Personal Allowance and Income Tax Bands Explained 2026/27

Income Tax can feel confusing because it is not charged as a single percentage on everything you earn. Instead, your income is split into slices, and each slice is taxed at its own rate. Understanding the Personal Allowance and the tax bands helps you estimate your bill, plan your finances and spot when something looks wrong. This guide explains how the system works for the 2026/27 tax year, with an emphasis on how it fits self-employed people and company directors.

Key takeaways

• The Personal Allowance is the slice of income you can earn before paying Income Tax. For most people it is £12,570.
• Income above the allowance is taxed in bands, with higher rates applying to higher slices of income.
• The allowance reduces for people with income above £100,000.
• Self-employed people pay tax on profit, not on turnover.
• Scotland has different bands, and dividends and savings have their own rules. Always check GOV.UK for current figures.

What is the Personal Allowance?

The Personal Allowance is the amount of taxable income you can receive in a tax year without paying Income Tax on it. For most people in the 2026/27 tax year, it is £12,570. Income up to that amount is taxed at 0%. It applies across all your income sources, so if you have a job and also trade on the side, the allowance is shared between them. You do not get a separate allowance for each source.

HMRC publishes the current allowance and the conditions that can change it. Check GOV.UK's Income Tax rates and Personal Allowances page before relying on a figure for your own planning.

How the tax bands work

After your Personal Allowance, the next slices of income are taxed at increasing rates. In England, Wales and Northern Ireland the main structure is a basic rate of 20%, a higher rate of 40% and an additional rate of 45%. The key point is that each rate only applies to the slice of income inside that band. Moving into a higher band does not mean all of your income is taxed at the higher rate.

Treat the table as a guide and confirm the figures on GOV.UK, because governments can change thresholds. Scotland uses its own set of bands and rates for most earnings, so a Scottish taxpayer should check the Scottish figures separately.

The allowance reduction above £100,000

If your adjusted net income goes above £100,000, your Personal Allowance reduces gradually. It falls by £1 for every £2 of income above that level, and can reach zero. This creates a stretch of income where the effective marginal rate is higher than the headline rate. It matters most for company directors and sole traders whose profits are climbing. Planning, such as pension contributions or the timing of income, can sometimes help, so speak to an adviser if you are near the threshold.

How this applies to self-employed people

If you are a sole trader, such as a private hire or delivery driver, your Income Tax is based on your taxable profit. That means your takings minus the expenses you can legitimately claim. Profit above your Personal Allowance is then taxed in the bands. Our guide to sole trader allowable expenses explains what you can usually deduct, and our Uber driver tax return guide shows how this works in practice.

Self-employed people also pay National Insurance, which is separate from Income Tax. The rates and thresholds are different, so do not assume the tax bands apply to National Insurance. Check the current Class 2 and Class 4 position on GOV.UK.

How this applies to company directors

Directors of limited companies often take a mix of salary and dividends. Salary uses the normal Income Tax bands. Dividends use the same band thresholds but have different tax rates and a separate dividend allowance. Because the Personal Allowance is used up by salary first in most set-ups, the split between salary and dividends affects how much of each is tax-free. Our article on director salary versus dividends goes into this in more detail.

Worked example (illustrative)

"Leila", an illustrative example, is a self-employed courier with taxable profit of £30,000 in the tax year and no other income. The first £12,570 falls in her Personal Allowance and is taxed at 0%. The remaining £17,430 falls in the basic rate band and is taxed at 20%, which comes to £3,486 of Income Tax. National Insurance is calculated separately.

Now suppose "Daniel", another illustrative example, has £60,000 of taxable income. The first £12,570 is tax-free, the next £37,700 is taxed at 20%, and the remaining £9,730 is taxed at 40%. Only the slice above £50,270 is hit by the higher rate. These are simplified figures that ignore National Insurance, pension contributions, Scotland and other income, so they are a teaching illustration and not a tax calculation.

Savings and dividend income

Not all income is taxed in the same way. Savings interest and dividends sit on top of your other income and have their own allowances and rates. There is a starting rate for savings for people with low other income, a Personal Savings Allowance whose size depends on your band, and a dividend allowance. These allowances have changed in recent years, so check the current figures on GOV.UK instead of relying on memory.

The order matters. Employment and self-employment profits are normally treated first, then savings, then dividends. That means a large profit can push your savings interest and dividends into a higher band even if the dividends themselves look modest. For directors who take dividends, this ordering is one reason to model the full year before deciding how much to draw.

Tax codes and why they matter

If you have a job or pension, your tax code tells the payer how much tax-free income to give you in each pay period. The standard code reflects the Personal Allowance, but codes can change if you owe tax from a previous year, receive benefits that are taxable or have several sources of income. A wrong code can lead to paying too much or too little tax, and the gap is often sorted out later. If your code looks different from what you expect, check it against your HMRC online account and ask HMRC or your accountant to confirm the reason.

Self-employed people do not have a tax code for their trading profit, but they can still be affected if they also have employment income. In that case part of the allowance may be used in payroll, and any remaining tax on the profit is collected through the Self Assessment return.

Practical ways to keep your tax bill sensible

You cannot change the bands, but you can make sure you use every relief you are entitled to. Claim all genuine business expenses, keep records that support them and check whether pension contributions, Gift Aid donations or other reliefs apply to you. Each of these can reduce the income that is taxed at the higher rates. Also check whether a spouse or civil partner with lower income could legitimately own part of a jointly run business, since the allowance and basic rate band are used per person. Any such arrangement needs to reflect the real position, so take advice before relying on it.

Finally, estimate your bill during the year, not after it. A quick calculation each quarter shows whether you are heading towards a higher band and lets you save accordingly.

Common mistakes

• Thinking a higher band taxes all your income at the higher rate. Only the slice within that band is taxed at that rate.
• Using turnover instead of profit. If you are self-employed, expenses reduce the figure that is taxed.
• Ignoring other income. A job, pension, rental income or savings interest all use up band space and allowance.
• Forgetting payments on account. If your bill is large, HMRC may ask for advance payments towards the next year. See our guide to payments on account.
• Assuming Scottish and English bands are identical. They are not, so use the right set.

If your income comes from several places, a quick check by a professional can save money and stress. Our personal tax service helps with self-assessment returns, and you can get in touch if you would like us to look at your position.