UK Ministers Consider Capital Gains Tax Rise to Fund Personal Allowance Increase

UK ministers are reportedly examining whether a rise in Capital Gains Tax could help fund a major increase in the income tax personal allowance.

The proposal comes as the government looks for ways to ease pressure on household budgets before next month's Budget.

The Daily Telegraph reported that Prime Minister Andy Burnham and Chancellor John Healey are reviewing the idea.

Under the proposal, Capital Gains Tax could rise to as much as 45%.

That is the current top rate of income tax in England, Wales and Northern Ireland.

The money raised could then be used to increase the tax-free personal allowance.

No decision has been made.

The Treasury has also declined to comment on speculation.

Where the proposal came from

The idea is not government policy.

It comes from a Budget submission by Dale Vince, founder of green energy company Ecotricity.

Vince is also a Labour donor.

His submission was sent to the Treasury and Downing Street's policy unit last week.

The proposal is now reportedly being examined.

Vince wants the personal allowance to rise by £3,000.

That would take it from £12,570 to £15,570.

The personal allowance is currently £12,570 for the 2026-27 tax year.

The proposed increase would cost the government about £20 billion.

Vince argues that the allowance would otherwise have been higher if it had risen with inflation since it was frozen.

Modelling from the National Institute of Economic and Social Research has also been cited alongside the proposal.

It suggests that the bottom fifth of earners could be about £600 a year better off.

How would the government pay for it?

Vince proposes increasing Capital Gains Tax to match income tax rates.

The submission estimates that this could raise about £14 billion.

The proposal also identifies interest payments on Bank of England reserves as another possible source of funding.

However, the £14 billion estimate comes from the proposal.

It is not an official Treasury or Office for Budget Responsibility costing.

Any policy adopted by the government would need further analysis and an independent assessment.

A "cost-of-living government"

The timing of the proposal is important.

Burnham has presented his government as focused on the cost of living.

He succeeded Sir Keir Starmer as prime minister during the summer.

Chancellor John Healey has also said that affordability and wealth creation will be priorities in his first Budget.

The Budget is due on October 28.

When Burnham took over from Starmer, he said he was considering an increase in the personal allowance.

He also warned that such a move would have significant consequences for the public finances.

Pressure is also coming from trade unions.

Unite general secretary Sharon Graham has called for an increase in the personal allowance.

The aim would be to put more money into workers' pockets.

Ministers are also looking for ways to ease household costs before an expected increase in energy bills next year.

Why does the personal allowance matter?

The personal allowance is the amount a person can earn before paying income tax.

It has remained at £12,570 since 202