Prime Minister Andy Burnham has stepped back from plans to raise the £12,570 personal allowance after officials estimated the move would cost £3.7 billion.
Personal Allowance Change Put on Hold
Burnham raised the issue after hearing complaints during the Makerfield by-election, where voters reportedly expressed frustration about paying more tax as wages rise while thresholds remain frozen.
Officials later assessed the likely cost of increasing the allowance. The estimated £3.7 billion bill appears to have persuaded the Government against making an early announcement.
The proposal could still be reviewed in the Budget, but ministers have made clear that no commitment has been made. Burnham has acknowledged that the state of the public finances will restrict the Government’s room for tax cuts.
Ministers Stress Fiscal Discipline
Burnham and the new Chancellor, John Healey, have both said that the Government must respect its fiscal rules and show control over public spending.
Their comments come as ministers face questions about another cost-of-living policy announced during Burnham’s first full day in office: the removal of 5% VAT from electricity bills from October 1.
Based on the current Ofgem price cap, the change is expected to reduce the annual bill of a typical household by about £45. The policy is forecast to cost £850 million in 2026-27.
Questions Remain Over Electricity VAT Funding
The Government said the first year of the VAT reduction would be financed using money released by the cancellation of the national digital ID scheme, which had been expected to cost £1.8 billion over three years.
Former minister Darren Jones challenged that explanation, arguing that the digital ID programme had not received confirmed funding. He said ministers would still need to explain in the Budget how the electricity tax cut would be financed.
Downing Street said the policy was funded for its first year but accepted that extending it would require another spending decision. Officials also declined to predict whether household energy bills would rise or fall in October, since wholesale prices and changes to the Ofgem cap will remain major factors.
Reshuffle Deepens Tensions Within Government
Burnham’s first reshuffle has also created divisions after several allies of former prime minister Sir Keir Starmer lost their posts. Darren Jones, David Lammy and Lord Hermer were removed, while Rachel Reeves left the Government after rejecting a more junior position.
The changes have raised questions about whether Burnham will retain policies inherited from the previous administration, including the Chagos agreement, plans to reduce the number of jury trials and the early release of prisoners.
For now, the decision to delay changes to the personal allowance shows the pressure facing the new Government as it tries to support household finances without weakening its fiscal position.
