The Most Familiar Number in the Tax System
The Personal Allowance is the amount of income you can receive in a tax year before you pay any Income Tax. For 2026/27 it is £12,570. It has been £12,570 every year since 2021/22, and it will be £12,570 next year too.
Almost everyone knows the number. Far fewer people know how it behaves: that there is one allowance per person and not one per job, that it cannot be saved up, that it disappears completely for higher earners, and that from April 2027 the full new State Pension will be larger than it. The Budget on 28 October 2026 dealt with that last point by creating a new relief called the Pension Tax Allowance, which we explain below.
This guide sets out the figures for 2026/27 and 2027/28, how the allowance reaches you, how you can lose it, and what we would do about each of the traps.
Personal Allowance Figures for 2026/27 and 2027/28
| 2026/27 | 2027/28 | |
|---|---|---|
| Personal Allowance | £12,570 | £12,570 |
| Income limit before the allowance is reduced | £100,000 | £100,000 |
| Income at which the allowance is nil | £125,140 | £125,140 |
| Marriage Allowance (amount transferable) | £1,260 | £1,260 |
| Blind Person's Allowance | £3,250 | £3,370 |
| Married Couple's Allowance (born before 6 April 1935, relief at 10%) | £4,530 to £11,700 | £4,690 to £12,110 |
| Pension Tax Allowance | Does not exist yet | Up to about £94 off your tax |
The allowance is the same in England, Wales, Scotland and Northern Ireland. Scotland sets its own tax bands and rates on earnings, but the Personal Allowance is decided at Westminster and applies across the UK.
What the Personal Allowance Is Worth
It is easier to think about the allowance in pounds of tax saved than in pounds of income.
To a basic rate taxpayer, £12,570 of tax free income saves 20 percent of that figure, which is £2,514 a year. To a higher rate taxpayer the same allowance shelters income that would otherwise be taxed at 40 percent, so it is worth £5,028. That second figure matters, because it is exactly what someone on £125,140 or more has lost.
Spread over the year, the allowance is £1,047.50 a month or about £241.73 a week. Those are the amounts your employer's payroll lets you earn tax free in each pay period, which is why the first payslip of a new job can look different from the rest.
How You Receive It
You do not claim the Personal Allowance. It is given to you automatically, in one of two ways.
Through your tax code. If you are employed or drawing a private pension, HMRC issues a code to the payer. The standard code for 2026/27 is 1257L, which is simply £12,570 with the last digit removed. Our guide to tax codes explains how to read the rest, and our guide to PAYE covers how the deductions are worked out.
Through your tax return. If you are a sole trader, a landlord or anyone else who files a Self Assessment return, the allowance is taken off your total income in the calculation.
Three features of the allowance cause most of the problems we see.
There is one allowance per person, not per job. HMRC puts the whole allowance against whichever job or pension it regards as your main one. Every other source gets a code such as BR, which taxes all of it at 20 percent.
Usually that works. It goes wrong when the main job does not use the full allowance. Take someone with two part time jobs paying £9,000 and £8,000. The first job has code 1257L, so £3,570 of allowance sits there unused. The second job is taxed in full at 20 percent, which is £1,600. The correct tax for the year on £17,000 is £886. They have overpaid £714, and it stays with HMRC until the year is reconciled and a refund is issued, often months after 5 April.
The fix takes ten minutes. You can ask HMRC, through your Personal Tax Account or by phone, to split the allowance between the two jobs. Very few people know this is possible.
National Insurance does not work the same way. The point at which employees start paying National Insurance is also £12,570 a year, which leads people to treat the two as one thing. They are not. The National Insurance threshold applies separately to each job and each pay period. The Personal Allowance applies once, to your total income for the whole year.
Unused allowance is lost. If your income in a tax year is £8,000, the other £4,570 of allowance disappears on 5 April. It cannot be carried forward or back. The only exception is the Marriage Allowance, which lets you hand £1,260 of it to a spouse or civil partner who pays basic rate tax.
What Income It Covers, and in What Order
The Personal Allowance is set against income of almost every kind: wages, pensions, self-employed profits, rent, interest and dividends. It is not set against capital gains. Capital gains tax has its own, much smaller annual exempt amount, and a year with no income does not give you a bigger tax free gain.
Until now, the order in which the allowance was used did not need much thought. The law lets it be set against your income in whichever way produces the lowest bill.
