Will Labour Increase Personal Tax Allowance?

The personal tax allowance is a pivotal element of the UK’s taxation system, determining the portion of income that individuals can earn without incurring income tax. As of the 2025/26 tax year, this allowance stands at £12,570, a figure that has remained unchanged since the 2021/22 tax year.

With the Labour Party currently steering the government, many are keenly observing potential shifts in tax policies, particularly concerning the personal tax allowance. This article discusses the intricacies of the personal tax allowance, scrutinizes Labour’s tax stance, evaluates the likelihood of any forthcoming changes, and explores the potential ramifications for taxpayers.

What is Personal Tax Allowance?

It’s the amount of income an individual can earn annually before being liable for income tax. For the 2025/26 tax year, the standard personal allowance is £12,570.

This means that earnings up to this threshold are tax-free. However, for individuals with an income exceeding £100,000, the personal allowance diminishes by £1 for every £2 earned over this limit, leading to its complete elimination for those earning £125,140 or more.

The structure directly influences the amount of income tax payable:

• Basic Rate (20%): Applied to earnings between £12,571 and £50,270.
• Higher Rate (40%): Applied to earnings between £50,271 and £125,140.
• Additional Rate (45%): Applied to earnings over £125,140.

This tiered system ensures that taxpayers contribute progressively, with higher earners paying a larger proportion of their income in taxes.

Labour’s Tax Policy: What We Know So Far

The Labour Party has historically championed progressive taxation, advocating for higher contributions from the wealthiest to fund public services and reduce inequality. In their recent manifesto, Labour pledged not to increase income tax rates for working individuals, explicitly stating that there would be no hikes in National Insurance or the basic, higher, or additional rates of income tax.

However, it’s noteworthy that while Labour committed to maintaining current income tax rates, they did not propose adjustments to tax bands or allowances. This omission implies a continuation of the existing policy of freezing tax thresholds, a practice that can lead to “fiscal drag.” Fiscal drag occurs when taxpayers are gradually pushed into higher tax brackets due to wage inflation, thereby increasing their tax burden without any changes to tax rates.

Additionally, Labour introduced measures targeting higher-income individuals and businesses. These include increasing business social security contributions by 1.2 percentage points to 15% and expanding inheritance taxes to encompass inherited pensions. Capital gains tax rates were also raised by 8 percentage points at the lower rate and 4 percentage points at the higher rate.

Learning how to calculate your total tax rates will help you in your personal financial planning process and help you manage your business, income, or property tax effectively.

Will Labour Increase Personal Tax Allowance?

Given the current economic landscape, the prospect of Labour increasing the personal tax allowance appears unlikely. Several factors contribute to this assessment:

1. Fiscal Constraints: Labour has instituted new fiscal rules aimed at balancing the current budget by the 2029/30 fiscal year. These rules necessitate careful management of public finances, limiting the scope for tax cuts or allowances that could reduce government revenue.
2. Policy Focus: Labour’s recent tax policy adjustments have predominantly targeted businesses and high-income individuals, such as increasing business social security contributions and capital gains tax rates. There has been no indication of plans to modify the personal tax allowance, suggesting that it is not a current priority.
3. Economic Indicators: The UK is experiencing economic challenges, including a slowdown in hiring and potential recessionary trends. Such conditions often lead governments to adopt cautious fiscal policies to maintain economic stability, making significant tax allowance increases less feasible.

Historically, Labour has favored progressive taxation, focusing on ensuring that higher earners contribute a fairer share to public finances. This approach aligns with their recent policy measures and suggests a continuity in their taxation strategy.

Potential Impact on Taxpayers

The decision to maintain the current personal tax allowance has varying implications across different income groups:

• Low-Income Earners: Individuals earning below the personal allowance threshold (£12,570) remain unaffected, as their income is already tax-free.
• Middle-Income Earners: Those with incomes slightly above the personal allowance may experience “fiscal drag,” where wage increases push them into higher tax brackets, incrementally increasing their tax liabilities without corresponding changes in tax rates.
• High-Income Earners: Individuals earning over £100,000 face a gradual reduction in their personal allowance, leading to higher effective tax rates. The continuation of this policy means that high earners will continue to see a diminishing personal allowance as their income rises.

While freezing the personal tax allowance helps the government maintain revenue, it can place additional financial strain on taxpayers, particularly as inflation and living costs rise.

Comparison with Conservative Tax Policies

The Conservative Party has traditionally advocated for lower taxation and has, in the past, implemented increases to the personal tax allowance to reduce the tax burden on individuals. However, recent economic pressures have led to a convergence in fiscal strategies between the major parties.

Under Conservative leadership, the personal tax allowance saw significant increases, aiming to lift more low-income earners out of the tax net. In contrast, the current Labour government has chosen to maintain the existing allowance levels, effectively increasing the tax burden on middle-income earners through fiscal drag.

Key Differences Between Labour and Conservative Tax Policies:

• Personal Tax Allowance: Conservatives historically increased it, while Labour is maintaining the freeze.
• Taxation on High Earners: Labour is implementing policies that target higher-income individuals (e.g., increased capital gains tax and business social security contributions), whereas Conservatives have historically been more lenient towards higher earners.
• Public Service Funding: Labour prioritizes using tax revenues to fund public services, while Conservatives often advocate for tax reductions to stimulate economic growth.

The key takeaway is that while the Conservatives have traditionally favored higher personal tax allowances, Labour is focused on redistributing tax burdens to wealthier individuals and businesses.

Conclusion: Will Labour Increase Personal Tax Allowance?

Based on current fiscal policies and economic conditions, it is unlikely that Labour will increase the personal tax allowance in the near future. The freeze on tax thresholds is set to remain in place, resulting in more taxpayers gradually moving into higher tax brackets due to inflation and wage increases.

Summary of Key Points:

• Labour has not indicated any plans to increase the personal tax allowance and is instead focusing on other forms of taxation.
• Fiscal drag will likely continue, meaning middle-income earners may see an increased tax burden despite no official tax rate hikes.
• Economic challenges and Labour’s fiscal rules make a tax allowance increase unlikely, as the government prioritizes financial stability.
• Conservatives have historically been more inclined to increase personal tax allowances, but economic conditions have constrained policy flexibility across all parties.