The UK tax system provides a set of annual allowances — amounts you can earn, save, or invest before tax applies. Most of them reset on 6 April each year and cannot be carried forward. Many have been cut significantly over the past four years, and several are changing again from 2026/27 and beyond. Knowing what each allowance covers, how much it is, and what is coming down the line is one of the most practical things you can do for your personal finances.
This post covers every major allowance relevant to individuals, sole traders, and limited company directors — with current figures, recent changes, and what to watch.
Income allowances
Personal Allowance
The amount of income you can receive each year before Income Tax applies. Every UK resident is entitled to this allowance, though it tapers by £1 for every £2 of income above £100,000, disappearing entirely at £125,140. The freeze until 2031 — while nominal rates stay fixed — is effectively a tax rise: as wages and prices rise, more income is dragged into the basic and higher rate bands. HMRC estimates around 400,000–600,000 additional taxpayers are being pulled into the 40% band in 2026/27 as a result.
Personal Savings Allowance
Interest earned on savings outside an ISA is tax-free up to this limit. Basic rate taxpayers receive £1,000; higher rate taxpayers receive £500; additional rate taxpayers receive nothing. With interest rates significantly higher than they were in 2021–22, more savers are now exceeding these limits and finding bank interest appearing on their Self Assessment returns for the first time. Savings interest within a Cash ISA is always tax-free and does not count against this allowance.
Trading Allowance
If your gross self-employment or trading income is £1,000 or less in a tax year, you do not need to register for Self Assessment or pay any tax on it. If your income exceeds £1,000, you can either deduct actual expenses in the normal way or simply deduct the £1,000 trading allowance instead — whichever is more beneficial. Useful for individuals with occasional side income such as selling items online, freelancing, or casual work.
Property Allowance
The first £1,000 of gross property income (rental income before expenses) is tax-free. If your rental income exceeds £1,000, you can choose between deducting actual allowable expenses or the £1,000 flat allowance. Cannot be combined with the Rent-a-Room scheme.
Rent-a-Room Allowance
If you let out a furnished room in your main home, you can receive up to £7,500 per year completely free of tax under the Rent-a-Room scheme. This applies whether you are an owner-occupier or a tenant. If your income exceeds £7,500, you can either opt into the scheme (paying tax only on the excess above £7,500) or use the standard property income rules. Cannot be used for rooms in a property that is not your main home.
Investment and savings allowances
Dividend Allowance
The first £500 of dividend income each tax year is tax-free, regardless of your total income. This allowance has been cut dramatically — it was £5,000 in 2017/18 and £2,000 as recently as 2022/23. For limited company directors drawing dividends, this reduction has a direct impact on take-home pay. From April 2026, dividend tax rates above the allowance rose by 2 percentage points across all bands: basic rate taxpayers now pay 10.75%, higher rate taxpayers 35.75%, and additional rate taxpayers 39.35%. Dividends within an ISA are entirely tax-free and do not use any of this allowance.
ISA Allowance
The annual ISA allowance is £20,000 per adult for 2026/27. This can be split across four types of ISA — Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, and Lifetime ISA (capped at £4,000 and included within the £20,000 total). All interest, dividends, and capital gains within an ISA are entirely tax-free, indefinitely. This is a use-it-or-lose-it allowance — unused amounts cannot be carried forward to the next tax year. Key upcoming change: from April 2027, the Cash ISA allowance will be reduced from £20,000 to £12,000, while the overall ISA limit stays at £20,000. The government's intention is to redirect savings toward investment. The Junior ISA allowance remains at £9,000 for 2026/27.
Lifetime ISA (LISA)
Available to individuals aged 18–39, the LISA allows you to save up to £4,000 per year and receive a 25% government bonus (up to £1,000 per year). Funds can be used to purchase a first home (up to £450,000) or accessed penalty-free from age 60. Withdrawing for any other purpose triggers a 25% penalty — which in practice means losing more than the bonus on the withdrawn amount. The £4,000 counts within your overall £20,000 ISA limit.
Capital gains
Capital Gains Annual Exempt Amount
Capital gains up to £3,000 per year are free of Capital Gains Tax. This allowance has been slashed over recent years — it was £12,300 as recently as 2022/23. Gains above this threshold are taxed at 18% (basic rate) or 24% (higher/additional rate) for residential property, and 18% or 24% for other assets following the October 2024 rate changes. Capital gains on assets held within an ISA are always exempt and do not use this allowance.
Pension allowances
Annual Pension Allowance
The maximum amount you can contribute to a pension each year while receiving tax relief. This includes both personal contributions and employer contributions. The allowance is tapered for high earners: if your adjusted income exceeds £260,000, the annual allowance reduces by £1 for every £2 above that threshold, to a minimum of £10,000. Unused annual allowance from the previous three tax years can be carried forward and used in the current year, provided you were a member of a pension scheme in those years. For limited company directors, employer pension contributions paid by the company are fully deductible against Corporation Tax and do not count as personal income.
Allowances at a glance — 2026/27
| Allowance | 2026/27 | 2025/26 | Direction |
|---|---|---|---|
| Personal Allowance | £12,570 | £12,570 | Frozen to 2031 |
| Personal Savings Allowance (basic) | £1,000 | £1,000 | Unchanged |
| Personal Savings Allowance (higher) | £500 | £500 | Unchanged |
| Dividend Allowance | £500 | £500 | Rate above allowance ↑ 2% |
| ISA Allowance | £20,000 | £20,000 | Cash ISA limit ↓ April 2027 |
| Junior ISA | £9,000 | £9,000 | Unchanged |
| Lifetime ISA | £4,000 | £4,000 | Unchanged |
| Capital Gains Exempt Amount | £3,000 | £3,000 | Unchanged (was £12,300 in 2022/23) |
| Annual Pension Allowance | £60,000 | £60,000 | Unchanged |
| Trading Allowance | £1,000 | £1,000 | Unchanged |
| Property Allowance | £1,000 | £1,000 | Unchanged |
| Rent-a-Room | £7,500 | £7,500 | Unchanged |
The freeze problem — why stable figures still mean higher tax
A pattern runs through the current allowance landscape: many figures have not moved, but that does not mean your tax bill has stayed the same. When allowances are frozen while earnings rise with inflation, more income is caught by tax. This is sometimes called fiscal drag, and it has had a significant effect since 2021.
The Personal Allowance at £12,570 today represents less purchasing power than it did when it was last meaningfully increased. A basic rate taxpayer on average earnings is paying a higher effective tax rate than in 2020, even though the headline rates have not changed. The same effect applies to the CGT exemption — now at £3,000 compared to £12,300 four years ago — and to the dividend allowance, which has fallen by 75% in the same period.
The practical implication: use allowances you are entitled to, every year, without exception. The ISA allowance does not carry forward. The CGT exemption does not carry forward. The pension carry-forward rule is an exception — but you need to have been a scheme member in the relevant years to use it. These allowances are genuinely valuable, and they are getting less generous over time, not more.
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Get in TouchThis article is for general information purposes and does not constitute financial or tax advice. Allowances and rates are subject to change. Always verify current figures with HMRC or speak to a qualified accountant before making decisions.