This is how the Chancellor can increase the personal allowance and lift millions out of hardship

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

Chancellor John Healey is set to present his first budget. Like his recent predecessors, he wants to see sustained economic growth which has remained elusive. The UK economy grew by an annual average of 3% between 1993 and 2007. The growth rate shrank to 1.5% between 2009 and 2023, 1% in 2024; 1.3% in 2025, and is forecast to grow by 1.1% in 2026

Depleted Purchasing Power

Sustained economic growth can’t be achieved without a major boost to the purchasing power of the bottom 50% of the population. Economic statistics show that in the absence of state intervention wealth has not trickled-down. After 50-years of economic growth workers’ share of gross value added has declined from 71.9% in 1975, to 59.7%. The average real wage has hardly grown since 2008. In August 2026, the median gross pay of a payrolled employee was £31,884, resulting in take-home pay of £26,476 after paying income tax and national insurance. The Joseph Rowntree Foundation estimates that single working-age adult needs to earn £31,500 a year to reach a minimum income standard and live a life with dignity. A lone parent with 2 children needs £67,600 a year, while a couple with 2 children needs to earn £77,400 a year between them. Unsurprisingly, 25.3m people, including 14.9m working adults and 7.7m children, live below minimum income standards and are not in a position to play a significant role in economic revival.

A large proportion of the population can’t dip into a savings buffer to support consumption and economic growth. 1 in 6 UK adults (16% or 8.9m people) have no savings. 2 in 5 Brits (39%) have £1,000 or less in savings.

At the same time, the richest 1% of Britons owns more wealth than the bottom 70% of the population combined. Just 50 richest families hold more wealth than the poorest half of the population, comprising more than 34m people. The concentration of wealth in fewer hands has not provided the necessary economic stimulus.

The tax system should be used to boost the purchasing power of the bottom 50%, but it has done the reverse and hit the poorest the hardest. The poorest 20% pay a higher proportion of their income in direct and indirect taxes than the richest 20%. In 2021, the personal allowance was frozen at £12,570 a year and 26.6m people paid income tax at the basic rate of 20%. By 2026-27, due to the freeze, 31.4m people became liable to pay income tax at the basic rate. If personal allowance had risen in line with the rate of inflation, it would have been around £16,070 for 2026/27. Due to frozen income tax thresholds, a minimum wage earner in England will pay additional £980 in income tax and national insurance in 2026-27 alone. Without change, it will be worse in 2027-28.

Pensioners have been particularly hit hard. In 200-21, 6.47m pensioners paid income tax. In 2026-27, 9.58m pensioners became liable to income tax. Nearly 2m pensioners live in poverty.

Increasing Personal Allowance

A substantial increase in tax free income tax personal allowance is the quickest way to boost people’s purchasing power. The tax cost of each £1,000 increase in personal allowance is around £10bn a year though the real cost would be considerably less as higher household spending would increase government yield from VAT and other indirect taxes.

A, immediate £3,000 increase in personal allowance to £15,570 would cost around £30bn and boost gross domestic product by around 1.2%. Neoliberals don’t ask any questions about the resources for bank bailouts and corporate welfare programmes, but they always ask ‘how is it going to be paid’ whenever redistribution is mentioned.

The £30bn cost would be met by ending subsidies to highly profitable commercial banks. Since 2006, the Bank of England has paid interest on central bank reserve deposits to commercial banks. Central bank reserves are deposits held by commercial banks at the Bank of England (BoE) and are used to settle payments between banks. They are also used by the BoE to manage interest rates through tools such as quantitative easing. The interest payments accelerated in 2009 as quantitative easing took hold. As interest rates rose, payments to commercial banks increased. The EU had similar arrangements but in 2023 virtually eliminated the practice, saving about £5.2bn a year. The Swiss central bank also stopped paying interest on minimum reserves.  The UK continues to pay and has paid £100bn in the last three years alone, which is an average of more than £30bn a year. 

Currently, the government hands subsidies to banks and then seeks to clawback a tiny portion by levying windfall taxes. 

A £3,000 increase in personal allowance would be worth £600 in cash to 31.4m basic rate income taxpayers. However, higher personal allowance would disproportionately boost the post-tax income of the higher rate (40%) taxpayers by £1,200 and even more for additional rate (45%) taxpayers. However, there are clawback arrangements. In general, currently personal allowance is reduced by £1 for every £2 of income above £100,000. The net effect is that personal allowance is zero for incomes of £125,140 or above. That said there would still be higher benefit to people in the 40% and 45% income tax bracket, which will increase inequalities. 

The government can tackle such effects by addressing tax anomalies mainly benefitting the wealthy, which in turn would generate even more resources for redistribution. For example, gains arising from the sale of second homes, buy-to-let properties, shares, art, antiques, businesses and cryptocurrencies, generally accrue to wealthy individuals. Capital gains are normally taxed at marginal rates of 18% to 24% (there is an additional rate of 32% for City fund managers who are exempt from paying income tax) and are not subjected to national insurance contributions. In contrast, wages are taxed at marginal rates of 20% to 45% and are subject to national insurance payments. By taxing capital gains at the same rates as wages, around £12bn – £14bn could be raised. More, if national insurance is levied. 

So who would be impacted? The capital gains tax regime benefits less than 1% of the population. In 2024-25, 584,000 people paid £24.2bn capital gains tax (CGT) on gains of £127.3bn, an effective rate of just over 19%. Most CGT comes from the small number of taxpayers who make the largest gains. In 2024-2025, 45% of CGT came from those who made gains of £5 million or more. This group represents less than 1% of CGT taxpayers each year. They paid ultra low rates of tax. According to HMRC, 52% of gains for CGT-liable individuals came from the 17% of individuals with taxable incomes above £125,140, the additional rate threshold for income Tax.

The benefit of lower CGT is spread unevenly. 234,000 individuals in London and the South East of England benefitted, compared to 33,000 in East Midlands, 34,000 in Yorkshire and 18,000 in Wales. Lower CGT rates widen regional inequalities. The alignment of capital gains rates with those applied to wages would also reduce regional inequalities.

There are also additional ways of clawing back gains from the rich. For example, dividends are taxed at marginal rates of 8.75% to 39.35%. Around £6 billion a year could be generated if dividends are taxed at the same rate as wages, and even more if national insurance is also charged. The wealthy are major recipients of dividends. The Institute for Fiscal studies (IFS) reported that the top 1% of income tax payers receive more of their income in the form of partnership income or dividends. Some self-employed and owner-managers pay themselves in dividends instead of a salary to take advantage of lower tax rates. The government states that over “90% of UK taxpayers do not receive taxable dividend income” and majority of pensioners do not receive dividends outside the tax-free ISA wrapper. 

Altogether, the Chancellor needs to make a political decision but can easily increase personal allowance by £3,000 a year by ending bank subsidies. This would lift millions out of poverty, increase spending power of the less well-off, lighten the cost-of-living crisis and boost economic growth. He can go further and restore the real value (since 2021) of personal allowance by aligning taxation of capital gains and dividends with wage rates. This change would also end tax avoidance schemes designed to convert incomes to capital gains. It would nullify strategies for concocting dividends to enable some to avoid income tax and national insurance contributions.

The above proposals transfer wealth from the wealthy to the less well-off. They do not require any increase in the rates of income tax, VAT or corporation tax. Unlike the Reform UK proposals, they do not call for cuts in spending on social security, public services or the state pension. 

Image credit: Simon Dawson / Number 10 – Creative Commons