What is the personal allowance?
The personal allowance is the amount of income most people can receive each tax year without paying income tax, set at £12,570 for 2026/27.
What the personal allowance means
Most UK taxpayers can earn £12,570 a year before they pay any income tax. That is the personal allowance. It applies to all kinds of income combined: salary, self-employed profits, rental profits, pensions, savings and dividends. The figure has been frozen for several years, which means more people pay tax as wages rise.
For employees, the allowance is built into your tax code. The common code 1257L tells your employer to give you £12,570 of tax-free pay across the year.
The £100,000 taper
Once your adjusted net income goes over £100,000, your personal allowance is reduced by £1 for every £2 above that level. It disappears completely at £125,140. In that band, every extra £100 of income costs £40 in tax plus £20 from the lost allowance taxed at 40%, an effective rate of 60%.
Example
| Total income | Personal allowance |
|---|---|
| £45,000 | £12,570 |
| £100,000 | £12,570 |
| £110,000 | £7,570 |
| £125,140 or more | £0 |
A director earning £110,000 who pays £10,000 into a pension brings adjusted net income back to £100,000 and restores the full £12,570 allowance, a saving of about £2,000 in tax on top of the normal pension tax relief.
For business owners
Company directors often take a salary of £12,570 so it is fully covered by the personal allowance, then take the rest of their income as dividends. Self-employed people get the allowance against their profits. The allowance is used against non-savings income first, then savings, then dividends, which is why dividends often fall into higher tax bands.
Other allowances can sit alongside it: the £500 dividend allowance, the personal savings allowance, the £1,000 trading allowance and marriage allowance.
Why it matters for your business
Using the allowance fully, and keeping income below the taper where you can, is one of the simplest ways to reduce personal tax. Timing bonuses and dividends, making pension contributions and sharing income with a spouse who works in the business can all help. Run your figures through the take-home pay calculator or salary and dividend calculator to see the effect.
Check your tax code each year so it reflects any changes.
Common questions
£12,570, the same figure that has applied since 2021/22. It is reduced by £1 for every £2 of adjusted net income above £100,000 and is lost completely at £125,140. Most people see it as the 1257L code on their payslip.
Yes. Any personal allowance not used by salary or other income is set against dividends. A director with no other income could receive £12,570 of dividends free of tax, plus the £500 dividend allowance on top.