The UK Personal Allowance 2025: 5 Critical Facts About The Extended Freeze And The 60% Tax Trap
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UK Personal Allowance and Income Tax Bands 2025/2026
The standard Personal Allowance is the amount of income you can earn each tax year before you start paying Income Tax. For the 2025/2026 tax year, which runs from 6 April 2025 to 5 April 2026, this figure is unchanged. The following table summarises the core tax bands and rates for England, Wales, and Northern Ireland for the 2025/2026 tax year. (Note: Scotland operates a separate Income Tax system with different bands and rates).| Income Tax Band | Taxable Income (Non-Savings/Non-Dividend) | 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% |
The 5 Critical Facts About the Personal Allowance Freeze
Understanding the static £12,570 allowance for 2025/2026 requires looking at the bigger picture of the government’s long-term tax strategy.1. The Freeze is Extended Until at Least 2028 (and Possibly Longer)
The Personal Allowance and the Higher Rate Threshold were initially frozen until 2025/2026. However, this freeze has since been legislated to continue until the end of the 2027/2028 tax year. Latest reports even suggest the freeze could be maintained until 2030/2031 under the current government’s fiscal plans. This long-term stagnation is a key financial planning consideration for all UK households, as it guarantees a period of reduced real-terms income.2. Fiscal Drag is the Main Financial Consequence
Fiscal drag occurs when income tax thresholds remain fixed while wages and prices rise. As people receive pay rises—even just to keep up with inflation—a greater proportion of their income is taxed, and more people are pulled into higher tax bands (the 40% Higher Rate). For the 2025/2026 tax year, the freeze on the £12,570 Personal Allowance and the £50,270 Higher Rate Threshold means that any pay increase is immediately taxed, leading to a stealth tax rise for millions of workers.3. The £100,000 Tax Trap Creates a 60% Effective Tax Rate
This is arguably the most punitive effect of the frozen Personal Allowance. Once your Adjusted Net Income exceeds £100,000, your Personal Allowance of £12,570 is withdrawn (tapered) at a rate of £1 for every £2 earned over the threshold. * The Math: To regain the full £12,570 allowance, you must earn an extra £25,140 (2 x £12,570). * The Trap: On the £25,140 of income between £100,001 and £125,140, you pay 40% Income Tax. Additionally, the withdrawal of the Personal Allowance means that for every £1 of income, you lose £0.50 of your tax-free allowance, which is then taxed at 40%, effectively adding another 20% to your marginal rate (40% + 20% = 60%). * Result: Taxpayers in the £100,000 to £125,140 income band face an effective marginal tax rate of 60% on that portion of their earnings. The freeze ensures that hundreds of thousands more taxpayers are dragged into this trap by 2029.4. The Allowance is Completely Lost at £125,140
The tapering continues until the Personal Allowance is completely eliminated. For the 2025/2026 tax year, anyone with an Adjusted Net Income of £125,140 or above will have a nil Personal Allowance. This means every pound of their income is subject to tax at the appropriate rate (40% or 45%).5. Other Key Allowances for 2025/2026
While the main Personal Allowance is frozen, other related allowances are also set for the 2025/2026 tax year: * Marriage Allowance: £1,260. This allows a spouse or civil partner who earns less than the Personal Allowance (£12,570) to transfer £1,260 of their unused allowance to their partner, provided the recipient is a Basic Rate (20%) taxpayer. * Blind Person's Allowance: £3,130. This is an additional tax-free allowance for registered blind individuals. * Dividend Allowance: £500. This is the amount of dividend income you can receive tax-free, a significant reduction from previous years. * Capital Gains Tax (CGT) Annual Exempt Amount: £1,500. This allowance continues its rapid reduction, making it a critical area for investors to monitor.How to Legally Mitigate the 60% Tax Trap (Adjusted Net Income)
The key to navigating the £100,000 tax trap is to reduce your Adjusted Net Income (ANI). ANI is your total income before tax, minus certain tax reliefs, such as gross pension contributions and gross Gift Aid charitable donations. By strategically reducing your ANI to below £100,000, you can fully or partially reinstate your £12,570 Personal Allowance, effectively saving you 60% tax on the amount contributed.1. Maximize Pension Contributions (SIPPs)
This is the most common and effective strategy. Making a lump sum contribution into a Self-Invested Personal Pension (SIPP) or increasing workplace pension contributions via salary sacrifice can reduce your ANI. * Example: If your ANI is £110,000, you have lost £5,000 of your Personal Allowance. By making a gross pension contribution of £10,000, your ANI falls to £100,000, fully reinstating your £12,570 Personal Allowance. The effective tax relief on this contribution is therefore substantial (40% on the contribution itself, plus the 20% relief from reinstating the allowance).2. Utilize Charitable Donations (Gift Aid)
Donations made under Gift Aid are treated as if you had already paid the Basic Rate tax on them. This reduces your ANI. * Mechanism: When you donate £80, the charity claims £20 back, making the gross donation £100. It is this gross amount (£100) that is deducted from your ANI, helping you to reclaim the Personal Allowance.3. Explore Salary Sacrifice Schemes
If your employer offers a salary sacrifice scheme for pensions or other benefits (like electric cars), this reduces your gross salary and, crucially, your ANI. This is a highly efficient way to reduce your taxable income below the £100,000 threshold without affecting your overall benefits package. The frozen Personal Allowance of £12,570 for 2025/2026 is not just a static number; it is a policy designed to increase the tax burden on a growing number of UK earners through fiscal drag. For those earning near or above £100,000, proactive tax planning using pension contributions and charitable giving is essential to avoid the crippling 60% effective tax rate.
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