UK Government has recently confirmed a major change that will affect millions of workers and taxpayers. From the next tax year, the personal allowance – the amount of income you can earn before paying tax – will rise from £12,570 to £20,000. This is the biggest increase in years and is being introduced to help people cope with the rising cost of living, higher energy bills, and ongoing inflation pressures.
But what does this really mean for your pay, your tax bill, and your household finances? Let’s break down the details in a clear and simple way so you can understand exactly how it impacts you.
What is the Personal Allowance?
The personal allowance is the income threshold up to which you pay no income tax. For the current tax year, that figure is £12,570. This means if you earn less than that, you don’t pay any income tax. If you earn more, tax applies only on the amount above the threshold.
By raising the allowance to £20,000, the Government is giving workers and pensioners more take-home pay. For many households, this change could mean saving hundreds or even thousands of pounds each year.
Why is the Government Increasing It?
The decision to increase the allowance is largely linked to the ongoing cost of living crisis in the UK. Over the past few years, households have faced rising food prices, higher mortgage repayments, increased rents, and expensive energy bills. By raising the allowance, the Government is effectively putting more money into people’s pockets without needing to raise wages directly.
Another reason is fairness. The tax system is designed so that low and middle-income earners benefit more from these changes. By lifting the allowance, those on modest salaries see a bigger improvement in their disposable income.
How Much Will You Save?
The actual benefit depends on how much you earn. Here are some examples to give you an idea:
- Someone earning £18,000 – Currently, they pay income tax on £5,430 (£18,000 minus £12,570). Under the new rules, they won’t pay any income tax at all. That’s a saving of over £1,000 per year.
- Someone earning £25,000 – At the moment, they pay tax on £12,430. With the new allowance, they’ll only pay tax on £5,000. That means they’ll save about £1,486 per year.
- Someone earning £35,000 – They’ll also benefit, paying tax on £15,000 of income instead of £22,430. That works out to a saving of around £1,486 as well.
- High earners above £100,000 – Their personal allowance is gradually reduced, so they won’t benefit as much. The real winners here are those earning between £15,000 and £50,000.
Impact on Part-Time Workers and Low Earners
Part-time workers and people on lower wages will see one of the biggest differences. For many people working around 20 hours per week at minimum wage, this change could mean not paying any income tax at all. That provides welcome relief, especially for households where one partner works part-time while managing childcare or other responsibilities.
What About National Insurance?
It’s important to remember that income tax is only one part of the deductions from your pay. National Insurance (NI) contributions still apply, and they aren’t affected by the personal allowance change. However, the Government has hinted at potential reforms to NI in the future. For now, the rise in the allowance only affects income tax.
Does This Affect Pensioners?
Yes, pensioners will also benefit. If your pension income is below £20,000, you won’t pay any income tax at all. That’s a huge relief for many retirees living on fixed incomes. Those with higher pensions will also pay less tax overall.
How Does It Compare Internationally?
With the new £20,000 threshold, the UK’s tax-free allowance will be one of the most generous in Europe. In some countries, such as Germany and France, the allowance is lower in cash terms, though their tax systems work differently. The move is likely to be welcomed by both workers and employers, as it improves incentives to work and boosts disposable income.
Will It Affect Benefits Like Universal Credit?
This is a key question for many households. The answer depends on your situation. Universal Credit takes into account your after-tax income. Since you’ll keep more of your earnings under the new allowance, it may reduce the amount of Universal Credit you receive. However, the Government has suggested that adjustments will be made to ensure low-income families still benefit from the policy.
The Wider Economic Impact
Raising the personal allowance has a ripple effect on the economy. More take-home pay means households have more money to spend, which can boost local businesses and encourage growth. On the other hand, it also means less income tax revenue for the Treasury. The Government argues that the benefits of stimulating spending and reducing financial stress outweigh the short-term drop in tax receipts.
Who Benefits the Most?
The biggest winners are:
- Full-time workers earning between £18,000 and £50,000
- Part-time workers earning just above the old allowance
- Pensioners with modest private pensions
- Families where one partner earns a low-to-middle salary
Those on very high incomes won’t see much of a difference because their allowance is reduced after £100,000 of earnings.
Practical Steps for Workers
If you’re employed, you don’t need to do anything to benefit. Your employer will automatically apply the new allowance through the PAYE system. From the first payslip of the new tax year, you should see the difference in your take-home pay.
If you’re self-employed, you’ll feel the benefit when you file your tax return. Your taxable income will be reduced, lowering your overall bill.
Will It Last?
The big question is whether this rise will be permanent. Governments sometimes make temporary tax adjustments, but in this case, the Chancellor has confirmed that the £20,000 allowance will be a long-term measure. That said, future Governments could review it depending on the state of the economy.
Common Questions Answered
Does this mean I’ll get a refund for the current year?
No, the new allowance only applies from the start of the next tax year. It won’t be backdated.
Will this affect student loan repayments?
Yes, indirectly. Student loan repayments are based on your income above a certain threshold. Since you’ll keep more income before tax, your net pay will rise, but your loan repayments will still depend on your gross salary.
What about Scotland?
Scotland has its own system of income tax bands. However, the personal allowance is UK-wide, so Scottish taxpayers will also benefit from the higher threshold.
Final Thoughts
The increase of the personal allowance from £12,570 to £20,000 is one of the most significant tax changes in recent years. For millions of workers, pensioners, and part-time employees, it means keeping more of their hard-earned money.
While it won’t solve all the financial pressures households face, it is a step in the right direction. More disposable income gives families greater breathing space and supports the wider economy.
As the change comes into effect, it’s worth checking your payslip carefully to make sure you’re getting the correct benefit. If you’re self-employed, plan ahead for how this will affect your next tax return.
Overall, this move is designed to put money back into people’s pockets at a time when many are struggling. Whether you use the extra income to pay bills, clear debt, or simply enjoy a little more comfort, the new £20,000 personal allowance is a welcome boost for millions across the UK.