disincentivised me from taking additional hours when available as I will always be better off.
“But, maybe you don’t agree that the taxation of income should be progressive?”
No idea where that came from. But we have, and AFAIK always have had a progressive income tax system where (at least if you ignore student loans) you pay more the more you earn and higher earners pay higher rates. There is a (valid) question about whether it could be more progressive
@ Hywel,
Tom Reeves was quite right, IMO, to say in a different post that ” Raising the personal allowance is the single most successful thing we did in government.” So the evidence base you are looking for is the same one that drove this tax policy change. If you’ve ever been in a position of wanting workers to work overtime you’ll surely have had heard something along the lines of: ” No thanks, it’s just not worth it. I’ll lose far too much in tax”.
It’s a problem now with many workers, thanks to the very ‘lumpy’ nature of our taxation system which needs to be considered alongside increased NI contributions, the requirement to repay student loans, the potential loss of child benefits and even the loss of personal allowances at some stage. See the graph in the link below.
If we are to have a truly progressive and fairer taxation system the income from assets should be included. Those who own property and don’t have to pay many thousands, and £20k pa. is often not an exaggeration, in rent or mortgage repayments are very likely doing much better. This amount has to be paid out of after tax income. So a fundamental rethink in how we do have an effective progressive tax system is probably in order. The issue goes much deeper than the personal tax threshold.
https://www.economicsobservatory.com/why-do-some-people-in-the-uk-face-marginal-tax-rates-of-over-60