That is changing. The legislation that raises the tax rates on rental profits and savings interest to 24, 44 and 49 percent from 6 April 2027 also fixes the order. The allowance must go against earnings, pensions and trading profits first. Only what is left over can be used against rent, interest or dividends.
Here is why that matters. Someone in 2027/28 has wages of £15,000 and rental profit of £5,000.
| Allowance against rent first | Allowance against wages first (the new rule) | |
|---|---|---|
| Wages taxed at 20% | £7,430, tax £1,486 | £2,430, tax £486 |
| Rent taxed at 24% | Nil | £5,000, tax £1,200 |
| Total tax | £1,486 | £1,686 |
The ordering rule costs this person £200 a year. It is a small sum, but it tells you the higher rates were designed so that the Personal Allowance could not be used to soften them. We cover the rate changes in our guides to tax on rental income and tax on savings interest.
Losing the Allowance Above £100,000
Once your adjusted net income goes over £100,000, the allowance is reduced by £1 for every £2 above that line. At £125,140 it has gone.
Adjusted net income is broadly your total taxable income, less the gross value of personal pension contributions and Gift Aid donations. It includes interest, dividends and rental profit, not only salary.
The effect is the highest marginal rate of Income Tax in the system. Each extra £1 in that band is taxed at 40 percent, and it also removes 50p of allowance, which brings another 50p into tax at 40 percent. That is 60p of tax on £1 of income. Employees pay 2 percent National Insurance on top.
Hannah earns £112,000. She is £12,000 over the limit, so she loses £6,000 of her allowance.
| At £100,000 | At £112,000 | |
|---|---|---|
| Personal Allowance | £12,570 | £6,570 |
| Income Tax | £27,432 | £34,632 |
The extra £12,000 of income has cost £7,200 in Income Tax, which is 60 percent.
The same arithmetic works in reverse, and this is the part worth acting on. If Hannah pays £9,600 into a personal pension, the provider adds £2,400 of basic rate relief to make £12,000. Her adjusted net income falls back to £100,000 and her full allowance returns. Through her tax return she gets £2,400 of higher rate relief on the contribution and £2,400 from the restored allowance.
She has put £12,000 into her pension at a real cost of £4,800. Salary sacrifice through an employer gets to the same place and saves the National Insurance as well.
Two other things happen at £100,000 that have nothing to do with Income Tax. Tax-Free Childcare and the funded childcare hours for working parents are both withdrawn when either parent's adjusted net income goes over it. For a family with two children in nursery, crossing the line by a few pounds can cost more than the whole of the tax described above.
Our view on the £100,000 limit is simple. It was set in April 2010 and has never been increased. A threshold aimed at the very highest earners sixteen years ago now catches head teachers, GPs and plenty of ordinary business owners in a good year. A 60 percent rate that sits in the middle of the income scale, with 45 percent above it, is not something anyone would design on purpose.
Why It Has Been £12,570 Since 2021
The allowance was last increased in April 2021, to £12,570, and then frozen. The freeze was first due to end in April 2026. It was extended to April 2028 in the Autumn Statement 2022 and then to April 2031 in the Autumn Budget 2025. The October 2026 Budget left that in place. If nothing changes, the allowance will have stood still for ten years.
A freeze sounds neutral. It is a tax rise that arrives through pay rises, and a simple example shows the size of it.
Someone earned £25,000 in 2021/22. With ordinary pay rises they earn £31,000 in 2026/27, an increase of 24 percent.
| 2021/22 | 2026/27 | |
|---|---|---|
| Salary | £25,000 | £31,000 |
| Personal Allowance | £12,570 | £12,570 |
| Income Tax | £2,486 | £3,686 |
| Tax as a share of salary | 9.9% | 11.9% |
If the allowance had grown at the same pace as their pay, it would now be about £15,590 and their tax bill would be £3,083. The freeze is costing this person roughly £600 a year, and the figure grows with every pay rise until 2031.
We do not think freezes are an honest way to raise money. A government that wants a fifth more Income Tax from a worker on £31,000 should say so and put it to a vote as a rate. Leaving a number alone in the rates table does the same job with far less scrutiny, and it falls hardest in proportion on people whose income is closest to the allowance.
The State Pension Overtakes the Allowance in April 2027
For years the full new State Pension sat just under the Personal Allowance. In 2026/27 it is £241.30 a week, or £12,547.60 a year, which is £22.40 short.
