Most people are familiar with the personal allowance as the amount of income they can earn before paying Income Tax. What is less widely understood is that the personal allowance does not remain fixed once your income exceeds £100,000. Above this level, it begins to reduce and eventually disappears entirely. Understanding exactly how this calculation works, and how much allowance you retain at different income levels, is essential for effective tax planning.
What Is the Personal Allowance?
The personal allowance is the amount of income you can receive each tax year before Income Tax becomes payable. For the 2026 to 2027 tax year, the standard personal allowance is £12,570. This figure has been frozen since April 2021, and at Budget 2025 the freeze was extended to 5 April 2031. Everyone who is a UK resident is entitled to this allowance unless their income exceeds £100,000, at which point the taper begins.
How Is the Personal Allowance Reduced Above £100,000?
The reduction works on a simple formula. For every £2 of adjusted net income above £100,000, you lose £1 of your personal allowance. This continues until the allowance reaches zero.
The formula for calculating your remaining personal allowance is:
Personal allowance = £12,570 minus [(adjusted net income minus £100,000) divided by 2]
The personal allowance reaches zero when adjusted net income hits £125,140. Above this level, no personal allowance is available.
Worked Examples at Different Income Levels
The figures below show how the personal allowance reduces at various income levels for the 2026 to 2027 tax year, and the approximate additional tax cost compared with someone earning £100,000. Each line reads: adjusted net income, personal allowance remaining, allowance lost, additional tax cost.
- Adjusted net income £100,000 — personal allowance £12,570 — nothing lost — no additional tax cost
- Adjusted net income £105,000 — personal allowance £10,070 — £2,500 lost — £1,000 additional tax
- Adjusted net income £110,000 — personal allowance £7,570 — £5,000 lost — £2,000 additional tax
- Adjusted net income £115,000 — personal allowance £5,070 — £7,500 lost — £3,000 additional tax
- Adjusted net income £120,000 — personal allowance £2,570 — £10,000 lost — £4,000 additional tax
- Adjusted net income £125,140 — personal allowance £0 — the full £12,570 lost — £5,028 additional tax
The additional tax cost shown above is the tax arising solely from the loss of personal allowance, separate from the 40% Income Tax paid on the income itself. This is why the effective marginal rate in the taper band reaches 60%. Because the personal allowance is frozen until 2031, the thresholds above will remain the same for the foreseeable future.
What Is Adjusted Net Income?
Adjusted net income is not simply your gross salary or total earnings. It is calculated by taking your total income from all sources and then deducting certain reliefs, most notably gross personal pension contributions and Gift Aid donations.
This distinction matters enormously for planning purposes. If your gross income is £110,000 but you make a £10,000 gross pension contribution, your adjusted net income falls to £100,000 and the personal allowance taper does not apply at all. Your personal allowance remains intact at £12,570.
Adjusted net income is also the figure used to determine eligibility for tax free childcare, the High-Income Child Benefit charge and certain other income related calculations.
Do You Lose Your Personal Allowance Permanently?
No. The personal allowance taper applies on a year-by-year basis. If your income falls below £100,000 in a subsequent tax year, your full personal allowance is restored for that year. There is no permanent loss.
This means that in years where your income fluctuates, for example due to a one-off bonus, a high dividend year or the sale of an asset, careful planning around the timing of income and pension contributions can make a significant difference to your overall tax position.
How Can You Protect Your Personal Allowance?
The primary tools for protecting your personal allowance are:
- Personal pension contributions. Gross pension contributions reduce your adjusted net income directly. Contributing enough to bring adjusted net income below £100,000 preserves the full personal allowance.
- Salary sacrifice. Reducing your gross salary through a salary sacrifice arrangement lowers your adjusted net income, which can prevent or limit the taper.
- Gift Aid donations. Charitable donations made through Gift Aid reduce your adjusted net income by the gross donation amount.
- Timing of income. Where you have control over when income is received, deferring a bonus or dividend payment to a later tax year can keep adjusted net income below £100,000 in the current year.
At Affinity Associates Isaacs & Co, our tax planning service works with clients earning around the £100,000 threshold to review their adjusted net income and discuss the planning options available. The numbers at this level make professional advice particularly worthwhile, and we would encourage anyone in this position to speak to us before the end of the tax year.