Updated on 28 July 2025

The big freeze – effects of the personal allowance steady state

Blog Post

The personal allowance has been frozen at its current amount of £12,570 since the tax year 2021/22. We take a look at what this policy means for those with lower incomes. 

Frozen New British one pound sterling coin up close macro inside ice cubes
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Background

The personal allowance is the amount that taxpayers can deduct from their taxable income before calculating income tax. It means they can have a certain amount of taxable income each year without having to pay tax on it.

Historically, the UK Government would increase the personal allowance annually. For example, the UK Government increased the personal allowance from £12,500 in 2020/21 to £12,570 in 2021/22, which was an inflationary increase – with inflation measured by the Consumer Price Index.

In March 2021, the then UK Government announced that the personal allowance would be fixed at £12,570 for the tax years 2021/22 to 2025/26 inclusive. This was followed by a further announcement in November 2022, that the personal allowance would remain at £12,570 for tax years up to and including 2027/28. This means that by April 2028, the personal allowance will have been frozen at the same level for seven tax years.

As a result of this freeze, the personal allowance has not increased in line with inflation or the cost of living since April 2021 yet since April 2021, there has been a significant level of inflation – over 20%. This has resulted in a phenomenon known as fiscal drag.

Fiscal drag

Fiscal drag occurs when income growth linked to inflation pushes taxpayers into higher tax brackets, resulting in an increased tax take for the government without them having to raise tax rates. It often happens when the government does not adjust thresholds or allowances for inflation. This is because, if a taxpayer’s income rises due to inflation, but the thresholds or allowances do not rise, a greater proportion of the taxpayer’s income will be subject to income tax and / or a higher rate of income tax.

Example to illustrate fiscal drag

Marina lives in England. She had gross employment income of £20,000 in 2021/22. As a result of inflationary rises in her salary, her gross employment income is £25,000 in 2025/26. We will compare her tax liabilities for each tax year. We will then consider what her tax liability would be if the personal allowance had increased by inflation to say, £15,650 for 2025/26.

2021/22 – Marina must pay income tax at 20% on £7,430 (£20,000 - £12,570). Her income tax liability is £1,486.

2025/26 (frozen personal allowance) – Marina must pay income tax at 20% on £12,430 (£25,000 - £12,570). Her income tax liability is £2,486.

2025/26 (personal allowance increased by inflation) – Marina would have to pay income tax at 20% on £9,350 (£25,000 - £15,650). Her income tax liability would be £1,870.

Marina’s 2025/26 tax liability is £616 (£2,486 - £1,870) more than it would be if the personal allowance had increased by inflation. This also means the government has increased the tax take without having to increase the tax rate.

Note – The figure used for the personal allowance increased by inflation is illustrative only.

As we can see from the example, someone who only sees inflationary or cost of living increases in their gross income faces a tax increase in 2025/26 as compared to 2021/22, because of the frozen personal allowance. Since the cost of living has also increased, the taxpayer may well feel worse off financially in 2025/26 than they did in 2021/22, despite being on a higher salary.

State pension

In a previous blog post, we looked at the effects on state pensioners of the interaction between the increase in the state pension and the freezing of the personal allowance. We also put forward some suggestions for the government that could make things easier for state pensioners.

The state pension increases each tax year. There is a ‘triple lock’ guarantee that means the state pension rises annually by the highest of 2.5%, inflation or wage growth. This effectively guarantees an annual rise of at least 2.5%.

The triple lock guarantee is of benefit to state pensioners, but there can be complications for state pensioners when it is placed in combination with the ongoing freeze in the personal allowance.

State pensioners who have no income other than the state pension may be finding that they have to start paying income tax, because their state pension exceeds their personal allowance. This may come as a shock to some state pensioners. Unfortunately, because the Department of Work and Pensions (DWP) does not deduct income tax at source under the PAYE system, such state pensioners are likely to receive a simple assessment from HMRC after the end of the tax year. Since this tax bill may be unexpected, it may be difficult to budget for it.

Alternatively, if they have income from a private pension, they may find that HMRC adjust their PAYE tax code to collect tax on their state pension. Again, this can be confusing. It can also make it seem like the benefit of any increase in the level of the private pension is being removed.

Example – interaction of private and state pensions with the frozen personal allowance

In the tax year 2024/25, Bruce was entitled to the personal allowance of £12,570. He received a state pension of £11,500. He also received a private pension of £8,000.

Bruce’s tax liability for 2024/25 is £1,386 ((£11,500 + £8,000 - £12,570) x 20%).

In the tax year 2025/26, Bruce continues to be entitled to the full personal allowance, which is frozen at £12,570. His state pension is now £11,975. His private pension has increased by inflation to £8,350.

Bruce’s tax liability for 2025/26 is £1,551 ((£11,975 + £8,350 - £12,570) x 20%).

Bruce’s gross income has increased by £825 (£20,325 - £19,500). However, his tax liability has increased by £165 (£1,551 - £1,386). So, his net income has increased by £660.

