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The UK Personal Allowance 2025/2026: Why Your £12,570 Tax-Free Income Is Now A 'Stealth Tax'

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The UK Personal Allowance (PA) for the 2025/2026 tax year is officially confirmed to be held at £12,570. This seemingly stable figure is, in fact, the central component of a major fiscal policy affecting millions of taxpayers, as the allowance remains frozen for the fourth consecutive year. The freeze, which began in the 2022/2023 tax year and is currently scheduled to last until April 2028, means that the tax-free portion of your income will not rise with inflation, a policy that has been widely dubbed a "stealth tax" on UK households.

This article, updated with the latest government figures for the 2025/2026 tax year (which runs from 6 April 2025 to 5 April 2026), provides a deep dive into what the frozen Personal Allowance means for your finances, how the tax bands interact with it, and the critical thresholds you must be aware of to manage your tax liability effectively. Understanding these fixed thresholds is essential for financial planning in the current economic climate.

Key UK Income Tax Rates and Allowances for 2025/2026

The standard Personal Allowance is the amount of income you can earn before you start paying Income Tax. For the 2025/2026 tax year, the core figures are:

  • Standard Personal Allowance (PA): £12,570 (Frozen)
  • Basic Rate Tax Band: 20% on income between £12,571 and £50,270
  • Higher Rate Tax Band (HRT): 40% on income between £50,271 and £125,140
  • Additional Rate Tax Band: 45% on income above £125,140
  • Higher Rate Threshold (HRT): £50,270 (The point where 40% tax begins, calculated as £12,570 PA + £37,700 Basic Rate Band)
  • Personal Allowance Taper Threshold: £100,000 (The point where the PA starts to be withdrawn)
  • Personal Allowance Zero Threshold: £125,140 (The point where the PA is completely lost)

It is important to note that these rates and bands apply to taxpayers in England, Wales, and Northern Ireland. Scottish taxpayers are subject to different Income Tax rates and bands (the Scottish Income Tax regime), which are set by the Scottish Parliament.

The Impact of the Personal Allowance Freeze: Understanding 'Fiscal Drag'

The decision to freeze the Personal Allowance at £12,570 until April 2028 is the single most significant factor shaping the UK tax landscape for 2025/2026. This policy has led to a phenomenon known as Fiscal Drag.

What is Fiscal Drag?

Fiscal Drag occurs when a government holds tax thresholds constant while wages and prices (inflation) increase. As a result, more people find themselves being pulled into the Income Tax system for the first time, or dragged into higher tax bands (the 40% Higher Rate).

For example, a person whose salary was £12,570 in 2022 and earned no tax would, due to inflation and typical pay increases, likely be earning more than £12,570 by 2025. Because the allowance has not increased, a portion of their pay rise is now being taxed at 20%, reducing the real-terms benefit of their salary increase. This effect is particularly punitive during periods of high inflation, as has been the case in the UK economy.

The 'Tax Trap' at £50,270

The Higher Rate Threshold (HRT) is also frozen at £50,270. This means that an increasing number of middle-income earners are being pushed into the 40% tax bracket. The freezing of the HRT, alongside the PA, significantly increases the tax burden on what were traditionally considered "middle-earners," as their marginal tax rate doubles on income above this fixed threshold.

The £100,000 Personal Allowance Taper: The Hidden 60% Tax Rate

For high earners, the most critical threshold to be aware of in 2025/2026 is the £100,000 income level. This is where the Personal Allowance starts to be withdrawn, leading to an extremely high effective tax rate.

How the Taper Works

For every £2 of income earned over £100,000, your Personal Allowance of £12,570 is reduced by £1.

  • Starting Point: Income of £100,000. Full PA of £12,570.
  • Taper Zone: Income between £100,000 and £125,140.
  • Effective 60% Tax Rate: Within this zone, the withdrawal of the Personal Allowance creates a hidden 60% marginal tax rate. For every extra £1 earned, you pay 40p in Higher Rate Income Tax, and you lose 50p of your tax-free allowance. The net result is that 50p of income that was tax-free is now taxed at 40%, which is an extra 20p tax. (40p + 20p = 60p tax on the extra £1).
  • End Point: Income of £125,140. The Personal Allowance becomes zero.

This £100,000 tax trap is a major factor for those nearing or exceeding this income level. Effective tax planning, such as making pension contributions or charitable donations, can reduce your 'adjusted net income' below the £100,000 threshold, allowing you to retain some or all of your Personal Allowance. This is a crucial strategy for financial entities and high-earning professionals.

Other Key Allowances and Entitlements for 2025/2026

While the Standard Personal Allowance is the primary focus, several other related tax entities and allowances remain in place for the 2025/2026 tax year, offering additional tax relief where applicable:

  • Marriage Allowance: Allows a spouse or civil partner to transfer £1,260 of their Personal Allowance to their partner, provided the recipient is a basic rate taxpayer and the transferring partner does not use all of their PA. This can save the couple up to £252 in tax.
  • Blind Person's Allowance: An additional allowance of £3,070 for the 2025/2026 tax year. This can be transferred to a spouse or civil partner if not fully used.
  • Savings Allowance (Personal Savings Allowance - PSA): This allows basic rate taxpayers to earn up to £1,000 in interest tax-free, and higher rate taxpayers up to £500. Additional rate taxpayers receive no PSA.
  • Dividend Allowance: The tax-free allowance for dividend income is confirmed to be £500 for the 2025/2026 tax year, a significant reduction from previous years.
  • Capital Gains Tax (CGT) Annual Exempt Amount: This allowance, which dictates how much profit from the sale of assets is tax-free, is also subject to a substantial reduction, dropping to £3,000 for 2025/2026. This is another key area of fiscal tightening.

The continuation of the frozen Personal Allowance at £12,570 for 2025/2026 means that taxpayers must be more vigilant than ever regarding their tax codes and overall financial strategy. The effect of Fiscal Drag will continue to pull more income into the taxable brackets, making proactive tax planning—especially around the £50,270 and £100,000 thresholds—an essential component of managing your net income. The stability of the Income Tax rates (20%, 40%, 45%) belies the increasing real-terms tax burden on UK households.

The UK Personal Allowance 2025/2026: Why Your £12,570 Tax-Free Income Is Now a 'Stealth Tax'
uk personal allowance 2025
uk personal allowance 2025

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