From April 2027 it rises by 3.9 percent to £13,036.40 a year. The allowance stays where it is. For the first time, someone whose only income is the full new State Pension would owe Income Tax: £466.40 over the allowance, taxed at 20 percent, is £93.28.
The State Pension is paid without tax taken off and there is no payroll to collect it from. HMRC would have had to send bills for under £100 to hundreds of thousands of people who have never dealt with it before.
The Pension Tax Allowance
The October 2026 Budget answered this with the Pension Tax Allowance. Despite the name, it does not increase your Personal Allowance. It is a reduction in the tax bill itself. HM Treasury's explainer sets out how it works.
- It applies for three tax years: 2027/28, 2028/29 and 2029/30.
- You qualify if you are over State Pension age, or reach it during the tax year.
- It is worth 20 percent of the gap between the full new State Pension and the Personal Allowance. For 2027/28 that is up to about £94.
- If your total income is no more than £13,036.40, the reduction covers all of your tax.
- Above that, you lose £1 of the reduction for every £3 of extra income. It has gone by the time income reaches £13,319.
- It is given automatically. There is no claim form.
- It cannot create a refund and it cannot be passed to a spouse.
The test looks at total income from every source. You do not have to be receiving the State Pension, and a small private pension, part time wages, rent, interest and dividends all count. Income inside an ISA does not.
The Treasury estimates that around 290,000 pensioners will pay no tax in 2027/28 because of it, and about 500,000 will get some reduction.
What We Think of It
It does solve the immediate problem. Someone living on the State Pension alone will not get a tax bill, and that matters.
But look at what happens just above the line. Jean has the full new State Pension and a private pension of £200 a year, so her income in 2027/28 is £13,236.40.
| Amount | |
|---|---|
| Income above the Personal Allowance | £666.40 |
| Tax at 20% | £133.28 |
| Maximum Pension Tax Allowance | £93.28 |
| Less withdrawn (£200 over the limit, divided by 3) | £66.67 |
| Reduction Jean receives | £26.61 |
| Tax to pay | About £107 |
Without the £200 private pension, Jean would pay nothing. With it, she pays about £107. Her £200 pension is taxed at an effective rate of 53 percent, and the tax still has to be collected, through a code on her private pension or a bill from HMRC, which is the paperwork the relief was meant to prevent. HMRC's own rounding may move these figures by a pound or so.
The sums involved are small and the band is narrow, about £283 wide. Even so, the government has responded to an allowance that is too low by adding a second allowance with its own taper, for three years only, with nothing promised after April 2030. Anyone with a modest workplace pension on top of their State Pension, which describes most people retiring now, gets little or nothing from it. Raising the Personal Allowance would have been simpler and more expensive. That trade off is the whole story of the freeze.
If you are helping a parent or relative with their affairs, the practical point is this. From 2027/28, expect HMRC to start writing to pensioners who have never had a tax bill, and do not assume the new allowance means the letter is a mistake.
Allowances That Sit on Top
The Personal Allowance is the base. Several other reliefs can be added to it, and they are regularly missed.
| Allowance | 2026/27 amount | Who gets it |
|---|---|---|
| Starting rate for savings | Up to £5,000 of interest at 0% | People with low earnings or pension income |
| Personal Savings Allowance | £1,000, £500 or nil | Depends on your tax band |
| Dividend allowance | £500 | Anyone with dividend income |
| Trading allowance | £1,000 | Small self-employed or casual income |
| Property allowance | £1,000 | Small rental income |
| Blind Person's Allowance | £3,250 | Registered blind or severely sight impaired |
| Marriage Allowance | £1,260 transferred, worth up to £252 | Couples where one earns under £12,570 |
Someone with no earnings can therefore receive £12,570 of any income, then £5,000 of interest, then another £1,000 of interest and £500 of dividends, and pay no tax on £19,070. We go through the savings layers in our guide to tax on savings interest, the dividend rules in what a dividend is, and the £1,000 reliefs in our guide to the trading allowance.
The Blind Person's Allowance is the one we most often find unclaimed. It is added to the Personal Allowance, it is worth £650 a year to a basic rate taxpayer, and any part the person cannot use can be transferred to their spouse or civil partner. If a relative has been registered as sight impaired, check whether anyone told HMRC.
Company Directors and the £12,570 Salary
Most owner managed companies pay their director a salary at or close to the Personal Allowance and the rest as dividends. A salary of £12,570 uses the allowance exactly, attracts no Income Tax and no employee National Insurance, and is a deductible cost for the company.