However, because the DWP do not deduct income tax from the state pension, the whole of Bruce’s tax liability comes out of his private pension under PAYE. This means that when Bruce looks at his monthly payslips for his private pension, he feels that he is not getting much benefit from the increase in his private pension. His private pension has increased by £350, but the income tax that is being deducted under PAYE from that private pension income has also increased, by £165.

His state pension payments do however fully reflect the increase of £475 in his state pension.

Hardship

At LITRG, although we aren’t able to give advice to individual taxpayers, we often receive queries from the general public. We are increasingly seeing concerns raised by individuals who are struggling to meet their living costs.

The impact of the freezes is often greater, proportionately, on those individuals with lower incomes. Some of these individuals may be eligible for means-tested benefits. But the interactions between benefits and the tax system can often mean that there is significant complexity; and in some cases, the end result is little or no net benefit. Increasing the personal allowance may not be the best way of assisting people on low incomes who are claiming means-tested benefits such as universal credit. This is because when determining entitlement to universal credit, the DWP takes into account net income (after income tax). The basic position is that in most cases a universal credit award will increase if the claimant’s net income after tax decreases and the award will decrease if their net income after tax increases. Taper rates apply depending on the type of income concerned.

Example – tax, benefits and the personal allowance freeze

In 2024/25, Dino has gross employment income of £15,000 and his income tax liability is £486, because he is entitled to the personal allowance of £12,570. This means his net employment income is £14,514. Dino also receives universal credit of £6,000. His total net income is £20,514.

Let’s consider what would happen if the personal allowance increased to say £13,000 in 2025/26. With gross employment income of £15,000, his tax liability would be £400, giving him net employment income of £14,600.

Compared to 2024/25, this would mean an increase in net employment income of £86 (£14,600 - £14,514). His universal credit award would be reduced by 55% for each additional £1 of income. This would be a reduction of £47 (86 x 55%) to £5,953.

This would give Dino total net income in 2025/26 of £20,553 (£14,600 + £5,953). This is £39 more than his total take-home income in 2024/25. Dino only benefits to the tune of 45% of his net increase in employment income.

For more information about universal credit, visit our benefits guidance.

Final thoughts

At LITRG, we are in favour of consultation on tax policy, as this allows various stakeholders, including members of the public, to put forward their views. Importantly, it also allows organisations like LITRG to think about the practical and operational impacts of policy proposals. Reviews of policies that are already in place can also be helpful in determining whether they are meeting their objectives or leading to unintended consequences. Perhaps now it is time for the government to review the effects of the personal allowance freeze.

We would love to hear what you think about this subject – you can share your comments below.

Please note all comments are moderated in line with our comment guidelines, so there might be a short delay before your comment is published if it meets the guidelines.

Joanne Walker

Technical officer

Comment guidelines

Comments

Ian Aĺcock
77.7% inflation since personal allowance was frozen 2007, Everything has gone up with inflation, wages , food, heating, water, council tax and much else except pension tax free allowance why ?
LITRG
The basic personal allowance (available to everyone – not just state pensioners) increased gradually each year from £5,225 in 2007/08 to £12,570 in 2021/22. Since then, it has remained at £12,570. Until 2015/16 there were also slightly higher age-related allowances, based on age or date of birth depending on the tax year. In the final year of those allowances, they were £10,600 for people born before 6 April 1948 and £10,660 for people born before 6 April 1938. As we note in the blog, the state pension is taxable, and always has been. Like many allowances, the personal allowance is set by the UK government. The decision as to whether to increase (or decrease) an allowance is not necessarily related to the level of inflation. However, at the 2024 Autumn Budget, the Chancellor said the personal allowance would remain frozen until 2027/28 and would then be uprated from April 2028 onwards in line with inflation.
Suki Jones
It is a very ill divided world when people on incomes as low as £12,571 will be taxed on it. I should like to see an MP surviving in this day and age on that income without freezing to death in the process.
Stephanie Harman
Whilst I appreciate the need for budgets, to reflect changes in the country's economy, I can't help but think there ought to be a better way, in particular to certain groups i.e. pensioners. I believe the previous Government put in the triple lock, due to freezing the personal allowance, and to protect state pension income, and this was needed, as pension values had not kept up with inflation, and I believe actually dropped in real terms. However, pension annual increases then becoming subject to tax payments, whilst I appreciate they are currently eligible for the winter fuel but this is always up for debate which seems counterintuitive. Currently it is estimated that 880,000 people are eligible for claiming pension credits but are not, therefore wouldn't it be better to introduce a better system, such as a tax code for the retired, to encompass different levels of tax/personal allowance. The fact is this group is, ageing individuals often with disabilities, some with onset dementia, they spend more time in their homes, therefore have greater heating costs. I appreciate they may have claim other benefits separately such as council tax but do feel it could simply things, I am concerned some tax payers may unknowingly, leave debts for their beneficiaries. This current labour Government was supposed to be about change.
Miss lola lowe
I am in hardship now on my state pension, I feel I will be worse off and I am very worried about having to pay tax, which I feel would be very unfair and at a unreasonable. As I can't see me surviving if I have to pay any tax.
Gennie
There is a bit hurt for not increasing personal tax allowance for so many ears . Can government defrost the frozen and increase the personal tax allowance urgently!!!!!

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