Currently the allowance is £14,600. Policy & Resources is proposing that this increase to £15,200 for 2026 – an increase of £600 (4.1%), which would be 0.8% above the inflation projection.
P&R said one of the considerations was that the level of the personal income tax allowance should be at a level at which those people in retirement, whose only source of income is the full-rate States pension and bank interest of less than £50, would not be subject to income tax.
The purpose of income tax allowances is to reduce tax liability by allowing a portion of an individual’s income to remain untaxed.
Lower-and middle-income earners feel the benefit most significantly.
Allowances are withdrawn above a set threshold, which would gradually to reduce the benefit to higher income individuals, without creating a cliff edge.
The taxable income threshold at which personal allowances, other allowances and deductions are withdrawn from individuals was increased to £82,500 in 2025.
The withdrawal ratio is a rate of £1 of allowance withdrawn for every £5 that a person’s income exceeds the income threshold.
Currently £2,500 of relief on pension contributions are protected from the withdrawal.
P&R is recommending that from January the withdrawal threshold be increased to £85,000, in line with the inflation forecast.
‘This will maintain the current value of the threshold in real terms and is consistent with the agreed policy that the threshold for withdrawal needs to be at such a level where there is little or no significant impact on lower and middle-income households.’
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