The UK government is reportedly considering raising the personal income tax allowance from £12,570 to £15,570.

The UK government is reportedly considering increasing the personal income tax allowance from £12,570 to £15,570, a move that could leave millions of workers with more disposable income and prevent most state pensioners from paying tax on part of next year’s pension increase.

The proposal, reported by Sky News citing The Telegraph, would represent the first increase in the personal allowance in five years. The threshold has remained frozen at £12,570 since 2021.

If implemented, the new threshold would be close to the level the allowance might have reached had it continued rising instead of being frozen.

The proposal is being considered by Chancellor John Healey and Prime Minister Andy Burnham, according to the report. It was suggested by Labour donor and Ecotricity owner Dale Vince.

Vince said: “If Labour wants to get the economy moving, it should put money into the pockets of people who will spend it.”

He added: “Raising the personal allowance to £15,570 would give millions of people a meaningful boost, with the biggest benefit going to those on the lowest incomes.”

He proposed funding the measure through changes to capital gains tax and by ending interest payments on Bank of England reserves.

“We can pay for it by making the tax system fairer – starting with capital gains and the billions we currently hand to banks in interest,” Vince said.

However, the government has not confirmed that the proposal will be included in the upcoming Budget.

A Treasury spokesperson said decisions on taxation were matters for the Chancellor to announce at fiscal events, rather than issues the department would “routinely comment on rumour, speculation or proposals”.

The proposed increase could also address an issue facing pensioners.

The UK’s state pension is expected to rise by 3.9% next April under the government’s triple lock system, which guarantees an annual increase based on whichever is highest among inflation, average wage growth or 2.5%.

Provisional wage figures show growth of 3.9%, meaning the full new state pension could increase from £12,547.60 to about £13,036.60.

That would put the state pension above the current £12,570 personal allowance by approximately £457.

For pensioners with total retirement income below £50,270, that amount would normally be subject to the basic 20% income tax rate, potentially resulting in an annual tax bill of about £91.40.

Increasing the personal allowance to £15,570 would place the projected state pension below the new threshold, meaning pensioners would not pay income tax on the state pension itself, assuming they had no other taxable income.

The proposal comes as the government faces pressure over its finances ahead of the next Budget.

Official figures showed that the UK public sector borrowed £18.3bn in August, the second-highest borrowing figure recorded for the month. Borrowing for the financial year so far was also £8.1bn above the level forecast by the Office for Budget Responsibility.

The government is therefore expected to face difficult decisions over taxation and spending when the Chancellor delivers the Budget.

Other possible tax changes under discussion include changes to capital gains tax and the proposed high-value council tax surcharge on expensive properties.

No decision on the personal allowance has been announced, and the final policy will depend on the Chancellor’s Budget decisions. (skynews)