The UK Government has confirmed that the personal allowance – the amount of income you can earn tax-free each year – will rise to £20,000 from April 2025. This is a significant increase from the previous level and represents one of the largest jumps in recent history. For millions of UK workers, pensioners and self-employed individuals, this change means a direct boost to their take-home pay. In simple terms, more of what you earn will stay in your pocket instead of going to HMRC, which can make a noticeable difference to household budgets.
How the personal allowance works
The personal allowance is the threshold below which you pay no income tax. In previous years this allowance had gradually increased, but in 2025 it will take a much bigger leap. Any income above the allowance is taxed at the basic rate, and then at higher rates depending on your income band. By increasing the allowance to £20,000, the Government is effectively reducing the amount of income tax that most people pay. This benefits employees on PAYE, self-employed workers submitting annual returns, and pensioners drawing retirement income.
The impact on take-home pay
With the new allowance set at £20,000, an average worker earning £30,000 per year will pay income tax only on £10,000 instead of on a larger portion under the old threshold. This results in several hundred pounds extra in take-home pay each year. For households already facing higher costs of living, this extra money can help with essentials, savings, or discretionary spending. Pensioners who rely on fixed incomes will also see a welcome change, as their taxable pension income may now fall partly or entirely under the new threshold.
Benefits for pensioners
Pensioners are often among those most affected by tax thresholds because their income is fixed and they cannot easily increase it. With the personal allowance rising to £20,000, many pensioners with modest private or workplace pensions in addition to their State Pension will pay little or no income tax at all. This could free up extra funds for day-to-day expenses, medical needs, or leisure activities. It also simplifies tax planning for older people who have been caught by the “tax on pensioners” headlines in recent years.
Changes for higher earners
While the increase in the personal allowance benefits almost everyone, it is most valuable to low- and middle-income earners. Higher earners who already pay at the higher or additional rate will still see some benefit, but the savings are proportionally smaller compared to their total tax bill. However, even those in higher brackets will keep an extra £500–£1,000 of their income depending on their circumstances. This still represents a positive change, particularly for households with multiple earners.
Effect on self-employed workers
Self-employed workers, freelancers and small business owners in the UK will also feel the impact of the new allowance. Because their income is often irregular, many will welcome a higher tax-free threshold as it gives more flexibility to manage cash flow. It also reduces the burden of saving for their self-assessment tax bill, since less of their income will be taxed. For sole traders and microbusinesses, the rise may also free up funds to reinvest in their businesses or cover rising operational costs.
Comparison with previous years
In 2020 the personal allowance stood at £12,500, rising gradually to £12,570 and then being frozen for several years. The jump to £20,000 in 2025 is therefore a dramatic policy shift. This reflects government attempts to ease the cost-of-living crisis and respond to calls for tax relief. For context, an increase of this size has not been seen in over a decade, making 2025 a milestone year for income tax policy in the UK.
What stays the same
While the personal allowance is rising, other elements of the tax system remain unchanged. National Insurance contributions, higher rate thresholds, and the additional rate of income tax still apply. The interaction between these factors will determine your actual take-home pay. For some, National Insurance may offset part of the gain from the higher allowance, but for most people the overall effect will still be positive.
Planning ahead for April 2025
Because the change takes effect from the start of the new tax year in April 2025, it is wise to plan ahead now. Check your current income level, tax code and pension contributions so you understand exactly how the new allowance will apply to you. If you are employed, your payroll department will automatically adjust your PAYE deductions. If you are self-employed, you may wish to update your bookkeeping software or talk to an accountant to project your 2025–26 tax bill.
Adjusting pension contributions
One of the biggest opportunities created by a higher personal allowance is the chance to review your pension contributions. If you can afford it, increasing your pension savings may make sense since the extra take-home pay could offset the additional contribution. For older workers approaching retirement, this is also an opportunity to reduce taxable income while boosting your retirement fund. Pension providers and financial advisers will be promoting reviews early in 2025 to help clients take advantage of the changes.
Impact on tax credits and benefits
Although the personal allowance rise is good news for most taxpayers, it may also affect eligibility for means-tested benefits or tax credits. Because your taxable income may change, your reported income for benefit purposes could shift as well. It is important to review your situation with HMRC or your benefits adviser to ensure you do not accidentally over- or under-claim. This is especially relevant for families receiving Universal Credit, Child Benefit or Pension Credit.
Common misconceptions
Some people assume that a higher personal allowance means everyone pays less tax across all income levels. In reality, the effect depends on your individual circumstances, tax band and deductions. Others believe the allowance is automatically backdated, but it only applies from the start of the tax year (April 2025) onward. Understanding these details will help you budget more accurately and avoid disappointment.
Why the change matters now
The increase to £20,000 comes at a time when inflation and living costs have eroded household budgets. By allowing people to keep more of their income, the Government hopes to stimulate spending and support economic growth. For ordinary households, it is simply a much-needed relief on monthly bills. For small businesses and self-employed workers, it is a chance to stabilise finances. And for pensioners, it represents recognition of the pressure they have been under since the pandemic.
How to calculate your savings
To estimate how much you will gain from the new personal allowance, start with your total annual income. Subtract £20,000 to find your taxable income. Apply the appropriate tax rate (basic, higher or additional) to the remainder. Compare this with what you paid under the old allowance to see your savings. Many online calculators will be updated early in 2025 to make this easier, but you can already do rough calculations using your current payslip or pension statement.
Final tips for UK taxpayers
As April 2025 approaches, keep an eye on any further announcements from HMRC. Tax codes, National Insurance and other allowances could also change, which would influence your overall position. Make sure your personal details with HMRC are up to date, including your address, employment status and pension arrangements. If you are uncertain about your situation, seek advice from a qualified tax adviser. A little preparation now can ensure you fully benefit from the higher allowance when it comes into effect.