The UK is facing tough economic times, and a big idea is gaining attention — raising the Personal Allowance from £12,570 to £45,000. If this happens, millions of workers might not have to pay any income tax at all.
This would be a major change in how taxes work in the UK, but many wonder if it is realistic and who will truly benefit from it. This article explains what Personal Allowance means, why this change is suggested, who would gain, and the possible effects on the economy and government.
What is the Personal Allowance?
The Personal Allowance is the amount of money a person in the UK can earn each year without paying income tax. For the tax year 2025/26, this limit is £12,570 and hasn’t changed since 2021. If you earn more than this, you pay tax on the extra income, based on different tax rates.
People earning over £100,000 lose some of their Personal Allowance. Specifically, for every £2 earned above £100,000, the allowance goes down by £1. If someone earns more than £125,140, they have no Personal Allowance at all and pay tax on all income.
The Current UK Tax System
The UK tax system uses different bands to decide how much tax people pay on parts of their income. For most people in England, Wales, and Northern Ireland, the bands for 2025/26 are:
- Personal Allowance: Up to £12,570 — 0% tax
- Basic rate: £12,571 to £50,270 — 20% tax
- Higher rate: £50,271 to £125,140 — 40% tax
- Additional rate: Over £125,140 — 45% tax
Scotland has a slightly different tax system with more bands and rates because of its separate tax powers.
Why Increase the Personal Allowance to £45,000?
There are several reasons why raising the Personal Allowance to £45,000 is being discussed:
Firstly, the cost of living has gone up sharply with inflation, making essentials like food, housing, and energy much more expensive. Wages, however, have not kept up, so people struggle to manage.
Secondly, supporters believe putting more money into workers’ hands will encourage spending, which could help the economy grow.
Thirdly, many think the current tax system unfairly hits low and middle earners more than the rich, who can use clever tax plans.
Lastly, a higher Personal Allowance would simplify the tax system by removing millions from paying income tax, which could save money on tax administration.
Who Benefits from This Change?
Raising the Personal Allowance to £45,000 would help many workers:
- Someone earning £15,000 would save £486 in tax each year.
- Someone earning £25,000 would save £2,486.
- At £35,000 income, the saving would be £4,486.
- At £45,000, they would pay no income tax at all and save £6,486.
- Even someone earning £55,000 would save about £6,486 in tax, paying less tax on the first £45,000.
- At £100,000 income, savings could be £16,432.
The biggest gains would be for those earning just under £45,000, who would stop paying income tax altogether. Higher earners would also save because their first £45,000 of income would be tax-free.
Economic Effects of Raising the Personal Allowance
The plan has both good and challenging economic effects.
On the positive side, more money in people’s pockets could lead to more spending in shops and services, boosting local businesses. It could reduce the need for government benefits as people earn more take-home pay. This extra spending might also create new jobs.
But, there are concerns. The government would lose a lot of tax revenue and might have to raise other taxes, cut spending, borrow more, or hope economic growth fills the gap. Also, more spending could cause prices to rise further (inflation). The effect would also differ across regions because incomes vary.
Is It Financially Possible?
The biggest hurdle is the loss of government income. The Treasury would need to find ways to make up the shortfall, like increasing other taxes (e.g., VAT, Corporation Tax), cutting government programs, borrowing money, or relying on economic growth to generate new revenue.
What Is the Government’s Position?
As of May 2025, the UK government has not accepted the £45,000 proposal. The Personal Allowance remains fixed at £12,570 until April 2028 based on current budgets.
The official House of Commons Library report confirms no immediate plans to change the threshold.
Public Opinion and Criticism
Many people support increasing the Personal Allowance because it is a simple way to help with rising living costs. It rewards people for working and puts more money directly into their hands.
However, critics argue it could be unfair. While everyone gains, richer people benefit more in actual money, which could increase income inequality.
Other Ways to Help
Some experts suggest other options, like gradually raising the allowance over years, targeting increases only to lower or middle-income earners, or giving tax breaks to essential workers and sectors under pressure.
What Would This Mean for You?
If the allowance rose to £45,000, a person earning £30,000 could save over £3,400 in tax annually. A household with two people each earning £40,000 could save nearly £9,000 combined. Self-employed workers would also benefit, but their tax situation might be more complex.
Clarifications
Would the change apply all over the UK?
Personal Allowance rules apply across the UK, but Scotland could make changes due to its tax powers.
How about pensioners?
Pensioners earning less than £45,000 would not pay income tax, which could greatly help their finances.
When could this happen?
Major tax changes usually start at the beginning of the tax year (April 6), but it depends on government approval.
Raising the UK Personal Allowance to £45,000 is an ambitious proposal that could ease financial pressure on millions and simplify the tax system. It would give a big boost to lower and middle earners, helping with the high cost of living. However, it also raises concerns about government funding and fairness. While not yet government policy, the discussion highlights a growing demand for tax reform as the UK faces ongoing economic challenges. How this proposal evolves will be important for the country’s financial future.
FAQs
What is the Personal Allowance in the UK?
Personal Allowance is the amount of income a UK resident can earn each year without paying income tax. For 2025/26, it is set at £12,570.
How would raising the Personal Allowance to £45,000 affect taxpayers?
It would mean people earning up to £45,000 pay no income tax, saving thousands each year, especially benefiting low and middle-income earners.
Will everyone in the UK benefit equally from this change?
While all taxpayers would save on taxes, higher earners gain more in actual money, raising concerns about fairness and wealth inequality.
How would raising the Personal Allowance impact government revenue?
The government would face a large loss in tax revenue, requiring other tax increases, spending cuts, borrowing, or relying on economic growth to fill the gap.
Is the UK government planning to increase the Personal Allowance soon?
No, as of May 2025, the Personal Allowance remains frozen at £12,570 until April 2028 with no official plans to raise it.
Would pensioners benefit from a higher Personal Allowance?
Yes, pensioners earning below £45,000 would pay no income tax, improving their financial situation significantly.
Can Scotland set a different Personal Allowance?
Yes, Scotland has devolved tax powers and could set its own Personal Allowance rules, which may differ from the rest of the UK.
Regarding state pensioners who contracted out are being unfairly treated
My position is my state pension and serps is appx 50/50 so serps is not guaranteed like the triple lock and therefore this year’s increase was 4.1% state and 1.7% serps = 2.9% How can this be right
Also when inflation is flat lining you do not received any increase at all
With the new state pension being more this makes my generations pensions fall further behind the gap just widens each year
It is new concept. It is difficult to predict the results from day one. But, it will good idea, to increase the threshold to £25.000 in first place and see the effect in years. Just observe the results for the first 5 years, and than increase to £45.000 or £50.000 if its good for the economy.
We know that we each have to contibute £18,000 a year in tax and NI so that we pay our way and are not another freeloader. ( Barnet formula amount )The country seems to be at least 50% freeloaders. How will this help getting more people to cover their own costs to Govt and not be just another freeloader ?