Andy Burnham eyes £3,000 boost for state pensioners – but there’s a massive catch

Andy Burnham is considering a tax proposal that could raise the personal allowance from £12,570 to around £15,570, potentially changing the amount of income millions of people can receive before income tax becomes payable.

For pensioners, the proposal has an important second dimension. The full new State Pension is already close to the current tax-free allowance, meaning continued increases in the pension combined with frozen tax thresholds could eventually bring more retirees into the income-tax system.

However, the proposed £3,000 increase should not be confused with a £3,000 cash payment to pensioners. It would be an increase in the amount of income that can be received before tax, with the value of the benefit depending on an individual’s income and tax position.

And there is another major question: how would the government pay for it?

The £15,570 proposal

The standard Personal Allowance is currently £12,570 and is due to remain at that level under legislation covering the period through April 2031. HM Revenue & Customs confirms that the allowance has remained at £12,570 and that the government’s current policy is to maintain it at that level until 5 April 2031.

The proposal being discussed would increase that threshold by roughly £3,000 to £15,570.

According to reporting by The Times, the plan is associated with Labour donor Dale Vince and would cost around £20 billion a year. Around £14 billion could come from increasing Capital Gains Tax, while another part of the funding proposal involves changing the way interest paid on Bank of England reserves is treated. The Treasury has not confirmed that the proposal will become government policy, meaning the figures remain part of the current Budget debate rather than an announced tax change.

For a basic-rate taxpayer, every additional £1,000 of Personal Allowance can potentially reduce income-tax liability by up to £200, assuming the individual has enough taxable income to use the allowance.

That means the headline £3,000 increase could be worth up to around £600 a year for someone paying income tax at the 20% basic rate.

But that calculation does not apply equally to everyone.

Someone whose income is already below £12,570 would not receive a £600 tax saving because they are already paying no income tax on their taxable income. Likewise, people with different sources of income or higher tax liabilities could experience a different effect.

That distinction matters particularly for pensioners.

Why pensioners are increasingly caught in the middle

The current State Pension is moving closer to the frozen Personal Allowance.

For 2026/27, the full new State Pension is £241.30 a week, equivalent to £12,547.60 a year. That is only £22.40 below the £12,570 Personal Allowance.

This does not mean every pensioner is automatically paying income tax. The actual tax position depends on total taxable income, including other pensions, employment income, savings income and other sources.

But the narrowing gap illustrates the problem created when one threshold rises while another remains frozen.

The State Pension is uprated under the triple lock, meaning it increases each year by the highest of average earnings growth, inflation or 2.5%.

The Personal Allowance, by contrast, is currently fixed at £12,570.

That creates a potential fiscal drag effect.

If the State Pension continues to rise while the tax-free threshold does not, a growing number of pensioners could eventually have taxable income above the allowance, particularly where they also receive private or workplace pension income.

This is one reason the proposed £15,570 threshold could be significant.

A Personal Allowance of £15,570 would provide a much larger gap between the full new State Pension and the point at which income tax starts.

But the £3,000 headline does not mean pensioners receive £3,000

This is perhaps the most important catch.

The proposal is a tax allowance increase, not a £3,000 pension increase.

A pensioner receiving only a State Pension below the new threshold would not suddenly receive an extra £3,000 in their bank account.

Instead, the higher allowance would mean they could receive more taxable income before income tax became due.

For a pensioner receiving £12,547.60 from the full new State Pension, for example, the proposed allowance would leave almost £3,000 of additional headroom before income tax became payable.

For someone already paying basic-rate tax on additional pension income, the saving could be meaningful.

For someone with no taxable income above the existing allowance, the immediate cash benefit would be much smaller or potentially zero.

The same principle applies to working-age taxpayers.

The proposal therefore represents a broad tax cut rather than a pension-specific payment.

The funding question is where the politics becomes complicated

The proposal becomes considerably more controversial when its funding is examined.

The reported plan would rely heavily on Capital Gains Tax changes. Current main CGT rates are 18% and 24% for most assets, while the annual exempt amount is £3,000 for 2026/27.

HMRC’s own ready-reckoner illustrates why predicting the revenue from higher CGT is difficult.

Its estimates show that a 10-percentage-point increase in the higher CGT rate could initially raise money but eventually produce substantially smaller receipts as taxpayers change their behaviour. For 2028/29, HMRC’s illustrative estimate is a £3.565 billion reduction in receipts from that particular tax change.

That does not mean every proposed CGT increase would lose money.

It does show, however, that the amount raised cannot simply be calculated by multiplying a new tax rate by today’s taxable gains. People can delay disposals, restructure investments or change other financial behaviour when tax rates change.

That creates uncertainty around the claimed £14 billion contribution to the £20 billion package.

The Bank of England question is another complication

The proposal has also been linked to changes involving interest paid on commercial bank reserves held at the Bank of England.

But the central bank’s balance sheet and quantitative easing operations are considerably more complicated than simply treating reserve interest as spare government revenue.

The Bank currently holds hundreds of billions of pounds of government bonds acquired through its monetary-policy operations. In September, it set out a plan to reduce its stock of government bonds held for monetary-policy purposes, with an average reduction of £46 billion a year through 2034.

The Bank also stressed that monetary policy decisions are aimed at achieving its inflation target, rather than providing a source of straightforward funding for government spending.

That means any attempt to use changes in reserve remuneration as part of a fiscal package would need to take account of monetary-policy, banking and financial-market consequences.

And then comes the triple-lock question

For pensioners, the bigger long-term issue may not be the Personal Allowance at all.

It could be the future of the triple lock.

The policy currently guarantees that the State Pension rises annually by whichever is highest of earnings growth, inflation or 2.5%.

The mechanism has helped lift pension incomes over the past decade, but its cost has also become an increasingly prominent issue in the public-finance debate.

Recent analysis has questioned whether the triple lock can remain unchanged indefinitely as the population ages and the number of pensioners increases. The debate has also acquired an intergenerational dimension, with arguments about whether additional public resources should instead be directed towards younger households and working-age people.

There is no announced decision to abolish the triple lock.

But that is precisely why pensioners may look beyond the immediate tax saving when assessing any future package.

A higher Personal Allowance could provide a relatively straightforward benefit today. A change to the way pensions are uprated could have a much larger cumulative effect over many years.

The timing could be crucial

The proposal is emerging against a difficult fiscal backdrop.

Reuters reported on September 22 that UK public-sector borrowing in August reached £18.3 billion, above the £15.5 billion forecast, while cumulative borrowing for the financial year was £8.1 billion higher than the Office for Budget Responsibility had expected. The report said the government’s estimated fiscal headroom had fallen from around £24 billion in March to about £10 billion.

That makes a £20 billion tax-and-spending proposal particularly significant.

The government’s Budget is scheduled for October 28, giving Burnham and Chancellor John Healey an opportunity to clarify whether the Personal Allowance idea is actually being considered as official policy.

Until then, pensioners should be cautious about treating £15,570 as a confirmed new threshold.

The existing Personal Allowance remains £12,570, and the full new State Pension for 2026/27 is £241.30 a week.

If the proposed increase goes ahead, it could reduce the tax pressure created by a rising State Pension and frozen income-tax thresholds.

But the central question will remain how the government funds the change — and whether pension policy, Capital Gains Tax and other parts of the tax system are altered in return.

For pensioners, therefore, the apparent £3,000 boost is only one side of the story. The more important calculation may be what happens to the wider pension settlement over the next five years.