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The UK government has officially announced a major change to the tax system from April 2025, the personal allowance will rise to £20,000, giving millions of workers more money in their pockets. But what does this really mean for you, your salary, and your future finances?
In this article, we break down everything you need to know about the new tax-free threshold, how much you could save, and what to do next.
What Is the Personal Allowance?
The personal allowance is the amount of income you’re allowed to earn each tax year before you start paying income tax. Up until now, that figure has remained frozen at £12,570, meaning any income above that was taxed at the basic, higher, or additional rate depending on your total earnings.
With the new 2025 update, the tax-free income threshold jumps to £20,000, providing workers with an extra £7,430 of tax-free income. That’s money you keep not the taxman.
Why Is It Being Increased?
There are two key drivers behind this bold tax move:
- Rising Cost of Living: With inflation, higher energy bills, rent hikes, and food prices all squeezing household budgets, increasing the allowance is a direct way to provide financial relief to UK residents.
- Political Strategy: With a general election looming, this policy gives the government a chance to showcase its commitment to supporting low and middle-income earners – and boosting its popularity in the process.
How Much Will You Actually Save?
Here’s a simple breakdown showing the estimated tax savings for common salary levels:
| Annual Salary | Old Tax-Free Allowance (£12,570) | New Allowance (£20,000) | Extra Tax-Free Amount | Estimated Tax Saving |
|---|---|---|---|---|
| £20,000 | £12,570 | £20,000 | £7,430 | £1,486 |
| £25,000 | £12,570 | £20,000 | £7,430 | £1,486 |
| £30,000 | £12,570 | £20,000 | £7,430 | £1,486 |
| £40,000 | £12,570 | £20,000 | £7,430 | £1,486 |
Key takeaway: Most basic-rate taxpayers will save around £1,486 a year – that’s over £120 per month added to your pay packet.
Who Benefits the Most?
This change is especially good news for:
- Low-income earners
- Young professionals
- Students and part-time workers
- Families on modest incomes
If you’re earning under £40,000, the new allowance will bring a noticeable uplift in your monthly income. While higher earners will still benefit, the relative impact will be greater for those in the lower tax brackets.
Economic Impact: More Than Just a Tax Cut
Boosting the personal allowance doesn’t just help individuals – it also has ripple effects across the UK economy:
- More disposable income → increased consumer spending
- Small businesses could see a rise in demand
- Potential for job creation and local growth
However, the government will see a reduction in income tax revenue, raising questions about long-term funding for public services like the NHS, education, and infrastructure.
How Will It Affect Your Monthly Pay?
Let’s say you’re earning £25,000 per year. With the new allowance, you’ll take home an extra £124 per month that’s money that could help you:
- Cover rising energy or grocery bills
- Boost your savings or pension
- Pay down debt faster
- Simply enjoy a better lifestyle
And you don’t need to apply it’ll be automatically adjusted through PAYE or self-assessment from April 2025.
Could This Change Again?
Yes as with all tax policies, future governments can amend, freeze, or even reverse changes depending on:
- Economic conditions
- Public finances
- Political priorities
It’s smart to stay informed and review your personal budget annually based on any changes in tax policy.
What Should You Do With the Extra Money?
While it’s tempting to spend the extra cash, this is a good opportunity to build a more secure financial future. Consider:
- Paying off credit card or loan debt
- Increasing your ISA or pension contributions
- Starting a rainy-day fund or investing
- Covering essential rising household costs
Whatever your priorities, a little planning can make your extra income work harder for you.
Final Thoughts
The increase in the UK personal allowance to £20,000 in 2025 is one of the most impactful tax updates in recent years. Whether you’re saving for a home, managing household expenses, or just trying to keep up with inflation, this change means more money in your pocket and that’s something most of us can welcome.
If you’re earning under £40,000, expect to feel a real difference in your take-home pay next year. It’s a step towards easing the financial pressure on working families and making everyday life just a bit more manageable.
