UK Tax Allowances & Thresholds Explained
Every UK taxpayer has tax-free allowances for income, dividends, savings interest, and capital gains. This guide explains each allowance, the current limits for 2026/27, and what happens when you exceed them.
Summary of UK Tax Allowances 2026/27
| Allowance | 2026/27 Amount | Applies To |
|---|---|---|
| Personal Allowance | £12,570 | Employment & self-employment income |
| Dividend Allowance | £500 | Dividend income from shares |
| Personal Savings Allowance (Basic Rate) | £1,000 | Savings interest |
| Personal Savings Allowance (Higher Rate) | £500 | Savings interest |
| Capital Gains Allowance | £3,000 | Profits from asset sales |
| ISA Allowance | £20,000 | Cash, Stocks & Shares, IF and Lifetime ISAs combined |
| Lifetime ISA Allowance | £4,000 | Within the £20,000 ISA limit (25% bonus) |
| Pension Annual Allowance | £60,000 | Total pension contributions (tapered for high earners) |
| Marriage Allowance (transferable) | £1,260 | Transfer to a basic-rate spouse — saves up to £252 |
| Trading Allowance | £1,000 | Self-employed / side-hustle income |
| Property Allowance | £1,000 | Rental and land income |
| Blind Person's Allowance | £3,250 | Added on top of the Personal Allowance (must be claimed) |
| Inheritance Tax Nil-Rate Band | £325,000 | Estate value on death |
| Residence Nil-Rate Band | £175,000 | Family home left to descendants |
These allowances apply to the 2026/27 tax year (6 April 2026 to 5 April 2027). Most cannot be carried forward if unused — unused pension annual allowance is the main exception (carry forward up to three years). From April 2027 the Cash ISA limit falls to £12,000 for under-65s, with the remaining £8,000 usable only in Stocks & Shares ISAs.
Personal Allowance
The Personal Allowance is the amount you can earn each year before paying Income Tax. For 2026/27, it stands at £12,570. This applies to income from employment, self-employment, pensions, and rental income.
The Personal Allowance has been frozen since April 2021 and the November 2025 Budget extended the freeze by a further three years, to 5 April 2031. With wages rising due to inflation, more people are being pushed into higher tax bands each year—a process known as "fiscal drag."
High Earner Warning
If you earn over £100,000, you lose £1 of Personal Allowance for every £2 earned above that threshold. By £125,140, your allowance is zero—creating an effective 60% tax rate in this band.
Dividend Allowance
The Dividend Allowance lets you receive a certain amount in dividends tax-free each year. For 2026/27, this is just £500—down from £1,000 in 2023/24 and £2,000 in 2022/23.
This allowance applies to dividends from UK and overseas companies held outside of ISAs. Dividends within an ISA or pension are already tax-free and don't count against this limit.
What happens when you exceed the Dividend Allowance?
Dividends above £500 are taxed based on your Income Tax band:
- Basic rate (10.75%) – if your total income is £12,571 to £50,270
- Higher rate (35.75%) – if your total income is £50,271 to £125,140
- Additional rate (39.35%) – if your total income exceeds £125,140
Dividends count as the top slice of your income. If you're near a threshold, dividend income can push you into a higher band.
Savings Allowance
The Personal Savings Allowance (PSA) allows you to earn a certain amount of interest from savings accounts tax-free. The amount depends on your Income Tax band:
- Basic rate taxpayers – £1,000 tax-free interest
- Higher rate taxpayers – £500 tax-free interest
- Additional rate taxpayers – No allowance
What happens when you exceed the Savings Allowance?
Interest above your PSA is taxed at your marginal Income Tax rate: 20% for basic rate, 40% for higher rate, or 45% for additional rate. Banks and building societies pay interest gross (without deducting tax), so you may need to report it on a Self Assessment tax return if you owe tax.
Interest earned in ISAs is always tax-free and does not count towards your PSA. A separate Starting Rate for Savings (0% on the first £5,000) exists for those with very low non-savings income.
