Andy Burnham has a cunning Budget plan – and it could sweep him to snap election victory

Andy Burnham is facing one of the most politically sensitive Budgets of his short time as Prime Minister, with reports that his government is examining a proposal that would combine tax rises on wealth with a substantial reduction in income tax for lower earners.

The idea could put a tax cut at the centre of the October 28 Budget rather than leaving the government to defend a package dominated by higher taxes. But whether the proposal would ultimately be adopted — or how voters would respond to it — remains unknown.

The plan has emerged from a submission by Labour donor and Ecotricity founder Dale Vince, who has proposed increasing Capital Gains Tax (CGT) and changing the way the Bank of England pays interest on reserves held by commercial banks.

According to reports, the money raised could be used to increase the income-tax Personal Allowance from its current £12,570 to £15,570. The Treasury has not confirmed that the proposal will become government policy, stressing that tax decisions are announced at fiscal events rather than through speculation.

Nevertheless, the proposal has attracted considerable attention because it addresses one of the most politically visible features of the current tax system: the Personal Allowance has remained frozen at £12,570 while prices and wages have risen.

The £3,000 tax-free allowance proposal

Under the proposal, the Personal Allowance would rise by £3,000, meaning individuals could earn more before paying income tax.

The current £12,570 allowance has been frozen for several years. Official HMRC figures confirm that it remains £12,570 for the 2026/27 tax year.

The significance of the freeze is that workers can become liable for more tax as their nominal wages rise, even if their purchasing power has not increased to the same extent.

Vince’s proposal therefore seeks to reverse part of that effect.

Reports suggest the increase to £15,570 could cost around £20 billion, with the largest proportional benefit going to lower earners. Sky News reported Vince arguing that putting additional money into the pockets of people who are more likely to spend it could also support economic activity.

For the government, that creates a potentially attractive political message: lower income-tax bills for millions of workers while raising additional revenue elsewhere.

But the financing mechanism is where the controversy begins.

Capital Gains Tax could become the main target

The proposal would gradually bring Capital Gains Tax closer to income-tax rates.

At present, the main CGT rates for individuals are 18% for basic-rate taxpayers and 24% for higher-rate taxpayers on most relevant gains. Those rates have applied since changes introduced in 2024.

The proposal reportedly envisages rates rising as high as 45%, broadly matching the top income-tax rate.

The argument made by supporters is that income from work should not be taxed substantially more heavily than gains made from investments and other assets.

The government is already examining options for reforming CGT ahead of the October Budget. Reuters reported earlier this month that CGT currently raises around £24 billion a year and that aligning rates with income tax could potentially raise additional revenue, although behavioural responses could reduce the amount ultimately collected.

That uncertainty is crucial.

Taxpayers do not necessarily respond to a tax increase by continuing exactly the same economic behaviour. People can delay selling assets, restructure investments or use other legitimate tax-planning measures.

Official analysis cited by the Centre for Policy Studies indicates that a 10-percentage-point increase in the higher CGT rate could reduce Treasury receipts by £3.6 billion in 2028/29.

That creates a significant question for Healey: how much additional revenue could realistically be raised if CGT rates were pushed sharply higher?

The Bank of England reserves argument

The second element of the proposal concerns interest paid on commercial-bank reserves held at the Bank of England.

The idea has been discussed by politicians and economists for some time. Critics argue that the state should not be paying billions of pounds in interest to commercial banks on reserves created through the central bank’s monetary-policy operations.

But the issue is considerably more complicated than simply describing the payments as a government handout.

The Bank of England uses the remuneration of reserves as part of the framework through which it implements monetary policy. Changing that system would therefore have implications for the banking sector and the transmission of interest rates.

Bank of England Governor Andrew Bailey has previously rejected claims that interest on reserves simply represents excess profits for banks, pointing out that much of the effect can ultimately pass through to depositors and other parts of the financial system.

That means eliminating or substantially changing reserve remuneration would not necessarily create a free £40 billion pot of money that could simply be redirected elsewhere.

Any alternative would need to preserve effective monetary-policy operations while accounting for the impact on banks, savers and borrowing costs.

Why the proposal is politically attractive

The political attraction is nevertheless obvious.

A government facing pressure over taxation could potentially announce a large increase in the Personal Allowance while arguing that the change is funded through reforms aimed at wealth and financial institutions.

That would allow ministers to frame the policy as a redistribution of the tax burden rather than simply an increase in overall taxation.

The proposal would also allow Labour to draw a sharper distinction between taxation of earnings and taxation of accumulated wealth.

But the government would face competing reactions.

Workers benefiting from a higher Personal Allowance could see an immediate reduction in their income-tax liability. Investors, entrepreneurs and people disposing of taxable assets could face higher CGT bills.

Financial institutions could also oppose changes to reserve remuneration if they believed the policy would affect their funding models or the transmission of monetary policy.

The political response would therefore depend heavily on the details.

Pensioners add another complication

The Personal Allowance also has implications beyond workers.

With the state pension increasing over time, a frozen income-tax threshold can eventually result in more pensioners becoming liable for income tax.

That is because the tax system looks at total taxable income, rather than treating the state pension as automatically tax-free.

A higher Personal Allowance could therefore reduce the number of pensioners facing income-tax liabilities or reduce the amount of tax paid by some pensioners.

For a government trying to address concerns about living costs, that could be an important secondary effect.

However, the precise impact would depend on the final allowance, the state pension level and each individual’s other taxable income.

The election question

The original political argument behind the proposal is that a significant tax cut could help Labour demonstrate a different direction before a future general election.

But there is no way to establish in advance whether such a measure would produce an electoral benefit.

The current Parliament does not need to face voters immediately. The House of Commons Library says Parliament can be dissolved earlier at the Prime Minister’s request, but if it runs its full term the next general election would take place no later than August 2029.

A snap election in November, as suggested in the original commentary, would therefore be a political decision rather than a requirement arising from the Budget.

For Burnham and Healey, the more immediate challenge is making the numbers work.

The government’s fiscal position is already under pressure. Recent analysis has pointed to rising borrowing costs, inflation and a shrinking amount of room available to meet fiscal rules. The Times reported that KPMG estimates fiscal headroom could have fallen to around £11.6 billion, although forecasts differ and the final position will depend on the Office for Budget Responsibility’s assessment accompanying the Budget.

That makes a £20 billion Personal Allowance increase particularly challenging.

A tax cut funded by tax reform

The proposal therefore represents a complicated trade-off.

On one side is a substantial tax reduction for people earning below or around the current threshold. On the other are higher taxes on capital gains and potentially major changes to the monetary-policy framework surrounding bank reserves.

The numbers also cannot simply be taken at face value.

Vince’s submission estimates that bringing CGT closer to income-tax rates could raise around £14 billion. Other analysis has produced different estimates and highlighted the possibility that higher rates could reduce receipts if taxpayers change their behaviour.

The government would therefore need to determine not just how much the policy might raise under static assumptions, but how taxpayers, investors and financial institutions might respond.

That is likely to be one of the central questions facing Healey before October 28.

If the government adopted the proposal, the Budget would contain an unusual combination: a substantial increase in the tax-free income threshold alongside higher taxation of certain forms of wealth.

Whether that becomes the centrepiece of Burnham’s economic strategy remains to be seen.

What is already clear is that the proposal has changed the political conversation around the Budget. Instead of asking only which taxes might rise, voters and businesses are now also waiting to see whether the government will offer a significant tax cut — and, crucially, who will ultimately pay for it.