UK Finance

The UK Personal Allowance Explained: Tax-Free Income in 2026

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The personal allowance is the amount of income you can earn each tax year before you start paying income tax. For 2025/26, it's £12,570. That means the first £12,570 you earn in a year is completely tax-free. Understanding how this works — and what happens as your income rises — is essential for making smart financial decisions.

How the Personal Allowance Works

Every UK taxpayer gets a personal allowance of £12,570 per year. Income below this threshold is tax-free. Income above it is taxed at: 20% (basic rate) on earnings from £12,571 to £50,270, 40% (higher rate) from £50,271 to £125,140, and 45% (additional rate) above £125,140. Your employer applies this through your tax code (usually 1257L). If you're employed, the personal allowance is spread across your pay periods — so each month, roughly £1,048 of your salary is tax-free.

When the Personal Allowance Reduces

If you earn over £100,000, your personal allowance starts to reduce. It goes down by £1 for every £2 you earn above £100,000. By £125,140, your personal allowance is zero — you pay tax on every penny. This creates an effective marginal tax rate of 60% on income between £100,000 and £125,140 (40% income tax plus the effect of losing the allowance). If you're near this threshold, making additional pension contributions can bring your adjusted net income below £100,000 and restore your full personal allowance — a very tax-efficient move.

Marriage Allowance

If you're married or in a civil partnership and one partner earns less than £12,570, they can transfer £1,260 of their unused personal allowance to the other partner (provided they're a basic-rate taxpayer). This saves the couple up to £252 per year. It's free, takes 10 minutes to set up online, and can be backdated for up to 4 years — potentially reclaiming over £1,000. Surprisingly, millions of eligible couples don't claim it.

Savings and Dividend Allowances

On top of the personal allowance, you get separate allowances for savings and dividend income. The Personal Savings Allowance lets basic-rate taxpayers earn £1,000 in savings interest tax-free (£500 for higher-rate taxpayers, £0 for additional-rate). The dividend allowance lets you earn £500 in dividends tax-free. These are 'use it or lose it' — they don't roll over between tax years. Understanding these allowances helps you plan where to hold your savings and investments for maximum tax efficiency.

How to Make the Most of Your Allowance

Several strategies help you maximise tax efficiency:
  • •Salary sacrifice: Contributing to your pension via salary sacrifice reduces your taxable income. The money goes straight into your pension before tax.
  • •ISAs: Interest and gains within ISAs don't count towards any allowance — they're completely tax-free.
  • •Marriage Allowance: Transfer unused allowance to your partner.
  • •Pension contributions near £100k: If your income is £100-125k, additional pension contributions can save you 60% in effective tax.
  • •Spread income between partners: If one partner has unused allowance, consider holding joint savings in their name (within tax rules).

FAQ

Is the personal allowance frozen?+

Yes. The government froze the personal allowance at £12,570 until April 2028. With inflation, this means more people are being pulled into higher tax brackets — a phenomenon called 'fiscal drag' or 'stealth tax'. More of your income gets taxed each year even if your salary only rises with inflation.

Do I get a personal allowance if I'm self-employed?+

Yes. The personal allowance applies to all UK taxpayers, whether employed, self-employed, or receiving pension income. Self-employed people claim it through their self-assessment tax return.

What if I have two jobs?+

Your personal allowance is usually applied to your main job. Your second job is taxed at the appropriate rate from the first pound. Check your tax codes for both jobs — errors here are common and can result in over or underpayment.

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