Whether that is still the best level depends on employer National Insurance and whether the company can claim the Employment Allowance, which we cover in our guide to directors' remuneration.
The point to take from this guide is that a director with other income has already used some or all of the allowance elsewhere. Someone with a pension in payment, a second employment or rental income cannot assume the first £12,570 from their company is tax free. We see this most often with people who start a company alongside a job.
What We Would Do
Check your tax code every April. The right code for most people is 1257L. If yours is different, find out why. If you have two jobs or pensions and the main one pays less than £12,570, ask HMRC to split the allowance.
Use both allowances in a couple. If one of you has income below £12,570, the unused part is wasted every year. Savings and rental property can be transferred between spouses and civil partners with no tax charge, so that the income falls on the person with allowance to spare. The transfer has to be a real gift. Where that is not practical, the Marriage Allowance recovers some of it.
Plan for low income years. A career break, a year abroad, the gap between leaving work and drawing a pension, or a bad year in a business can all leave allowance unused. If you can choose when income arrives, for example by drawing taxable income from a pension or paying a company dividend, a low year is the time to take it.
Remember children have their own allowance. A child's income from a job or from money given by grandparents is covered by their own £12,570. Income from money given by a parent is different: if it exceeds £100 a year it is taxed as the parent's.
Work out your adjusted net income before 5 April, not after. Pension contributions and Gift Aid donations only help with the £100,000 taper if they are paid inside the tax year. By the time the tax return is being prepared, the options have gone.
If you live abroad, do not assume you have lost it. Non-residents do not get the allowance automatically. Many still qualify, including citizens of EEA countries and Crown employees, or through a tax treaty. It has to be claimed.
Common Mistakes
- Thinking each job has its own allowance. There is one per person per year.
- Believing the allowance can be carried forward. It cannot. What is not used by 5 April is lost.
- Assuming it covers capital gains. It does not, even in a year with no other income.
- Confusing it with the National Insurance threshold. The figure is the same and the rules are not.
- Treating £100,000 of salary as the test. The taper uses adjusted net income, so interest, dividends, rent and benefits in kind all count.
- Assuming the State Pension is tax free. It is taxable income that uses up your allowance, and from April 2027 the full amount exceeds it.
- Reading the Pension Tax Allowance as a higher Personal Allowance for pensioners. It is a small, tapered reduction in the bill for people with income under £13,319.
How IAK Can Help
We prepare tax returns for employees, directors, landlords, sole traders and pensioners across North London and Hertfordshire. Through our personal tax service we check that your tax code is right, that every allowance you are entitled to has been claimed, and that tax overpaid in earlier years is recovered. Our tax planning work deals with the thresholds in this guide, the £100,000 taper in particular, and for directors it looks at salary, dividends and pension contributions together. You can estimate your take home pay with our salary calculator, and our UK tax year guide lists the dates that matter.
Call us on 020 8445 3300 or get in touch for a free initial conversation.
Sources
- Income Tax rates and Personal Allowances, GOV.UK, for the £12,570 allowance, the 2026/27 bands, the reduction above £100,000 and the £125,140 point at which the allowance is nil.
- Annex A: rates and allowances, Budget 2026 overview of tax legislation and rates, GOV.UK, for the 2027/28 Personal Allowance, Blind Person's Allowance, Married Couple's Allowance and the Pension Tax Allowance thresholds of £13,037 and £13,319.
- Pension Tax Allowance Explainer, HM Treasury, published 28 October 2026, for how the allowance is calculated and withdrawn, who qualifies, the £13,036.40 State Pension figure and the estimates of 290,000 and 500,000 pensioners.
- Budget 2026, HM Treasury, published 28 October 2026, for the decision to introduce the Pension Tax Allowance from 6 April 2027 to 5 April 2030 and its cost.
- Income Tax rates and allowances for current and previous tax years, GOV.UK, for the history of the allowance and the 2026/27 Blind Person's and Married Couple's Allowance figures.
- Change to tax rates for property, savings and dividend income: technical note, GOV.UK, for the rule that the Personal Allowance is set against other income before property, savings and dividend income.
- Residence, domicile and the remittance basis: RDR1, GOV.UK, section 8.12, for which non-residents can claim UK personal allowances.
- Income Tax Act 2007, section 35, for the Personal Allowance and the reduction where adjusted net income exceeds £100,000.