Every payslip in the UK has a line that quietly decides how much tax you pay before you’ve even thought about it: the personal allowance. Most people have heard the term, fewer could explain what it actually does, and almost nobody realises it can shrink — or disappear completely — if you earn enough.
This matters more than it sounds. The personal allowance is the single biggest reason most people in the UK don’t pay tax on every pound they earn. Get it wrong — or miss that it’s changed because of a pay rise, a bonus, or a new side income — and you could end up with an unexpected tax bill, or be paying more than you need to.
This article explains what the personal allowance actually is, how it interacts with the rest of the income tax system, what happens if you earn over £100,000, and the common mistakes that cost people money.
What the personal allowance actually is
The personal allowance is the amount of income you can earn in a tax year before you start paying income tax on it. For the 2026/27 tax year, that amount is £12,570.
Here’s the plain-English version: if you earn £20,000 a year, you don’t pay tax on all £20,000. You pay tax only on the £7,430 above your personal allowance (£20,000 − £12,570). The first £12,570 is yours, tax-free, every single year.
This applies to most forms of income — your salary, self-employment profits, most pension income, and rental income all count towards using up your personal allowance. It resets every tax year, which runs from 6 April to 5 April.
One thing people often assume incorrectly: the personal allowance is not a tax rebate or a bonus you claim. It’s built into the system automatically, usually via your tax code. If you’re employed, your tax code (often something like 1257L) tells your employer how much of your pay to leave untaxed before applying tax to the rest.
How it fits into the wider tax system
The personal allowance is the foundation, but it’s not the whole picture. Once your income goes above £12,570, you move into tax bands, and different portions of your income are taxed at different rates. This is called a marginal tax system — only the income within each band is taxed at that band’s rate, not your entire income.
| Income band (2026/27) | Tax rate | What it means |
|---|---|---|
| Up to £12,570 | 0% (personal allowance) | Tax-free |
| £12,571 to £50,270 | 20% (basic rate) | Standard rate for most earners |
| £50,271 to £125,140 | 40% (higher rate) | Applies only to income in this band |
| Over £125,140 | 45% (additional rate) | Top rate, and personal allowance is fully gone by here |
So someone earning £40,000 a year pays nothing on the first £12,570, then 20% on the remaining £27,430. They don’t pay 20% on the whole £40,000 — this is the most common misunderstanding people have about how income tax works, and it’s worth getting straight because it changes how you think about pay rises and bonuses.
These figures apply across England, Wales and Northern Ireland. Scotland has its own income tax bands and rates set by the Scottish Parliament, though the personal allowance itself is set by the UK government and applies in Scotland too.
The misconception that trips people up: “I’ll lose money by earning more”
A huge number of people worry that crossing into a higher tax band means they’ll “take home less” overall, or that a pay rise isn’t worth it because “it’ll just get taxed away.” This is almost never true.
Because the UK uses a marginal system, moving into the 40% band only means the extra income above £50,270 is taxed at 40% — everything below that threshold is still taxed exactly as before. You will always take home more overall from a pay rise, even if the extra amount is taxed at a higher rate than your existing income.
Where this concern becomes legitimate is the personal allowance taper, covered next — that’s the one spot in the system where earning more can genuinely feel punishing.
What happens if you earn over £100,000
This is the part of the system that catches out higher earners, and it’s rarely explained clearly.
Once your income — specifically your “adjusted net income” — goes above £100,000, your personal allowance starts shrinking. For every £2 you earn above £100,000, you lose £1 of personal allowance. By the time your income reaches £125,140, your personal allowance is £0.
This creates an effective tax rate of around 60% on income between £100,000 and £125,140 for many people, because you’re paying 40% tax on that income and simultaneously losing your tax-free allowance, which pulls more income into the taxable bracket. It’s one of the strangest quirks in the UK tax system, and it’s rarely mentioned on a payslip in a way that makes it obvious.
If you’re in or near this income range, this is exactly the kind of situation where pension contributions become genuinely useful — paying into a workplace pension or a SIPP (self-invested personal pension) reduces your “adjusted net income,” which can pull you back under £100,000 and protect your personal allowance. This isn’t a loophole; it’s how the system is designed to encourage retirement saving. You can check the detail on gov.uk’s income tax rates and personal allowances page.
Marriage allowance: the bit most couples miss
If you’re married or in a civil partnership, there’s a specific mechanism called marriage allowance that lets one partner transfer £1,260 of their unused personal allowance to the other — but only if the person receiving it is a basic rate taxpayer and the person giving it up earns less than the personal allowance threshold.
This is worth roughly £250 a year in reduced tax for the receiving partner, and it can be backdated up to four years if you’ve been eligible and haven’t claimed. It’s one of the most commonly missed, genuinely free bits of help in the UK tax system — largely because nobody tells couples it exists. You apply directly through gov.uk’s marriage allowance service.
How the personal allowance interacts with different types of income
Not all income is treated identically once it’s inside your personal allowance calculation. Here’s a quick breakdown of common income types and how they’re treated:
| Income type | Counts towards personal allowance? | Notes |
|---|---|---|
| Salary/wages | Yes | Taxed via PAYE automatically |
| Self-employment profit | Yes | Declared via Self Assessment |
| Pension income | Yes | State Pension and private pension both count |
| Savings interest | Partially | Separate “personal savings allowance” also applies on top |
| Dividends | Partially | Separate “dividend allowance” applies first |
| ISA income/growth | No | ISAs are entirely tax-free and don’t touch your personal allowance |
This is worth knowing because it explains why moving money into an ISA (individual savings account) is so valuable — income and growth inside an ISA is tax-free regardless of your personal allowance, so it never adds to the calculation that could push you towards losing allowance or crossing into a higher band.
What to check if something looks off
If your tax code looks wrong, or you think you’ve paid too much or too little tax, the fix is usually straightforward:
- Check your tax code on your latest payslip or via your personal tax account at gov.uk. The standard code for 2026/27 is 1257L — if yours looks very different and you don’t know why, that’s worth investigating.
- Use HMRC’s tax checker tools to see if you’ve been correctly taxed, particularly if you changed jobs mid-year, had more than one employer, or received a one-off bonus that pushed you temporarily into a higher band.
- If you’re self-employed, your personal allowance is applied when you complete your Self Assessment tax return, not automatically through the year — so don’t assume it’s already been accounted for in payments on account.
- If you’re close to £100,000, work out your adjusted net income properly rather than guessing, since pension contributions, Gift Aid donations, and certain other deductions can all reduce it.
The bottom line
The personal allowance isn’t something you need to actively manage most of the time — it works quietly in the background through your tax code. But three groups of people should pay closer attention this week:
- If your income is creeping towards £100,000, work out your adjusted net income now, not at the end of the tax year, so you have time to consider pension contributions before the tax year closes.
- If you’re married or in a civil partnership and one of you earns under £12,570, check your eligibility for marriage allowance at gov.uk — it takes a few minutes and can be backdated four years.
- If you’ve changed jobs, had a bonus, or started a side income this year, check your tax code is still correct rather than assuming HMRC has it right by default.
- If you’re building savings or investments, remember ISA growth sits entirely outside this system — it’s one of the few parts of UK finance that genuinely simplifies things rather than complicating them.
The system sounds complicated because it’s rarely explained properly, not because it’s actually that hard. Once you know where your income sits relative to £12,570, £50,270, and £100,000, you know exactly how your tax works.
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