Why You’re Losing Your £12,570 Personal Allowance

In the UK tax system, most workers benefit from the £12,570 Personal Allowance – the amount of income you can receive each tax year without paying income tax. For the current and 2026/27 tax years, this allowance is set at £12,570, meaning you don’t pay income tax on the first £12,570 you earn.

However, for those earning above £100,000, a less‑well‑understood rule gradually reduces this allowance. Many high earners see the tax‑free benefit shrink and ultimately disappear completely before they even enter the highest tax band. This hidden effect increases the marginal tax they pay and can make additional income significantly less rewarding.

Below, we break this down and explain what it really means for your take‑home pay, who gets affected, why it exists and how some people manage or mitigate it.

How the Personal Allowance Taper Works

What the Rules Say

• Personal Allowance for 2025/26 and 2026/27: £12,570.
• Once your adjusted net income exceeds £100,000, your Personal Allowance is reduced by £1 for every £2 earned above this threshold.
• If your income reaches £125,140 or more, you lose the Personal Allowance completely.

This taper reduces your tax‑free income gradually, rather than all at once.

What “Adjusted Net Income” Means

Adjusted net income includes most taxable income, such as:

• Salary or wages
• Bonuses
• Benefits from employment
• Rental income
• Some pension and savings income

Certain reliefs – like pension contributions or Gift Aid – can reduce your adjusted net income, which may affect how much allowance you lose.

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Why This Creates a Hidden 60% Tax Rate

When your Personal Allowance is tapered away, it effectively increases the tax you pay on extra income before you reach the additional rate.

Here’s how:

1. Between £100,000 and £125,140, any extra £1 of income is taxed at the higher rate of 40%.
2. At the same time, you lose £0.50 of Personal Allowance for every extra £1 earned above £100,000.
3. That lost £0.50 would otherwise be tax‑free, so it now becomes taxable at 40%.

Putting that together:

Component	Amount
Tax charged on extra £1 of income	40p
Value of allowance lost (£0.50 taxed at 40%)	20p
Total effective tax rate	60p per £1

Put another way: every extra £100 you earn above £100,000 can leave you with just £40 in extra take‑home pay.

If you also pay National Insurance contributions at 2%, the effective marginal rate can reach 62% on that slice of income.

This has become known in financial planning circles as the “£100,000 tax trap”.

Practical Example

Imagine you earn £100,000 and receive a £10,000 pay rise:

Income rise	Tax rate	Tax payable
Extra income taxed at 40%	40%	£4,000
50% allowance lost (£5,000) taxed at 40%	40%	£2,000
Total tax on £10,000 raise	–	£6,000
Take‑home from £10,000 increase	–	£4,000 (40%)

In this range, the effective marginal tax rate is 60%.

Impact of Frozen Thresholds

The most important contextual factor is that these thresholds have not increased with inflation for many years. The Personal Allowance and the £100,000 threshold have been frozen since the early 2020s and are set to remain unchanged until April 2031.

The result is fiscal drag:

• More people get pulled into higher tax bands as wages rise with inflation.
• Increasing numbers of professionals — including clinicians, teachers, engineers and managers — encounter this high marginal rate even if their real purchasing power hasn’t changed.

Estimates suggest over 2 million taxpayers will be affected by this trap in the current tax year.

Who Is Affected Most

This tapered Personal Allowance rule mainly affects:

• Individuals with adjusted net income between £100,000 and £125,140
• People receiving bonuses or irregular earnings within this range
• Professionals combining salary with rental or investment income
• Those whose income is creeping up due to inflation but have not moved into much higher tax bands

It’s not limited to employees — contractors, business owners and sole traders can be caught too.

How to Reduce the Impact

While you can’t avoid the rule entirely, several legal strategies can help reduce exposure to the 60% effective rate:

Common Options

• Increase pension contributions – These reduce your adjusted net income.
• Use salary sacrifice schemes – Items like additional pension contributions, childcare vouchers or approved benefits can lower taxable income.
• Charitable donations under Gift Aid – These extend your basic rate band and can reduce net income.
• Make use of other tax reliefs – Such as trading losses or investment allowances

Each option has its own rules and implications, so professional advice is often valuable.

Also Read:

How to Increase Your Tax-Free Personal Allowance to £20,070 Through HMRC Rent-a-Room Scheme

Summary

The UK tax system’s Personal Allowance taper is straightforward in concept but can hit high earners unexpectedly hard. As income climbs past £100,000:

• You gradually lose your £12,570 tax‑free allowance.
• This generates an effective 60% marginal tax rate between £100,000 and £125,140.
• Frozen thresholds mean more taxpayers are affected over time.

Understanding these rules helps you with £12,570 personal allowance planning more effectively and avoid surprises at tax time.

How We Can Help With £12,570 Personal Allowance Planning 

At Apex Accountants, we provide tailored tax planning for high earners, professionals and businesses. Our expert services include:

• Income tax planning and optimisation
• Personal Allowance and marginal rate strategies
• Pension and retirement tax planning
• Tax‑efficient remuneration structuring
• Year‑end planning and projections
• Support with HMRC filings and compliance

We help you navigate complex tax rules, reduce liabilities within the law and maximise your take‑home income. Contact us today to build a smart, personalised plan for your finances.

Get Free Consultation

Call Anytime 0203 883 4777

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FAQs: Personal Allowance in the UK

1. What happens if you lose your Personal Allowance?

If you lose your Personal Allowance, your income becomes taxable from the first pound, making your effective tax rate higher. This typically happens if your income exceeds £100,000.

2. Is Personal Allowance still £12,570?

Yes, the standard Personal Allowance is £12,570 for the 2025/26 and 2026/27 tax years. However, it’s gradually reduced if your income exceeds £100,000. 

3. Why has my Personal Tax Allowance dropped?

Your Personal Allowance may drop if your income exceeds £100,000. For every £2 earned above this threshold, £1 of your Personal Allowance is lost, reducing your tax-free income. 

4. How to regain Personal Allowance?

You can regain your Personal Allowance by reducing your adjusted net income. Options include contributing to pensions, making charitable donations through Gift Aid, or using salary sacrifice schemes. 

5. Why has my Personal Allowance been tapered?

Your Personal Allowance is tapered if your adjusted net income exceeds £100,000. The taper reduces your tax-free allowance by £1 for every £2 earned above this threshold, resulting in a higher effective tax rate. 

6. Has Personal Allowance changed from 2025-26?

The Personal Allowance for the 2025-26 tax year is set to remain at £12,570. There have been no increases due to frozen thresholds, and the rate will stay the same until 2031. 

7. Is the HMRC considering raising Personal Tax Allowance from £12,570 to £20,000?

Currently, there are no official plans to raise the Personal Tax Allowance to £20,000. The government has frozen the allowance at £12,570 until 2031. 

8. How much is the tapered annual allowance?

The tapered annual allowance is the amount by which your Personal Allowance is reduced once your income exceeds £100,000. For every £2 earned over this threshold, £1 of your allowance is lost.