In 2025, a bold new proposal is dominating discussions around UK income tax—raising the Personal Allowance from £12,570 to £45,000.
Amid rising inflation, stagnant wages, and increased living costs, this proposed change has the potential to transform the tax landscape, allowing millions of Britons to keep more of their earnings.
This article dives into the facts, figures, and potential impact of this historic reform—breaking down who benefits, how much you could save, and what it means for the UK economy.
What Is the Personal Allowance?
The Personal Allowance is the amount of income you can earn before paying income tax. As of 2025, the allowance sits at £12,570. Once this threshold is passed, income is taxed as follows:
Current Income Tax Bands (2025)
| Income Bracket | Tax Rate | Range |
|---|---|---|
| Personal Allowance | 0% | Up to £12,570 |
| Basic Rate | 20% | £12,571–£50,270 |
| Higher Rate | 40% | £50,271–£125,140 |
| Additional Rate | 45% | Over £125,140 |
With such a low tax-free threshold, many low- and middle-income earners quickly find themselves paying tax on a significant part of their income.
The New Proposal: Raise Personal Allowance to £45,000
Under the proposed reform, the Personal Allowance would triple, allowing up to £45,000 in annual income to remain completely tax-free.
Current vs Proposed Personal Allowance
| Key Topic | Current Status | Proposed Change |
|---|---|---|
| Personal Allowance | £12,570 | £45,000 |
| Tax-Free Benefit | Only covers £12,570 | Full tax exemption up to £45,000 |
| Main Beneficiaries | Lower-income earners | All under £45,000; partial relief for higher earners |
| Estimated Treasury Cost | N/A | £100+ billion annually |
| Economic Impact | Limited spending power | Boost in consumer activity |
This would eliminate income tax for anyone earning £45,000 or less. Even those with salaries beyond that point would receive significant relief, paying tax only on income above the new threshold.
Who Stands to Benefit Most?
A policy like this would be broadly felt across society, but specific groups stand out:
- Low and middle-income workers facing rising bills
- Young professionals beginning their careers
- Self-employed individuals with inconsistent incomes
- Households juggling inflation and high rent
Higher earners would also benefit, but the greatest proportional gain would be among those currently paying tax on incomes just above the existing £12,570 threshold.
Why Now? The Arguments for Reform
Advocates argue that raising the allowance is necessary and overdue. Here’s why:
- Combat Inflation: Helps households retain more income in real terms
- Encourage Work: Removes disincentives to earn more
- Promote Fairness: Simplifies the system and reduces the need for benefits
- Boost Spending: Increases disposable income, which stimulates demand and VAT revenue
Potential Economic Benefits:
- Higher consumer spending could boost the economy
- Reduced reliance on in-work benefits
- Increased savings and financial stability for households
- Enhanced business growth due to more disposable income
What Are the Drawbacks and Concerns?
Despite the broad support, there are critical challenges:
- The £100+ billion annual cost to the Treasury would need offsetting through budget cuts or new taxes
- Public services like the NHS or pensions may face reductions
- Higher earners may receive larger absolute benefits, making the reform appear regressive to some
- Potential risks of increased borrowing or inflationary pressure
Critics worry that while helping many, the proposal could strain government finances or benefit the wealthy disproportionately.
How Would Your Paycheck Change?
Let’s break it down with a real-world example:
| Annual Income | Tax Paid Under Current System | Tax Paid Under £45,000 Allowance | Tax Savings |
|---|---|---|---|
| £20,000 | £1,486 | £0 | £1,486 |
| £35,000 | £4,486 | £0 | £4,486 |
| £50,000 | £7,486 | £1,000 (on £5,000) | £6,486 |
| £60,000 | £11,486 | £6,000 (on £15,000) | £5,486 |
The tax savings are immediate and substantial, especially for those currently earning under £45,000.
The proposal to raise the UK Personal Allowance to £45,000 could reshape the tax system, potentially giving millions of Britons a massive boost in take-home pay.
While the economic cost is high, the political momentum and public support suggest the idea is gaining traction.
Even if the reform isn’t fully adopted, this debate is pushing policymakers to reconsider how taxes affect working families in an era of rising costs. The big question is: Will this policy become reality, or remain a headline-making proposal? Time will tell.
FAQs
Will everyone benefit from the £45,000 Personal Allowance?
Yes, all income up to £45,000 would become tax-free. However, higher earners would still pay tax on income beyond that threshold.
How much could I save with the new allowance?
Savings depend on your income. For instance, someone earning £35,000 would save over £4,400 annually in income tax.
Could this proposal affect public services like the NHS?
Potentially, yes. With a tax revenue drop of over £100 billion, the government may need to find alternative funding or reduce spending elsewhere.