As the UK approaches the 2025/2026 tax year, many individuals are questioning whether the HMRC tax-free allowance will see any form of increase.
With the cost of living continuing to rise and inflation placing additional strain on household budgets, the absence of an increase in the Personal Allowance raises significant financial and political concerns.
This blog takes a closer look at the current state of the HMRC tax-free allowance, explores the reasoning behind the government’s freeze on thresholds, and examines what it means for UK taxpayers, both now and in the years to come.
What Is the Personal Tax-Free Allowance and Why Does It Matter?
The Personal Allowance is the amount of income an individual can earn each year before they are liable to pay Income Tax. For millions of taxpayers across the UK, this threshold directly affects how much of their income is taxed and, therefore, their take-home pay.
This allowance is one of the cornerstone elements of the UK’s income tax system. When it increases, taxpayers retain more of their earnings.
Conversely, when it is frozen or reduced, especially in the context of inflation and wage growth, a larger proportion of income may fall into taxable brackets, diminishing the real value of earnings.
In simpler terms, a static Personal Allowance in a rising-income environment equates to more individuals being pushed into paying more tax, even if they are not technically earning more in real terms. This has become a central issue as we head into the 2025/2026 financial year.
What Is the HMRC Tax-Free Allowance for the 2025/26 Tax Year?
As of the current policy, the HMRC Personal Allowance will remain £12,570 for the 2025/2026 tax year, unchanged since it was last updated in the 2021/2022 fiscal period.
The UK government announced a freeze on the Personal Allowance and other major thresholds, such as the higher-rate tax band, as part of a broader economic strategy.
This freeze is set to stay in place until the end of the 2027/2028 tax year, meaning that there will be no HMRC tax-free allowance increase for at least three more years unless new policy changes are introduced.
| Tax Year | Personal Allowance | Status |
| 2021–2022 | £12,570 | Increase Applied |
| 2022–2023 | £12,570 | Frozen |
| 2023–2024 | £12,570 | Frozen |
| 2024–2025 | £12,570 | Frozen |
| 2025–2026 | £12,570 | Frozen |
| 2026–2027 | £12,570 | Expected Freeze |
| 2027–2028 | £12,570 | Expected Freeze |
This extended freeze is already having long-term financial effects on UK taxpayers, particularly as inflation continues to erode purchasing power.
Why Has the Government Frozen the Personal Allowance Until 2027/28?
The government’s decision to freeze the personal allowance forms part of a broader fiscal strategy aimed at stabilising public finances after the economic impact of the COVID-19 pandemic. Instead of directly raising tax rates, this freeze allows for a gradual increase in revenue through a less visible method.
Key Reasons Behind the Freeze:
- Fiscal Recovery: Helps manage the high national debt accumulated during the pandemic.
- Fiscal Drag: As wages rise, more income becomes taxable without changing tax rates.
- Revenue Growth: Generates higher tax income without increasing rates.
- Political Strategy: Avoids public backlash linked to explicit tax hikes.
- Service Funding: Supports public spending pressures caused by inflation.
Overall, this policy enables the government to boost revenue subtly while sustaining financial stability and funding essential public services.
How Does the Allowance Freeze Lead to Fiscal Drag?
Fiscal drag is the silent mechanism through which taxpayers pay more, even when no new tax rates are introduced. When tax thresholds like the Personal Allowance remain static while wages increase due to inflation or performance, a larger portion of income becomes subject to tax.
The problem intensifies as income growth pushes people not only into tax-paying territory but also into higher tax bands. The result is higher effective tax rates and reduced take-home pay, all without any change in tax legislation.
How It Works in Practice?
Suppose a worker received a modest pay rise to keep pace with inflation. Although their purchasing power may remain largely the same, the increased salary may tip their income over the Personal Allowance limit or into the higher rate tax band. This results in more tax paid, even if their standard of living hasn’t improved.
| Scenario | 2024/25 Income | Taxable Income | 2025/26 Income (with raise) | Taxable Income |
| Employee A | £12,000 | £0 | £13,000 | £430 |
| Employee B | £49,000 | £36,430 | £52,000 | £39,430 |
These subtle shifts across the population generate substantial additional revenue for the Exchequer without any formal change to the tax rules.
How Are Higher Earners Affected by the £100,000+ Threshold Rule?
While most individuals focus on the general Personal Allowance threshold, higher earners face a different kind of tapering that significantly reduces their tax-free entitlement.
How Tapering Reduces Your Personal Allowance?
Once someone’s adjusted net income exceeds £100,000, their Personal Allowance is gradually reduced by £1 for every £2 earned above that amount. This tapering continues until the allowance reaches zero for those earning £125,140 or more.
For example, someone earning £110,000 would lose £5,000 of their Personal Allowance, leaving only £7,570 tax-free. At £125,140 and above, the entire £12,570 is removed, meaning every penny is subject to tax.
Tax Planning Considerations for High Earners
This effective 60% marginal tax rate (between £100,000 and £125,140) creates strong incentives for tax planning. Strategies such as increased pension contributions or charitable donations can help bring taxable income below the threshold, preserving part or all of the allowance.
Have Any Other Allowances Changed in the 2025/26 Tax Year?
