UK Personal Allowance 2025 Rises to £20000 – How Much More Will You Really Take Home?

But what exactly does this mean for your payslip, and how much more money will you really get to keep in your pocket each month? Here is a detailed breakdown of the new allowance, its impact on different groups, and what you need to know before the change takes effect.

What Is the Personal Allowance?

The personal allowance is the amount of income you can earn before paying income tax. In the current 2024/25 tax year, it stands at £12,570, meaning workers pay no income tax on the first £12,570 they earn.

From April 2025, this threshold will rise significantly to £20,000. This is not just a routine adjustment—it is one of the largest jumps in the allowance in recent memory, following years of frozen thresholds and only modest increases.

Why Has the Government Increased It?

The government has introduced the £20,000 allowance in response to ongoing cost-of-living pressures. Over the past few years, households have faced:

• High inflation on food and essentials.
• Rising energy bills.
• Increased housing and rent costs.

By raising the allowance, the government aims to:

• Put more disposable income into people’s pockets.
• Provide greater relief for low and middle-income earners.
• Ease the burden on pensioners living on fixed incomes.
• Encourage work by letting employees keep more of what they earn.

This tax cut is intended as a direct response to financial pressure and a way to deliver tangible support to households across the UK.

Who Will Benefit the Most?

Almost everyone who pays income tax will benefit, but the impact will vary depending on earnings:

• Full-time workers earning over £20,000: will save around £1,486 a year.
• Part-time workers earning less than £20,000: may now pay no income tax at all.
• Pensioners with state pension plus private income: will see significant reductions in their tax bills.
• Families with two working adults: could see a combined saving of nearly £3,000 per year.

For households on tight budgets, these changes are likely to be transformative.

How Much Extra Will You Take Home?

Here are some practical examples:

• If you earn £20,000 a year:
• Old allowance: taxed on £7,430.
• New allowance: taxed on £0.
• Saving: £1,486 a year (£123 a month).
• If you earn £30,000 a year:
• Old allowance: taxed on £17,430.
• New allowance: taxed on £10,000.
• Saving: £1,486 a year.
• If you earn £50,000 a year:
• Old allowance: taxed on £37,430.
• New allowance: taxed on £30,000.
• Saving: £1,486 a year.
• If you earn £15,000 a year:
• Old allowance: taxed on £2,430.
• New allowance: taxed on £0.
• Saving: £486 a year.

This shows that the maximum saving is capped at £1,486 annually, but even smaller savings are meaningful for lower earners.

Impact on Low Earners

For those on modest wages, the rise is particularly important. A worker earning just above the old tax threshold will now pay no income tax at all.

This could mean an extra £400–£500 annually, which can go towards rent, energy, or food costs—essentials that have seen sharp price increases in recent years.

What About National Insurance?

It’s crucial to note that this change only applies to income tax, not National Insurance (NI).

• The NI threshold is currently set at £12,570, in line with the old personal allowance.
• The government has not yet confirmed whether this will rise alongside the new £20,000 allowance.

If the NI threshold remains unchanged, workers will still pay NI contributions once earnings exceed £12,570, even if they pay no income tax up to £20,000.

Will Pensioners Benefit?

Yes, pensioners will also gain, especially those who receive state pension plus private pension income.

• A retiree with an annual income of £19,000 from pensions currently pays around £486 in tax.
• From April 2025, they will pay no tax at all.

This change reduces financial stress for pensioners, many of whom have struggled with rising utility and food bills on fixed incomes.

What About Higher-Rate Taxpayers?

Higher earners also benefit, but the maximum gain is still £1,486 per year. This is because only the first £20,000 of income is tax-free, while income above that is taxed at normal rates:

• 20% (basic rate)
• 40% (higher rate)
• 45% (additional rate)

While this is still a welcome saving, the biggest impact is felt by middle and low-income households.

Will It Affect Benefits?

For those on means-tested benefits, income after tax can influence eligibility. The higher personal allowance could slightly reduce reported taxable income, potentially affecting how benefits are calculated.

However, in most cases, the overall result will still leave households better off.

Wider Economic Impact

Beyond household budgets, the £20,000 allowance could impact the economy:

• Boost to consumer spending: More disposable income may support shops, services, and hospitality.
• Potential reduction in government tax revenue: Some critics warn the Treasury could lose billions, leading to pressure on public spending.
• Encouragement of employment: Workers may feel more incentivised to increase hours or rejoin the workforce.

The long-term impact will depend on broader economic performance and government spending priorities.

Key Things to Remember

• The new £20,000 allowance starts in April 2025.
• Everyone earning above £12,570 will save on tax.
• The maximum saving is £1,486 per year.
• Pensioners and low earners will benefit most.
• National Insurance contributions remain separate and may not rise in line with the allowance.

How to Check Your Payslip

From April 2025, employers will automatically apply the new allowance through the PAYE system. Workers do not need to apply or request changes.

Employees can:

• Use online tax calculators to estimate their savings.
• Review their payslip after April 2025 to see the increase in take-home pay.

FAQs

Q1. What is the new personal allowance for 2025?
A1. The personal allowance will rise to £20,000 from April 2025, meaning you pay no income tax on the first £20,000 you earn.

Q2. How much will I save each year?
A2. The maximum saving is £1,486 per year, with lower earners saving less depending on their income.

Q3. Will this change affect National Insurance?
A3. Not directly. NI thresholds are currently set at £12,570, and the government has not confirmed whether they will increase to match the new allowance.

Q4. Do pensioners benefit from the change?
A4. Yes. Pensioners with income from state and private pensions will see tax bills reduced or eliminated entirely if their income is under £20,000.

Q5. Do I need to apply to benefit from the new allowance?
A5. No. Employers will automatically apply the new allowance through PAYE, and pension providers will adjust calculations for retirees.