The personal allowance — the amount of income you can earn before paying income tax — has been frozen at £12,570 since 2021. It will stay there until at least 2028. On the surface, nothing has changed. In practice, the freeze is quietly pushing more people into higher tax brackets every year.
What is the personal allowance?
The personal allowance is the amount of income you can receive in a tax year without paying income tax. For most people in England, Wales, and Northern Ireland, that figure is £12,570 for 2025/26. Scottish taxpayers follow the same threshold, though they pay different rates above it.
Once your income exceeds £12,570, you start paying income tax. The standard rate bands are:
| Band | Income | Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic Rate | £12,571 – £50,270 | 20% |
| Higher Rate | £50,271 – £125,140 | 40% |
| Additional Rate | Above £125,140 | 45% |
Why does a freeze matter?
When wages rise but the personal allowance does not, more of your income falls into taxable territory each year. This is called fiscal drag — and it is one of the most effective ways for the government to increase tax revenue without formally raising rates.
Here is a simple example. If you earned £30,000 in 2021 and your salary has risen with inflation to roughly £35,000 today, you are now paying basic rate tax on an additional £5,000 of income — an extra £1,000 in tax — without any change to the published tax rates.
Across the UK workforce, the OBR estimates that the allowance freeze will bring several million additional people into the income tax net by 2028.
The personal allowance taper — a hidden trap
There is an additional complication for higher earners. If your income exceeds £100,000, your personal allowance starts to reduce — by £1 for every £2 earned above that threshold. By the time your income reaches £125,140, you have no personal allowance at all.
This creates an effective tax rate of 60% on income between £100,000 and £125,140. That is not a typo. For every £100 you earn in that band, £60 goes in tax. This is one of the less talked-about anomalies in the UK tax system and it catches a significant number of people — particularly directors and senior employees — who have not planned around it.
If your income is approaching or exceeding £100,000, pension contributions are one of the most effective tools available. Contributing to a pension can reduce your adjusted net income below the taper threshold, effectively restoring your personal allowance and saving significant tax. This is worth discussing with an accountant.
What this means for employees
If you are employed and paid through PAYE, your employer and HMRC handle the calculations. But there are still things to be aware of:
- If you have multiple income sources — employment, rental income, dividends — your personal allowance may be allocated incorrectly across them. Check your tax code.
- If your income has increased significantly, you may now be liable for income tax on savings interest or dividends that were previously covered by allowances.
- Benefits in kind — company cars, private medical insurance, interest-free loans — are added to your taxable income and can push you into a higher band.
What this means for sole traders
For self-employed individuals, the personal allowance works slightly differently in practice because your tax is calculated through self assessment rather than PAYE. Your trading profit, after allowable expenses, is set against the personal allowance first. Any remaining allowance can then be used against other income.
The key thing to watch is your total income from all sources — trading profit plus any employment income, savings interest, rental income, or dividends. Each source adds to your total and can push you through rate bands or taper thresholds you might not have been expecting.
What this means for directors
Most limited company directors take a combination of salary and dividends. The optimal split depends on the interaction between corporation tax, income tax, and National Insurance — and with both thresholds frozen and NIC rates changed, the calculation looks different in 2025/26 than it did a couple of years ago.
The broad principle — a salary up to the NIC threshold, with remaining profit taken as dividends — still holds for many directors, but the exact figures need reviewing annually. The right number depends on your other income, your company's profit, and whether you have other tax relief available.
Pros of the freeze: Simplicity — the allowance has not changed, so there is nothing new to learn.
Cons of the freeze: In real terms, you are paying more tax each year as wages rise. Anyone who received a pay rise in the last three years is paying more in income tax than they were, even if the rates look the same.
Three things worth checking now
- Check your tax code — if it is not 1257L (the standard code for the full personal allowance), find out why. HMRC sometimes adjusts codes to collect underpaid tax from prior years, which can come as an unpleasant surprise.
- Review your income against the £100,000 taper — if you are approaching that threshold, pension contributions or other planning may be available.
- Consider the Marriage Allowance — if one partner earns below the personal allowance, they can transfer up to £1,260 of unused allowance to their spouse or civil partner, saving up to £252 in tax.
This article is for general information purposes and does not constitute tax advice. Tax rules can change and individual circumstances vary. Please speak to a qualified accountant before making financial decisions.