Everyone who earns money pays Income Tax. However, you do not pay tax on all your income. The Personal Allowance lets you earn a set amount each year without paying tax.
For the 2026/27 tax year, the standard Personal Allowance is £12,570. This means you can earn up to this amount before any Income Tax applies. The tax year runs from 6 April to 5 April the following year. Therefore, your allowance always applies within this period.
Simply, the Personal Allowance helps you keep more of your income. It reduces the amount of money that becomes taxable.
How the Personal Allowance Works
You only pay tax on your income above the £12,570 threshold.
For example: If you earn £20,000 per year, £12,570 remains tax-free. The remaining £7,430 then becomes taxable.
This shows how the allowances reduces your taxable income. Additionally, this system ensures that lower earners pay less tax.
Where Your Income Comes From
Income Tax applies to many different types of income, such as:
- Employment income
- Self-employment earnings
- State Pension
- Workplace or private pensions
- Interest from savings
While these income sources vary, the Personal Allowance still applies in most cases. As a result, you benefit from the allowance regardless of how you earn your money.
When You Go Over £100,000
Your Personal Allowance starts to reduce once your income exceeds £100,000. This reduction happens gradually. You lose £1 of allowance for every £2 you earn above £100,000.
As a result,
- Your allowance reduces step by step
- Your allowance reaches £0 at £125,140
At this point, you pay tax on all your income.
The Personal Allowance and Income Tax Bands
Income Tax uses a band system. As your income increases, different portions fall into different tax rates.
You can think of this like steps on a staircase. As you earn more, you move up a step. However, only the income on that step is taxable at the higher rate.
Here are the main tax bands for England and Wales:
| Tax Band | Income Range | Tax Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic Rate | £12,571 to £50,270 | 20% |
| Higher Rate | £50,271 to £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
As previously stated, you only pay each rate on the income within that band. Therefore, you never pay one rate on your full income.
Your Tax Code
If you receive a salary or pension, your tax code reflects your Personal Allowance. You can find this code on your payslip.
The most common tax code is 1257L, which represents the standard £12,570 allowance.
Your employer uses this code to calculate how much tax to deduct from your pay. If your tax code looks incorrect, you should check it as soon as possible. This helps prevent overpaying or underpaying tax.
Additional Tax-Free Allowances
In addition to the Personal Allowance, other tax-free allowances may apply. These allowances can further reduce your tax bill.
This includes:
- Personal Savings Allowance for interest
- Trading Allowance for side income
- Dividend Allowance for share income
- Capital Gains Tax allowance on asset sales
- Marriage Allowance for couples
Furthermore, the Blind Person’s Allowance can increase your tax-free income if you qualify. As a result, you can earn even more before paying tax.
When You Need to Submit a Tax Return
Many people receive their Personal Allowance automatically through PAYE. However, some individuals must submit a Self Assessment tax return.
You may need to file a return if:
- Your income exceeds £150,000
- You earn income from self-employment
- You receive rental or investment income
If this applies, you must register by 5 October and submit your return by 31 January.
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This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK tax laws and regulations are subject to change. Please speak to an accountant or tax professional for advice tailored to your individual circumstances. Pi Accountancy accepts no responsibility for any issues arising from reliance on the information provided.