While the Personal Allowance remains frozen, there are updates or continued freezes across other key allowances. Understanding these figures can help taxpayers identify opportunities for tax efficiency.
| Allowance | 2024/25 | 2025/26 | Status |
| Personal Allowance | £12,570 | £12,570 | Frozen |
| Married Couple’s Allowance | Up to £11,270 | Up to £11,270 | No Change |
| Blind Person’s Allowance | £3,130 | £3,130 | No Change |
| Dividend Allowance | £500 | £500 | Reduced (previously £1,000) |
| CGT Annual Exempt Amount | £3,000 | £3,000 | Reduced (previously £6,000) |
| ISA Limit | £20,000 | £20,000 | No Change |
Although not increasing, allowances such as the Blind Person’s and Married Couple’s Allowances offer some support for eligible individuals. The dividend and CGT exemptions, however, have been reduced in recent years, impacting investors and landlords.
Are There Calls or Petitions to Raise the Tax-Free Threshold?
Public sentiment around the ongoing freeze is growing increasingly critical. With more workers entering the tax system or moving into higher brackets, political pressure is beginning to mount.
A recent public petition to raise the Personal Allowance to £20,000 gathered thousands of signatures. While not yet the subject of formal legislative debate, the level of engagement indicates dissatisfaction with the current tax policy, particularly from those whose wages have risen in line with inflation rather than real economic gains.
Despite public advocacy, the government has thus far remained firm on maintaining the freeze, citing broader economic concerns.
What Is the Long-Term Impact of a Frozen Allowance Amid High Inflation?
The most pressing concern is the disconnect between rising incomes and stagnant thresholds. As inflation continues to erode the value of money, a frozen Personal Allowance effectively increases tax burdens on the working population, particularly middle-income earners.
Without upward adjustments to the allowance, taxpayers face a higher effective tax rate, reduced disposable income, and limited capacity to save. This could have broader economic implications, including reduced consumer spending and increased reliance on credit.
In the long term, such a policy may also affect wealth inequality, as lower earners are disproportionately impacted by fiscal drag relative to those with significant non-taxable income or capital gains.
Is There Any Possibility of an HMRC Tax-Free Allowance Increase Before 2028?
While current legislation sets the freeze through 2027/28, political and economic developments could potentially accelerate changes.
Should inflation remain high or if a new government comes into power with a different fiscal outlook, there may be room for early revision. Budget announcements in 2026 or pre-election fiscal strategies could provide an opportunity for an allowance increase as a political lever to gain public support.
However, at present, no confirmed plans exist to raise the Personal Allowance before the scheduled end of the freeze.
What Can Taxpayers Do to Minimise the Impact of the Allowance Freeze?
Although individuals can’t control government tax policies, there are effective ways to legally reduce taxable income and strengthen financial stability. By using the right strategies, taxpayers can make the most of available allowances and reliefs.
Practical Ways to Reduce Taxable Income:
- Use ISA Allowances: Save or invest up to £20,000 tax-free each year.
- Increase Pension Contributions: Lower your taxable income while building retirement savings.
- Opt for Salary Sacrifice: Exchange part of your salary for benefits like pensions or EV schemes.
- Make Charitable Donations: Use Gift Aid to extend your basic rate band.
- Transfer Income Between Spouses: Take advantage of your partner’s lower tax bracket.
| Strategy | Benefit |
| ISA Contributions | Tax-free income and growth |
| Pension Contributions | Reduce taxable income + long-term saving |
| Salary Sacrifice Schemes | Lower taxable salary, increased net benefits |
| Charitable Donations | Gift Aid can extend the basic rate band |
| Spousal Income Transfers | Utilise partner’s lower tax bracket |
These methods require careful planning, and professional advice is recommended, especially for individuals with complex financial arrangements or those near key tax thresholds.
Conclusion
The HMRC tax-free allowance will remain frozen at £12,570 for the 2025/2026 tax year, continuing a policy that extends through to 2027/2028. While this freeze may seem subtle, it significantly impacts taxpayers, especially amid rising inflation and wage growth.
More individuals are finding themselves paying more tax or moving into higher brackets due to fiscal drag. Although no increases are currently planned, future political or economic shifts could influence changes.
In the meantime, taxpayers should explore legal ways to reduce their liability through pensions, ISAs, and other allowances. Staying informed and proactive is key to managing the financial impact of this ongoing policy.
Frequently Asked Questions
What is the income tax rate after the Personal Allowance in 2025/26?
After the £12,570 Personal Allowance, income is taxed at 20% up to £50,270, 40% from £50,271 to £125,140, and 45% above that.
Can retirees benefit from the Personal Allowance freeze?
Yes, retirees still benefit from the same allowance. However, those with private pensions or investment income may experience similar fiscal drag effects.
What happens if I get a pay rise during the freeze period?
A pay rise may push more of your income into the taxable range or into a higher tax band, increasing your overall tax liability.
Does the Personal Allowance apply to investment income?
Yes, investment income such as dividends or interest is included in taxable income and counts toward the Personal Allowance.
How does the allowance freeze affect National Insurance?
While separate from Income Tax, rising wages due to inflation may increase NI contributions, compounding the total deductions from earnings.
Will the Dividend Allowance change in future years?
It has already been reduced in recent years, and further reductions remain possible, especially if tax policy tightens further.
Where can UK residents get reliable tax planning advice?
Qualified financial advisers, accountants, or regulated tax consultants can help assess personal circumstances and recommend tax-efficient strategies.
