The UK government has announced a significant increase in the personal allowance for the 2025/26 tax year. From April 2025, the personal allowance—the amount of income you can earn before paying income tax—rises to £20,000.
This change will impact millions of taxpayers across the UK, allowing them to keep more of their earnings and plan their finances better. Understanding the details of this change is crucial for employees, pensioners, and self-employed individuals alike.
This guide breaks down how the personal allowance works, who benefits most, and practical steps to make the most of the increase.
What is Personal Allowance?
Personal allowance is the amount of income an individual can earn before paying income tax.
For most taxpayers, the personal allowance applies to:
- Employment income
- Pensions
- Some benefits and savings income
Previously, the personal allowance was £19,500, so the new increase to £20,000 represents an extra £500 of tax-free income.
How Much More You’ll Keep
The increase effectively reduces the tax you pay on your earnings.
For example:
- If your income is £25,000, you previously paid tax on £5,500.
- With the new allowance, you now pay tax on £5,000.
This means £500 more remains in your pocket, which could cover essentials, savings, or leisure spending.
For higher earners, the benefit may be slightly reduced due to gradual reductions in personal allowance for those earning over £100,000 per year.
Who Benefits Most
The following groups are likely to see the most advantage from the increased allowance:
- Low and middle-income earners – The additional tax-free income provides more disposable income.
- Pensioners – Individuals drawing pensions under £20,000 will now pay less tax.
- Self-employed – Freelancers and small business owners can retain more income.
- Families with multiple earners – Each person benefits individually from the allowance.
Understanding these benefits allows households to plan budgets more effectively.
Regional Differences in the UK
While the personal allowance applies to the entire UK, tax rates vary slightly in Scotland due to devolved powers:
- England, Wales, and Northern Ireland: Standard income tax rates apply.
- Scotland: Different income tax bands may affect how much tax you pay above the personal allowance.
It is advisable for Scottish taxpayers to check the latest guidance from Revenue Scotland to understand the exact impact.
How to Make the Most of the Increased Allowance
There are several strategies to optimise the benefit of the higher personal allowance:
- Check your tax code – Ensure HMRC applies the correct allowance automatically.
- Adjust pension contributions – Tax-free contributions can enhance savings while reducing taxable income.
- Maximise ISAs and savings accounts – Use tax-free savings to make the most of available allowances.
- Plan income distribution – Couples can balance income to utilise both personal allowances effectively.
- Review benefits – Some benefits may interact with taxable income, so planning helps avoid unnecessary tax.
Frequently Asked Questions
Does the increase apply automatically?
Yes. HMRC typically updates tax codes to reflect the new personal allowance.
Will higher earners benefit?
Individuals earning above £100,000 see a gradual reduction in allowance, so the benefit may be smaller.
Do pensioners benefit?
Yes. Pensioners under the personal allowance threshold pay less tax.
Does this affect Universal Credit or other benefits?
Some benefits are calculated based on income. A higher personal allowance may slightly reduce means-tested benefit entitlements.
Planning Ahead
The rise in personal allowance offers an opportunity to plan finances strategically:
- Review household budgets
- Adjust savings and investments
- Check tax codes for accuracy
- Plan pension contributions for maximum efficiency
Being proactive ensures you keep more of your hard-earned money and avoid surprises at tax time.
Conclusion
The increase of UK personal allowance to £20,000 in 2025/26 is a welcome change for many taxpayers.
Low and middle-income earners, pensioners, and self-employed individuals will see the most benefit. By understanding how this allowance works, monitoring tax codes, and planning finances carefully, you can maximise your savings and reduce tax liability.
Keeping up with these changes ensures households remain financially resilient and fully prepared for the year ahead.