Personal Allowance Explained: How Much Can You Earn Tax-Free?

The Personal Allowance is the amount of income you can earn each tax year before you start paying Income Tax.

But how much can you earn before HMRC starts taking a share? That's what the Personal Allowance determines.

Whether you're a sole trader or a limited company director, learning the rules and details regarding your Personal Allowance can save you a lot of money.

Here's what you need to know about it.

Key points

• Most people can earn £12,570 tax-free 💷
  The Personal Allowance has been frozen at this level since 2021/22 and applies to your total income from all sources – salary, self employment profit, rental income, and more.
• Your allowance can be higher or lower depending on your situation ⚖️
  Marriage Allowance and Blind Person's Allowance can increase what you keep tax-free. But earn over £100,000, and your allowance starts to decrease, disappearing entirely at £125,140.
• For self employed people, it's profit that matters, not turnover 🧾
  Allowable business expenses reduce your taxable income before the Personal Allowance is applied. Keeping accurate records throughout the year can make a meaningful difference to your tax bill.
• Income Tax and National Insurance are two separate things ⚠️
  Your Personal Allowance only covers Income Tax. NICs follow different thresholds, so you could owe National Insurance even when your Income Tax bill is low.
• The allowance resets every year and doesn't roll over 📅
  If you don't use your full allowance by 5 April, you lose it. That's why reviewing your income position before the end of the tax year is very important.
• ANNA helps you make the most of your allowance 🚀
  ANNA automates expense tracking, provides real-time tax estimates, supports salary and dividend planning, and files Self Assessment returns automatically, helping small business owners stay tax-efficient without the admin hassle.

How much is the Personal Allowance?

The Personal Allowance applies to your total income. For most people in the UK, the Personal Allowance is £12,570 for the 2026/27 tax year. You only pay tax on the amount over the threshold.

What counts as income for Personal Allowance purposes?

It's broader than most people think. HMRC includes:

• Employment income (salary, bonuses, benefits in kind)
• Self employment profits
• Rental income
• Pension income
• Savings interest (though a separate Personal Savings Allowance may cover some of this)
• Dividends (after the Dividend Allowance)

Some income is tax-free and doesn't count, such as Individual Savings Account interest, certain state benefits, and the first £1,000 of trading income under the Trading Allowance.

Income Tax rates for 2026/27

Once you earn above your Personal Allowance, you move into the Income Tax bands.

Here's how the tax bands stack up in England, Wales, and Northern Ireland:

Scotland has its own bands with slightly different thresholds and rates, so it's worth checking the official guidance if you're based north of the border.

Does everyone get the full Personal Allowance?

Not always. Your Personal Allowance can change based on your circumstances.

You can get more in two cases:

• Marriage Allowance: You may be eligible for this allowance if you're married or in a civil partnership, and one of you earns less than the Personal Allowance. You can transfer up to £1,260 of your unused Personal Allowance to your partner.
• Blind Person's Allowance: If you qualify for the BPA, you can add £3,070 on top of your standard allowance.

However, your Personal Allowance can also be reduced.

If your income exceeds £100,000, your Personal Allowance is reduced by £1 for every £2 of income above that threshold. It disappears once your income reaches £125,140.

⚠️ Keep in mind

If you're a business owner paying yourself a mix of salary and dividends, your total income from all sources counts towards the £100,000 threshold.

How the Personal Allowance works for self employed people

If you're self employed, your Personal Allowance works the same way, but it's your profit (income minus allowable expenses) that's measured, not your total turnover.

So if you earned £30,000 in revenue but spent £10,000 on legitimate business expenses, your taxable profit is £20,000. Subtract your £12,570 Personal Allowance, and you'd pay basic rate tax on £7,430.

📌 Good to know

Keeping accurate records of your business expenses helps ensure your taxable income is calculated correctly, so you pay the right amount of tax. ANNA's Auto Accountant helps you track expenses automatically throughout the year, so nothing slips through the cracks.

The Personal Allowance and Self Assessment

If you're self employed, a company director, or you have multiple income streams, you'll likely need to file a Self Assessment tax return each year. This is how HMRC calculates whether you owe any tax after applying your Personal Allowance and any other reliefs.

The deadline for online Self Assessment returns is 31 January following the end of the tax year. Miss it, and you'll face automatic penalties starting at £100, even if you don't owe any tax.

Getting your Self Assessment right means accounting for:

• All taxable income sources
• Allowable business expenses
• Your Personal Allowance
• Any tax already paid (via PAYE, for example)

🧠 Good to know

Filing your Self Assessment doesn't have to be stressful. ANNA's Auto Accountant prepares and files your return for you – and if you're new to ANNA, we'll file your 2025/26 Self Assessment for free.

