The UK Personal Allowance Explained for 2025/2026

Self-Assessmentself-employmentSelf assessment for self-employedSelf-employed tax adviceTax-Free Allowance UKPersonal Allowance
Written By Dwayne Barnett

The UK Personal Allowance Explained for 2025/2026

Decoding Your Income: The UK Personal Allowance Explained for 2025/2026

The UK tax system is notoriously complex, but understanding one key figure can make all the difference to your finances: the Personal Allowance.

For every taxpayer, this is the cornerstone of your tax calculation. In essence, it is the amount of income you can earn each tax year before you start paying Income Tax. Knowing how it works, what the limits are, and how it is affected by your total income is crucial for effective financial planning.

Here is everything you need to know about the Personal Allowance for the current 2025/2026 tax year.

What is the Standard Personal Allowance for 2025/2026?

The standard Personal Allowance has been held at the same level for several years and remains frozen for the current tax year, with plans to keep it there until April 2028. For the 2025/2026 tax year, the Standard Personal Allowance remains £12,570.

This means that for the vast majority of people, the first £12,570 you earn from employment, self-employment, or a pension will be tax-free. Only the income you earn above this threshold is subject to Income Tax.

The Fiscal Drag: Why a 'Frozen' Allowance Costs You More

While the figure of £12,570 has not changed, the fact that it has been frozen is a major factor in the UK’s current tax landscape.

This effect, known as fiscal drag, means that as wages naturally increase (even just to keep pace with inflation), more of your total earnings are pushed into the taxable bands. Essentially, more people end up paying tax, and more people are pulled into the higher 40% tax bracket, even without receiving a significant 'real' pay rise.

The 'Tax Trap': When Your Allowance Starts to Disappear

The Personal Allowance is a universal entitlement, but it is not available to everyone at every income level. This is a critical point for higher earners to understand, as the withdrawal of the allowance creates a punitive marginal tax rate.

How the Taper Works:

If your Adjusted Net Income exceeds £100,000, your Personal Allowance of £12,570 is gradually reduced, or 'tapered'. The allowance is reduced by £1 for every £2 you earn over the £100,000 threshold.

Once your income reaches £125,140, your Personal Allowance is reduced to zero. This withdrawal creates an effective marginal tax rate of 60% on the income you earn between £100,000 and £125,140, as you are paying 40% tax on the income itself, plus an extra 20% due to the loss of your tax-free allowance.

Other Allowances to Stack with Your Personal Allowance

The Personal Allowance is just the starting point. Depending on your circumstances, you may be able to utilise other allowances to reduce your taxable income further:

  • Marriage Allowance: If you are a basic-rate taxpayer and your partner has income below the Personal Allowance, you may be able to transfer £1,260 of your unused allowance to them, potentially reducing their tax bill.

  • Personal Savings Allowance: This allows most individuals to earn tax-free interest on savings. Basic-rate taxpayers can earn up to £1,000, higher-rate taxpayers up to £500, and additional-rate taxpayers receive no Personal Savings Allowance.

  • Dividend Allowance: You can receive £500 in dividend income tax-free, regardless of your tax band.

  • Trading / Property Allowance: If you earn income from self-employment or renting property (before expenses) up to £1,000, this can be tax-free for each.

Action Points: Maximising Your Tax Position

Understanding the Personal Allowance is the first step towards tax efficiency. If you are approaching or within the taper zone (£100,000 – £125,140), there are planning opportunities you should explore:

  1. Pension Contributions: Making employer or personal pension contributions is one of the most effective ways to reduce your Adjusted Net Income. This can potentially allow you to recover some or all of your lost Personal Allowance and reduce your taxable income.

  2. Check Your Tax Code: Your tax code (the standard is typically 1257L) tells your employer or pension provider how much tax-free allowance you have. If this code is wrong, you could be paying too much or too little tax. It is worth reviewing it annually.

  3. Claim Marriage Allowance: If you are eligible and have not claimed the Marriage Allowance, remember that you can backdate your claim for up to four years, potentially resulting in a significant tax refund.

The Personal Allowance is crucial, but its true impact only becomes clear when you consider how it interacts with the other complex rules of the UK tax system. For detailed, professional advice tailored to your specific circumstances, seeking guidance from a qualified accountant is essential.

Contact Barnett & Co Accountants today for a confidential discussion about your personal tax planning.

  • Phone: 0345 646 1516

  • Email: info@barnettandco.uk

  • Website: www.barnettandco.uk

Barnett & Co Accountants: Helping you navigate the complexities of tax with clarity and confidence.

Useful External Links for UK Taxpayers

For further official information on the topics covered in this post, please refer to the following government resources:

Dwayne Barnett
Next

How Internal Audit Protects Your Business from Fraud