Capital Gains Allowance
The Capital Gains Tax (CGT) Annual Exempt Amount is the profit you can make from selling assets before paying CGT. For 2026/27, this is £3,000—drastically reduced from £12,300 just three years ago.
This allowance applies to gains from selling shares, second homes, buy-to-let properties, valuable personal possessions, and other assets. Your main home is exempt under Principal Private Residence Relief.
What happens when you exceed the CGT Allowance?
Gains above £3,000 are taxed at different rates depending on the asset type and your Income Tax band:
| Asset Type | Basic Rate | Higher/Additional Rate |
|---|---|---|
| All assets (from April 2026) | 18% | 24% |
Couples can transfer assets between them tax-free, potentially doubling the effective allowance to £6,000. Capital losses can be carried forward indefinitely to offset future gains.
Inheritance Tax Thresholds
Inheritance Tax (IHT) applies to estates above certain thresholds when someone dies. The main thresholds are:
- Nil-Rate Band: £325,000 – The basic tax-free threshold for all estates
- Residence Nil-Rate Band: £175,000 – Additional allowance if you leave your home to direct descendants
Combined, a single person can pass on up to £500,000 tax-free. Married couples and civil partners can transfer unused allowances, giving a combined potential of up to £1 million tax-free.
What happens when you exceed the IHT threshold?
Estate value above the available thresholds is taxed at 40%. However, gifts to charity can reduce the rate to 36% if you leave at least 10% of your estate to registered charities.
The Residence Nil-Rate Band tapers away for estates worth over £2 million, reducing by £1 for every £2 above this level. Certain gifts made during your lifetime may also become subject to IHT if you die within 7 years.
Other Allowances Worth Claiming in 2026/27
- ISA allowance – £20,000: shelters interest, dividends and gains permanently. Up to £4,000 can go into a Lifetime ISA (25% government bonus, so up to £1,000 free a year). From April 2027 the Cash ISA share drops to £12,000 for under-65s.
- Pension Annual Allowance – £60,000: or 100% of earnings if lower, with up to three years of unused allowance carried forward. Tapered by £1 for every £2 of adjusted income above £260,000 (only if threshold income exceeds £200,000), down to a £10,000 minimum. The Money Purchase Annual Allowance is £10,000 once you flexibly access a pension.
- Marriage Allowance – £1,260: transfer 10% of your Personal Allowance to a basic-rate spouse or civil partner, worth up to £252 a year. It can be backdated four tax years.
- Trading Allowance – £1,000: the first £1,000 of side-hustle or self-employed income is tax-free and needs no tax return (unless you have other reasons to file).
- Property Allowance – £1,000: the same idea for rental and land income; separate from Rent a Room relief (£7,500).
- Blind Person's Allowance – £3,250: added on top of the Personal Allowance for 2026/27 (up from £3,130 in 2025/26). It must be claimed, and can be transferred to a spouse if unused.
What Happens When You Go Over a Threshold
Understanding the consequences of exceeding each threshold helps you plan more effectively:
Progressive Taxation
UK taxes are mostly progressive—meaning only the amount above each threshold is taxed at the higher rate. Earning £52,000 doesn't mean all your income is taxed at 40%. Only the portion above £50,270 (after Personal Allowance) faces the higher rate.
Cliff Edges and Tapers
Some thresholds create effective tax rates higher than the headline rates:
- £100,000 – £125,140: 60% effective rate due to Personal Allowance withdrawal
- £60,000 – £80,000: High Income Child Benefit Charge claws back Child Benefit at 1% per £200 over £60,000
- Above £2 million (estates): Residence Nil-Rate Band tapers away at £1 per £2
How to Reduce Your Taxable Income
Legitimate ways to stay below thresholds or reclaim allowances include:
- Pension contributions (reduce adjusted net income)
- Salary sacrifice schemes
- Gift Aid donations
- Using ISAs to shelter investment growth and income
- Spreading capital gains across tax years
Calculate Your Tax Position
Use our free calculators to see exactly how these allowances affect your finances.