Many taxpayers are effectively losing out on £3,500 of their tax-free personal allowance as a result of HM Revenue and Customs (HMRC) freezing the threshold. According to AJ Bell, if the personal allowance had kept pace with inflation since the freeze was introduced, it would now stand at £16,072 for the 2026/27 tax year, which is £3,502 higher than the current level.
The personal allowance refers to the amount of income an individual can earn before paying income tax, and it is normally adjusted annually in line with inflation. However, in March 2021, then-Chancellor Rishi Sunak announced a suspension of inflation uprating for income tax thresholds, freezing the personal allowance at £12,570 from April 2021 through to April 2026.
Since then, the freeze has been extended twice: initially by two years under Chancellor Jeremy Hunt, and most recently by three more years under Chancellor Rachel Reeves. This means the personal allowance is set to remain frozen at £12,570 until April 2031.
READ MORE: UEFA confirm Aston Villa’s Super Cup squad amid Brian Madjo registration update
Labour Party leader and Greater Manchester Mayor Andy Burnham recently indicated he is “looking at” the possibility of increasing the personal allowance to let people earn more before paying income tax. Although he raised the issue upon taking office, Mr Burnham has clarified that there is no firm commitment to make changes yet, saying, “There is no commitment at this point to change, but we will look at that at the budget.”
Financial advisor Des Cooney of Axis Financial Consultants emphasises the impact of this freeze on retirees. He noted that the full new State Pension has risen to £241.30 per week this year, which equates to around £12,548 annually. This leaves very little room beneath the £12,570 personal allowance for other taxable income before a pensioner begins to pay income tax.
“With the Personal Allowance now set to remain frozen until 2031, that squeeze is no longer a distant concern. It is something people approaching retirement need to factor into their planning today,” said Cooney.
He further explained that although many expect the State Pension to continue increasing under the triple lock system, an increasing proportion of their total income can become taxable, meaning part of the pension increase may be offset by income tax payments, effectively reducing the net gain.
This freeze on the personal allowance has significant implications for taxpayers, particularly retirees, who face a higher likelihood of paying income tax on previously untaxed income, thereby diminishing their spending power despite nominal increases in pension payments.