Personal allowance
The personal allowance is the amount of income you can receive each year before income tax applies — £12,570 for 2026/27. It is withdrawn by £1 for every £2 of income above £100,000.
How it works
Most people get the full £12,570 allowance, delivered through a tax code if you are paid through PAYE. Above the allowance, the basic rate of 20% applies to the next £37,700 of income, taking you to the higher rate threshold of £50,270, then 40%, and 45% above £125,140.
The taper is the part that surprises directors. Once income passes £100,000, the allowance falls by £1 for every £2 of extra income and is gone entirely at £125,140. In that band the effective rate on salary is 60%, which makes a pension contribution or a deferred dividend unusually valuable.
For a company director the allowance shapes the standard extraction plan: a salary using part of the allowance, then dividends on top. Dividends above the £500 dividend allowance are taxed at 10.75% within the basic rate band and 35.75% above it for 2026/27.
Thresholds are frozen rather than rising with inflation, so more income falls into higher bands each year without any rate changing. Planning around the £100,000 and £50,270 points is therefore a recurring annual exercise, not a one-off.
Who this affects
- Directors setting a salary to use the allowance efficiently
- Anyone whose total income crosses £100,000 and loses allowance at 60% effective rates
- Couples who could shift dividend income between shareholders
- Directors with rental or other income stacking on top of dividends
Common mistakes
- Drawing a dividend in March that tips income past £100,000 when April would have been better
- Assuming the allowance applies separately to salary and dividends
- Ignoring a wrong tax code and overpaying for a full year
Frequently asked questions
How much is the personal allowance for 2026/27?
£12,570, reduced by £1 for every £2 of income above £100,000 and fully withdrawn at £125,140.
Why is my effective tax rate 60%?
Between £100,000 and £125,140 you pay 40% on the income and lose 50p of allowance for each extra pound, which is taxed too.
Does the allowance cover dividends?
Yes. The personal allowance applies to total income, and dividends falling within it are untaxed. The £500 dividend allowance sits on top of it.
Can I transfer my allowance to my spouse?
Marriage allowance lets a non-taxpayer transfer a fixed part of their allowance to a basic rate taxpaying spouse or civil partner.
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Reviewed by Waqas Sagar ACA FCCA FMAAT · Last reviewed 13 September 2026 · Figures for 2026/27 · About our practice
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