Could the Personal Allowance Finally Rise in the October Budget?

What Is the Personal Allowance?

The personal allowance is the amount of income an individual can receive before paying Income Tax. For most UK taxpayers, the allowance is currently £12,570. Income above this level is generally subject to Income Tax depending on the taxpayer’s income band. 

For example, an employee earning £30,000 during the 2026/27 tax year can normally receive the first £12,570 without Income Tax. The remaining taxable income falls within the basic rate band, subject to applicable rules.

The allowance applies to most individuals, including employees, self-employed workers, and company directors. However, high earners may receive a reduced allowance.

Current Personal Allowance Rules

For the 2026/27 tax year, the standard personal allowance remains £12,570. The government has maintained this level rather than increasing it with inflation.

The main income tax bands for England, Wales, and Northern Ireland are:

The higher rate threshold remains £50,270. Additional rate tax applies to income above £125,140. 

The personal allowance also reduces for individuals with adjusted net income above £100,000. The allowance reduces by £1 for every £2 above this limit. Once income reaches £125,140, the allowance is fully removed. 

(Source: Income Tax rates and allowances for current and previous tax years)

Why Is the Allowance Frozen?

The personal allowance freeze was introduced as part of previous government tax policy. Instead of increasing with inflation, the allowance has remained fixed.

When salaries increase, more income becomes taxable even if tax rates remain unchanged. This effect is commonly known as fiscal drag.

For example, an employee earning £35,000 today receives the same tax-free allowance as someone earning the same amount several years ago. However, rising wages mean more taxpayers may gradually move into higher tax bands.

The House of Commons Library notes that the personal allowance has remained fixed at £12,570 and is scheduled to remain frozen until 2030/31 under current legislation. 

(Source: Direct taxes: Rates and allowances for 2026/27, House of Commons Library)

Could the October Budget Increase the Allowance?

At the time of writing, there is no confirmed government announcement increasing the personal allowance in the October Budget.

An increase would provide relief for taxpayers because more income would become tax-free. It could also affect employer payroll calculations and personal tax planning.

However, changing the allowance would have a significant cost to government finances. This means any decision would depend on wider economic conditions, public spending commitments, and revenue requirements.

Taxpayers should avoid making financial decisions based on possible Budget changes until official announcements are published.

What Would an Increase Mean for Businesses?

A higher personal allowance would mainly affect individuals. However, businesses may still need to review their processes.

Payroll Impact

Employers would need to update payroll systems if tax codes or PAYE calculations changed.

Businesses using payroll services should ensure their systems remain updated with HMRC guidance. Incorrect tax codes can result in employees paying the wrong amount of tax.

Artifin Accountants supports businesses with professional payroll services to help maintain accurate PAYE reporting.

Director Salary Planning

Many small company directors balance salary and dividends to manage tax efficiently.

A change to the personal allowance could affect decisions around:

• director salary levels
• dividend payments
• Corporation Tax planning
• personal tax liabilities

Directors should review their position regularly rather than relying on historic arrangements.

Self-Employed Individuals

Sole traders and partnerships should consider how their taxable profits interact with personal allowances and tax bands.

Maintaining accurate records through reliable bookkeeping services helps ensure tax calculations are based on complete information.

Tax Planning Before Any Budget Announcement

Businesses and individuals should focus on actions they can control rather than waiting for possible changes.

Useful steps include:

Review Your Income Position

Check your expected income before the tax year ends. This helps identify whether you may enter a higher tax band.

Maintain Accurate Records

Good records support accurate tax returns and reduce the risk of errors.

HMRC expects taxpayers and businesses to keep sufficient records supporting income and expenses.

Consider Pension Contributions

Individuals approaching the £100,000 income threshold may wish to review pension contributions. These can sometimes reduce adjusted net income and preserve part of the personal allowance.

Professional advice should be taken because pension decisions depend on personal circumstances.

Review Company Extraction Strategy

Directors should review whether salary, dividends, or retaining profits within the company remains appropriate.

This should consider:

• Corporation Tax rates
• dividend tax rates
• personal income levels
• future cash requirements

Artifin Accountants provides business advisory services to help directors make informed decisions.