- The Personal Allowance and the tax bands
- The 100,000 pound trap
- Allowances that sit alongside it
- How the Personal Allowance reaches your pay
- When the Personal Allowance isn't the whole story
- Worked examples
- Personal Allowance and side income
- Personal Allowance and savings or dividends
- How to make the most of it
- My verdict
- Frequently asked questions
The UK Personal Allowance is the first 12,570 pounds of income you can earn each tax year without paying Income Tax. It shrinks by 1 pound for every 2 pounds your adjusted net income goes over 100,000 pounds, so it's gone completely at 125,140 pounds, which creates a very high effective tax rate in between.
Most people meet the Personal Allowance as a tax code on their payslip, and never think about it again. That's fine if you only have a salary. Once you add side income, a rental room or a pay rise past six figures, the details start to matter. Here's how it works using HMRC's own figures.
The Personal Allowance and the tax bands
| Band | Taxable income | Tax rate |
|---|---|---|
| Personal Allowance | Up to 12,570 pounds | 0% |
| Basic rate | 12,571 to 50,270 pounds | 20% |
| Higher rate | 50,271 to 125,140 pounds | 40% |
| Additional rate | Over 125,140 pounds | 45% |
These are the bands GOV.UK gives for people with the standard Personal Allowance.
The 100,000 pound trap
This is the part that catches people out. GOV.UK says your Personal Allowance goes down by 1 pound for every 2 pounds of adjusted net income over 100,000 pounds. By 125,140 pounds, it's zero.
Think about what that means for each extra pound you earn between those figures. You pay 40% higher-rate tax on it, and you also lose 50p of tax-free allowance, which then gets taxed at 40% too. That works out at an effective 60% Income Tax rate on that slice of income. These figures are my working from the GOV.UK rules, but the effect is real. If your income is heading into this band, it's worth talking to an adviser about what counts towards adjusted net income before the tax year ends.
Allowances that sit alongside it
| Allowance | Amount | For |
|---|---|---|
| Trading allowance | 1,000 pounds | Self-employment and side hustle income |
| Property allowance | 1,000 pounds | Income from property you rent, unless you're in the Rent a Room Scheme |
| Blind Person's Allowance | Added to your Personal Allowance | People who qualify |
| Marriage Allowance | Transfers part of your allowance | Couples where one earns less than the Personal Allowance |
The trading and property allowances are separate from the Personal Allowance. So someone with a salary can still have a small side income covered by the trading allowance.
How the Personal Allowance reaches your pay
Most people pay Income Tax through PAYE, where your employer deducts tax before paying you. Your tax code tells them how much of your Personal Allowance to use. If your code looks wrong, that's the first place to check, and you can see it in the HMRC app.
When the Personal Allowance isn't the whole story
GOV.UK says you'll need a Self Assessment tax return if you have more than 2,500 pounds of other untaxed income, such as tips or rent. At that point your Personal Allowance is worked out across all your income, not just your salary. If you're self-employed, you'll use Self Assessment anyway, and the allowance comes off your total income there.
Worked examples
- Salary of 30,000 pounds: the first 12,570 pounds is tax-free, and 17,430 pounds is taxed at 20%.
- Salary of 110,000 pounds: the allowance is cut by 5,000 pounds (half of the 10,000 pounds over 100,000), leaving 7,570 pounds.
- Income of 130,000 pounds: no Personal Allowance at all, because it's over 125,140 pounds.
These sums are mine, worked from the GOV.UK rules, to show the taper.
Personal Allowance and side income
If you have a salary and a side hustle, the Personal Allowance is usually used up by the salary through your tax code, so your side profit is taxed from the first pound above any allowances that apply to it. That's where the separate 1,000 pound trading allowance helps: it covers the first 1,000 pounds of self-employment income on top of your Personal Allowance. For rent from a property, the 1,000 pound property allowance does the same job, unless you're using the Rent a Room Scheme.
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Personal Allowance and savings or dividends
GOV.UK notes that you pay tax on interest, dividends or income over your allowances. In other words, the Personal Allowance covers all kinds of income, not just wages, and anything above it may be taxed depending on which other allowances apply. If your only income is from savings or dividends, a good chunk of it can fall within the Personal Allowance before any tax is due.
How to make the most of it
- Check your tax code each tax year so the right allowance is being used.
- If you earn under the Personal Allowance, look at whether Marriage Allowance could reduce your partner's tax.
- If you have side income, check whether the trading or property allowance covers it.
- If you're heading over 100,000 pounds, get advice on your adjusted net income before the tax year ends.
My verdict
For most people, the Personal Allowance just works in the background, through PAYE, without you needing to do anything at all. Pay attention if you have side income, two jobs or income near 100,000 pounds, because that's where it changes your bill. If you're starting something on the side, see sole trader vs limited company and what it costs to start a business in the UK.
Frequently asked questions
What is the UK Personal Allowance?
12,570 pounds of income you don't pay Income Tax on, for people with the standard allowance.
When do you lose your Personal Allowance?
It goes down by 1 pound for every 2 pounds of adjusted net income over 100,000 pounds, and is zero at 125,140 pounds or above.
Is the trading allowance part of the Personal Allowance?
No. The 1,000 pound trading allowance and 1,000 pound property allowance are separate.
How does my employer know my Personal Allowance?
Through your tax code, which tells your employer how much tax to deduct under PAYE.
Can I give my Personal Allowance to my partner?
If you earn less than the Personal Allowance, you may be able to claim Marriage Allowance to reduce your partner's tax.
