Burnham’s Tax Break: A Breathing Space or a Brief Exhale?

The cost of living crisis has been a persistent issue in British politics for years, with various leaders promising to ease the burden on households. Andy Burnham’s recent pledge to raise the tax-free personal allowance is the latest iteration of this promise. This move aims to provide some much-needed relief to taxpayers, but it remains unclear whether it will be more than just a brief respite from economic hardship.

The current state of taxation in Britain is stagnant. The personal allowance has been frozen for five years, and tax band thresholds have remained unchanged despite rising wages. This phenomenon, known as fiscal drag, has pulled an increasing number of people into paying tax or moving into higher tax brackets. As a result, more individuals face the prospect of higher taxes, exacerbating the cost of living crisis.

Burnham’s proposal to raise the personal allowance would provide some breathing space for basic rate taxpayers. According to calculations, this increase would yield a £96 saving per year for those earning £35,000 or less. This extra untaxed income would be welcome in times of economic uncertainty, but its impact is largely limited to basic rate taxpayers.

Higher earners would also benefit from the proposal, with estimates suggesting that those earning up to £100,000 would save around £192 per year. However, these amounts taper down for individuals earning between £100,000 and £125,140. As Kate Steere, a personal finance expert at Finder, notes, while this extra income is not life-changing, it’s still a welcome boost in uncertain times.

The implications of Burnham’s proposal extend beyond individual taxpayers. If implemented, it would impact around 40 million Britons, providing some much-needed relief from the economic squeeze. The scale of these savings is undoubtedly positive, and one wonders if this move will be enough to galvanize public opinion in favor of Burnham’s leadership.

However, as Steere astutely observes, there is no such thing as free money. Raising the personal allowance would indeed come at a cost to the Treasury, with estimates suggesting a loss of tax take between £4.5bn and £5.5bn annually. To recoup this loss, Burnham may need to look elsewhere for revenue streams, potentially through increased additional rate income tax or other measures.

Burnham’s proposal to replace council tax with an annual property tax is also worth noting in this context. While this move may appeal to homeowners, it could have far-reaching consequences for millions of households, potentially eroding the benefits of any tax relief provided by raising the personal allowance.

Burnham has actively spoken in favor of replacing council tax with an annual property tax. For millions of homeowners, that structural shift could mean this week’s nice little bonus evaporates just as quickly as it arrived.