Even if you've already paid to file with someone else, ANNA will refund the filing fee when you switch.

Personal Allowance and dividends

Many limited company directors pay themselves a small salary, often up to the National Insurance threshold, and top up with dividends. This is a tax-efficient approach, and the Personal Allowance plays a key role in making it work.

By keeping total income within the Personal Allowance, you take home everything you earn – no Income Tax due.

Above that, dividends are taxed at dividend tax rates (8.75% for basic rate taxpayers and 33.75% for higher rate taxpayers), which are generally lower than the tax rates applied to salary income.

💡 Did you know?

There's also a separate Dividend Allowance (currently £500 for 2026/27) on top of your Personal Allowance. Any dividends within this allowance are tax-free, even if you've used your Personal Allowance elsewhere.

What about National Insurance?

Your Personal Allowance covers Income Tax, but National Insurance Contributions (NICs) run on a slightly different system.

For the self employed in 2026/27, class 4 NICs kick in on profits over £12,570 at 6%, then 2% above £50,270.

For employees and directors taking a salary:

• Employee NICs start on earnings over £12,570 at 8%
• Employer NICs kick in at £5,000 at 15% – paid by the company, not the individual

If you're a director paying yourself a salary, you're personally liable for employee NICs above £12,570, while the company pays employer NICs on your salary from £5,000 upwards. Both come out of the business one way or another.

Either way, your NIC bill can be significant even when your Income Tax is low, which is why it's important to factor both into your tax planning.

Planning around your Personal Allowance

Most people only think about their Personal Allowance at tax return time, but a bit of forward planning throughout the year can make a big difference.

Timing matters

One area many people overlook is timing. The UK tax year runs from 6 April to 5 April, and your Personal Allowance resets every year – it doesn't carry over.

If you've had a quiet year and haven't used your full allowance, there's no way to roll the unused portion forward. For this reason, you should review your income position before 5 April each year, not after.

Married couples and civil partners can plan together

For married couples or civil partners, income splitting can be a powerful planning tool.

If one partner earns significantly less than the other, structuring income so the lower earner makes better use of their Personal Allowance can reduce the household's overall tax bill.

Gift Aid can have an impact

You should also consider how Gift Aid interacts with your allowance. When you donate to charity through Gift Aid, the basic rate tax is reclaimed by the charity.

But if you're a higher rate taxpayer, you can claim the additional 20% relief through Self Assessment. Also, Gift Aid donations extend your basic rate band by the gross value of the donation, which can pull some income back from the 40% bracket.

Pension contributions can be especially valuable

Making pension contributions reduces your adjusted net income, which is the figure HMRC uses to calculate whether your allowance should be reduced. By lowering your adjusted net income, a pension contribution can restore some or all of your lost Personal Allowance.

The combination of pension tax relief and recovering your tax-free allowance means you can effectively save up to 60p in tax for every £1 contributed within this income range.

Make the most of your Personal Allowance with ANNA

Knowing your Personal Allowance is a start – using it well is where most people lose ground.

Missed expenses, poor timing, and last-minute tax returns are some of the most common reasons people end up paying more tax than necessary, and none of them are difficult to manage with the right setup.

ANNA is built to fix that. Here's how it helps at each stage:

• Automatic expense tracking: ANNA captures and categorises your business expenses throughout the year, so your taxable profit stays as low as it should be. Nothing slips through, and nothing needs uploading at the last minute.
• Self Assessment filed for free: Once your HMRC account is connected, ANNA prepares and files your Self Assessment automatically – and it’s free. If you already submitted your 2025/26 return, ANNA will refund you the filing cost.
• Real-time tax estimates: You'll be able to see exactly how much you're likely to owe as you earn, based on your actual income and expenses. That means fewer surprises in January.
• Tax Pots: ANNA automatically sets aside the right amount of tax as money comes in, so when January arrives, the funds are already there.
• Built-in business account: Your banking, invoicing, and tax all sit in one place. Transactions feed directly into your accounts with no manual imports or reconciliation needed.
• Invoicing and payments: Efficient invoicing allows you to create and send invoices, chase outstanding payments, and get paid via a personal payment link – all within the same app.
• Deadline reminders built in: The 31 January Self Assessment deadline and the 5 April tax year end are both handled automatically. You'll always know what's coming and when.

If you want to take home more of what you earn – without spending hours on bookkeeping – try ANNA today.