Millions of workers could be in line for a £3,000 tax boost if plans reportedly being examined by Andy Burnham and Chancellor John Healey go ahead. The personal allowance could rise from £12,570 to £15,570 under proposals ahead of the October Budget, with Labour donor Dale Vince suggesting the move could be funded by changes to capital gains tax and Bank of England interest payments to commercial banks.
Mr Vince has suggested funding the change by stopping the Bank of England from paying commercial banks interest on the reserves they hold with it.
The personal allowance has been frozen at £12,570 since 2022/23 and the Government has extended the freeze until April 2031.
Mr Vince told BBC Radio 4's Today programme that ending the freeze could generate a significant boost to economic growth.
He said: “The income tax allowance freeze is a great example. We’ve taken £600 from millions of people, and we’ve actually impaired the economy.
“If we put that back, respected economists have modelled the impact, and it’s a 1.2% GDP growth in year one, that’s a doubling of GDP (growth) by restoring the income tax allowance.”
The £600 figure refers to the estimated gain for people in the bottom 20% of workers under the proposal, according to modelling cited by Mr Vince.
A rise to £15,570 would represent an extra £3,000 of tax-free income for someone entitled to the full personal allowance.
Dale Vince's £30bn Bank of England plan
Mr Vince said the tax cut could be paid for by changing the way interest is paid on commercial bank reserves held at the Bank of England.
He claimed the payments amount to around £30 billion a year.
He said: “It will cost £20 billion actually to restore the income tax freeze, which is really robbing people, particularly hard-working people.
“We pay interest to the banks every year totalling about £30 billion, you know the banks that don’t really pay us any money for our deposits with them, we through the Bank of England pay them 4% at the moment for the money that they’re sat on… £30 billion, take that back, pay for the income tax allowance, and have £10 billion in change.”
The proposal would therefore involve reducing or ending interest payments on some bank reserves, rather than raising another tax to fund the increase in the personal allowance.
Mr Vince has also proposed bringing capital gains tax rates into line with income tax rates in a submission to the Treasury ahead of the Budget.
Former Treasury minister questions proposal
Former Conservative Treasury minister Sir David Gauke questioned whether the banking proposal could raise the sums claimed without wider economic consequences.
Sir David told Today: “Anything that sounds too good to be true is almost certainly too good to be true. I’m very sceptical that you can raise that sort of money from the banking sector, without it having a significant impact on competitiveness, a significant impact on lending to small businesses in particular.”
He added: “There isn’t, I’m afraid, an easy answer whether that’s the banking sector or a few high net worth individuals, our tax system is already very dependent upon the very wealthy. I’m afraid that answers that sort of sound terrific and mean ordinary people are unaffected are not going to be credible.”
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Sir David also argued that the Government would need to find savings if it wanted to reduce taxes elsewhere.
He said Labour should consider measures including potentially ending the State Pension Triple Lock in the next Parliament to “restore some credibility with the markets”.
He continued: “If we’re going to raise more in taxes, (it’s) better to do broad-based taxes than anything narrowly hitting one group of people or one type of business.”
Personal allowance freeze has pushed up tax bills
The personal allowance is the amount of income most people can receive before they start paying income tax.
For the 2026/27 tax year it remains £12,570, while the higher-rate threshold remains £50,270 in England, Wales and Northern Ireland.
The allowance was frozen at £12,570 from 2022/23 and the November 2025 Budget extended the freeze through to 2030/31.
The freeze has contributed to fiscal drag, whereby wages rise but tax thresholds do not, meaning more income becomes taxable and more people can move into higher tax bands.
The Office for Budget Responsibility estimates that the combined effect of personal tax threshold freezes will raise £66.6 billion by 2030/31, compared with a scenario where the thresholds had instead been indexed to inflation. It also forecasts that the freezes will have brought an additional 5.2 million people into income tax between 2022/23 and 2030/31.
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The OBR estimates that the personal allowance would be around £4,900 higher by 2030/31 if it had continued to rise with inflation from its current level.
That means Mr Vince's proposed £15,570 allowance would still be below the level the OBR estimates it could have reached by the end of the decade if it had continued to be uprated with inflation.
His proposal comes as the frozen tax allowance is facing renewed scrutiny, with the full new State Pension also set to rise above £12,570 next year under the Triple Lock.
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