The £12,570 Tax Trap: 5 Critical Facts About The UK Personal Allowance Freeze Until 2028
The UK Personal Allowance is arguably the most important figure in the country's tax system, representing the amount of income you can earn each year before you start paying Income Tax. As of today, December 19, 2025, the key financial reality for the upcoming 2025/2026 tax year is not a change, but a steadfast freeze, a policy decision that continues to have profound financial implications for millions of workers across England, Wales, and Northern Ireland (and affects Scottish taxpayers' allowances).
The standard Personal Allowance for the 2025/2026 tax year remains fixed at its current level of £12,570. This figure has been locked in place since April 2021 and is legislated to remain frozen until the end of the 2027/2028 tax year. This extended freeze is a central pillar of the government's fiscal policy, designed to raise revenue without technically increasing headline tax rates, a phenomenon widely known as 'fiscal drag'.
The Statutory Freeze: Personal Allowance and Income Tax Thresholds 2025/2026
The decision to freeze the Personal Allowance at £12,570 was first announced in the 2021 Budget and subsequently extended, creating a period of stability—or stagnation—in the tax system. While the number itself is straightforward, its interaction with rising wages and inflation is complex and critical for financial planning.
1. The £12,570 Figure: A Four-Year Lock-In
For the 2025/2026 tax year, starting on April 6, 2025, the standard Personal Allowance is confirmed as £12,570. This means that the first £12,570 of an individual’s income is tax-free. This allowance is available to most UK residents, though it is reduced for those with very high incomes (see section below).
Crucially, the Basic Rate Limit—the income threshold at which the 20% basic rate of Income Tax ends and the 40% Higher Rate begins—is also frozen. For 2025/2026, the Basic Rate Limit remains at £37,700. Consequently, the Higher Rate of Income Tax (40%) will start on income over £50,270 (£12,570 Personal Allowance + £37,700 Basic Rate Limit).
This statutory freeze on both the Personal Allowance and the Basic Rate Limit is legislated to continue until the end of the 2027/2028 tax year.
2. The Hidden Tax Hike: Understanding Fiscal Drag
The most significant impact of the frozen Personal Allowance is the effect known as fiscal drag. This occurs when tax thresholds are not increased in line with inflation or average earnings growth.
- How it Works: As wages increase (even if only to keep pace with the cost of living), more of a person's income is pushed above the fixed £12,570 Personal Allowance and into the taxable band (20%, 40%, or 45%).
- The Result: Individuals pay a higher proportion of their total income in tax, effectively increasing the government's tax take without any official announcement of a tax rate increase.
- "Bracket Creep": Fiscal drag also causes 'bracket creep,' where individuals whose earnings rise move into a higher tax bracket (e.g., from the Basic Rate to the Higher Rate) simply due to inflationary pay rises, not genuine increases in purchasing power. This is why the frozen £50,270 threshold for the Higher Rate Tax is particularly impactful.
High Earners: The Personal Allowance Withdrawal and Tax-Free Income
While the £12,570 figure applies to most UK taxpayers, those with higher incomes face a significant reduction in their tax-free entitlement. Understanding the withdrawal mechanism is crucial for high-earning professionals, company directors, and those with substantial investment income.
3. The £100,000 Taper: A 60% Effective Tax Rate
The Personal Allowance is not universal; it is progressively withdrawn for individuals whose adjusted net income exceeds £100,000. For every £2 earned over the £100,000 threshold, the Personal Allowance is reduced by £1.
- Withdrawal Start Point: £100,000
- Withdrawal Rate: £1 for every £2 of income over £100,000
- Zero Allowance Point: The Personal Allowance is completely eliminated when an individual’s income reaches £125,140 or more.
This withdrawal mechanism creates a notorious income band between £100,000 and £125,140 where the effective marginal tax rate can be extremely high. The combination of the 40% Higher Rate Tax and the loss of the 20% tax relief on the withdrawn allowance results in an effective marginal tax rate of 60% in this specific income bracket. Tax planning, such as making pension contributions or charitable donations, is often focused on reducing income below the £100,000 taper threshold.
Geographical Differences: The UK Personal Allowance and Devolved Tax
While Income Tax is generally a UK-wide tax, the devolution of tax powers means that the tax rates and bands applied to non-savings and non-dividend income differ significantly for residents of Scotland.
4. Scotland’s Unique Tax Landscape 2025/2026
Scottish taxpayers are entitled to the same standard UK Personal Allowance of £12,570. However, the Income Tax rates and thresholds applied to their earnings are set by the Scottish Parliament and are different from the rest of the UK (rUK).
For the 2025/2026 tax year, Scotland operates a six-rate system, which includes:
- Starter Rate: (e.g., 19%)
- Basic Rate: (e.g., 20%)
- Intermediate Rate: (e.g., 21%)
- Higher Rate: (e.g., 42%)
- Advanced Rate: (e.g., 45%)
- Top Rate: (e.g., 48%)
These Scottish income tax thresholds mean that many taxpayers in Scotland begin paying higher rates of tax at a lower income level than their counterparts in England, Wales, and Northern Ireland, even though their Personal Allowance is identical. The Scottish government’s policy aims to generate higher revenue from income tax to fund devolved public services.
5. Other Key Allowances and Entitlements
While the Personal Allowance is the primary tax-free amount, several other allowances remain critical for financial planning in 2025/2026:
- Blind Person's Allowance: An additional tax-free amount available to registered blind individuals.
- Marriage Allowance: Allows a spouse or civil partner to transfer up to 10% of their Personal Allowance (£1,260 for 2025/2026) to their partner, provided the recipient is a basic rate taxpayer.
- Savings Allowance (Personal Savings Allowance - PSA): This allows basic rate taxpayers to earn up to £1,000 of 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 expected to continue its reduction, following recent Budget announcements.
- Capital Gains Tax (CGT) Allowance: This allowance, which dictates how much profit from the sale of assets is tax-free, has also been subject to significant reductions, making it a key entity for investors and those selling second properties.
The stability of the £12,570 Personal Allowance through the 2025/2026 tax year provides certainty for payroll and HMRC calculations, but its fixed nature, combined with the effects of fiscal drag and the varying tax thresholds across the UK, means that the effective tax burden on UK workers continues to rise. Taxpayers should review their tax codes (e.g., 1257L) and financial planning strategies to mitigate the impact of the long-term freeze.
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