Is it safe to delete AppData\Local\Packages?

No, don't delete the AppData\Local\Packages folder, and don't delete whole app folders inside it by hand. It holds the data of Microsoft Store apps and other packaged apps, including parts of Windows. If one app in there is taking a lot of space, reset it or uninstall it from Settings. That removes the same data, cleanly.

Quick verdict:

The Packages folder itself: never delete.
An app's folder inside it: don't delete by hand. Use Reset or Uninstall in Settings.
TempState inside an app's folder: safe to empty with the app closed.
LocalCache: only when the app's own instructions say so.
LocalState and Settings: leave alone. That's the app's real data.

What is AppData\Local\Packages?

The folder is at C:\Users\<your name>\AppData\Local\Packages, or %LocalAppData%\Packages. The apps themselves are installed in C:\Program Files\WindowsApps, which is locked down. Their per-user data goes here, one folder per app, named after the package: for example Microsoft.WindowsCalculator_8wekyb3d8bbwe or MSTeams_8wekyb3d8bbwe.

Microsoft's guide to app data for packaged apps describes what goes inside. Each app folder usually contains:

Subfolder	What it holds	Safe to delete?
`LocalState`	The app's main data and files that must survive between sessions.	No
`Settings`	The app's settings.	No
`LocalCache`	Data kept out of backups. For desktop apps packaged as MSIX, often their redirected `AppData` files: caches, but also real data.	Only if the app says so
`TempState`	Temporary files. Microsoft says the system may delete them at any time.	Yes, app closed
`RoamingState`	Old roaming data. Roaming is no longer supported on Windows 11.	No, it's usually tiny
`AC`, `AppData`, `SystemAppData`	Internal folders used by Windows for the app.	No

Why does it grow? Store apps can keep as much local data as they like. Chat apps keep message history and media, streaming apps keep offline downloads, and desktop apps distributed as MSIX packages write their normal AppData caches into a private copy inside their package folder, as described in how packaged desktop apps run. Microsoft also notes that all of this data is removed when the app is uninstalled, which is why uninstalling is the clean way to get the space back.

How much space does it use?

Settings → Apps → Installed apps shows a size next to most apps. To see the folder itself, right-click Packages and choose Properties.

To find which app is big, scan the folder. With SquirrelDisk:

On the home screen, click A folder and paste %LocalAppData%\Packages into the folder dialog. From a terminal: squirreldisk %LocalAppData%\Packages.
The biggest package folders are listed first. Click one to see whether the space is in LocalState, LocalCache or TempState.
For a text summary: squirreldisk scan %LocalAppData%\Packages --depth 2 --top 5.

If a folder name isn't clear, run this in PowerShell to match folder names to apps:

Get-AppxPackage | Select-Object Name, PackageFamilyName

The PackageFamilyName is the folder name.

How to delete it safely

Reset the app (keeps the app, clears its data)

Open Settings → Apps → Installed apps.
Find the app, click ... next to it and choose Advanced options. Not every app has this.
Under Reset, click Reset. Windows warns you that the app's data will be deleted.

This is what Microsoft recommends in its guide to repairing apps, and it's the right tool when an app's data has grown out of control. You'll need to sign in to the app again and redo its settings.

Uninstall the app

If you don't use the app, uninstall it from the same page. Its package folder goes with it.

Clear temporary files only

Close the app completely.
Open its folder in %LocalAppData%\Packages and empty TempState.
Microsoft notes that Disk Cleanup can also clear this temporary app data for you.

Follow the app's own cache instructions

Some vendors document which part of the package is a cache. For the new Teams, Microsoft's Clear the Teams client cache article lets you either reset the app from Settings or delete the contents of %LocalAppData%\Packages\MSTeams_8wekyb3d8bbwe\LocalCache\Microsoft\MSTeams with Teams closed. Use instructions like that, not guesswork.

SquirrelDisk asks for an extra confirmation before deleting anything inside AppData. It won't stop you deleting a package folder, so be deliberate: if you do remove something by hand, choose Move to Trash so you can restore it from the Recycle Bin.

What you should not delete

The whole Packages folder. Built-in parts of Windows are packaged apps too, such as the Start menu (Microsoft.Windows.StartMenuExperienceHost_cw5n1h2txyewy) and Windows Search. Their data lives here.
Folders of apps you still have installed. Windows still thinks the app's data is there. The app may crash, start empty, or need a reset or reinstall.
LocalState of chat, notes or game apps. For some apps it holds data that isn't synced anywhere, such as local message history or offline saves.

If an app breaks after you've deleted something, try Repair and then Reset from Advanced options. If that fails, uninstall and reinstall it from the Microsoft Store.

Better ways to free space

If Packages is big because of one app, resetting or reinstalling it usually gives you most of the space back. For the rest of your profile, see Is it safe to delete the AppData folder? and Is it safe to delete temp files?.