Loss of Personal Allowance

Loss of Personal Allowance is a UK tax rule that reduces the amount of income you can earn tax-free if your earnings exceed £100,000. Understanding this is crucial for high earners to avoid unexpected tax bills and plan finances effectively.

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How the Loss of Personal Allowance Works

HMRC reduces your personal allowance by £1 for every £2 your adjusted net income exceeds £100,000. This means if you earn £110,000, you lose £5,000 of your allowance, paying more tax on that income.

Adjusted net income includes your total income from sources like salary, dividends, or rental income, minus certain deductions such as pension contributions. Calculating this correctly is key to understanding your tax liability.

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Key Details About the Loss of Personal Allowance

To navigate this tax rule effectively, here are the essential points you need to know:

The standard personal allowance for 2026/27 is £12,570 (check HMRC updates for current rates).
Loss of personal allowance starts when your adjusted net income exceeds £100,000.
For every £2 over £100,000, you lose £1 of your personal allowance.
If your income reaches £125,140, your personal allowance is reduced to zero.
Adjusted net income includes salary, bonuses, dividends, rental income, and other earnings, minus pension contributions.
Pension contributions can lower your adjusted net income, potentially saving part of your allowance.
This rule creates an effective tax rate of 60% for income between £100,000 and £125,140.
Self-employed individuals and business owners must account for this in their Self Assessment tax returns.
Keep accurate records of all income and deductions to ensure correct calculations and avoid HMRC penalties.
Planning ahead with tax-efficient strategies, like salary/dividend splits, can help mitigate the impact.

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Common Mistakes and When to Seek Help

Many people underestimate their adjusted net income or overlook deductions, leading to incorrect tax bills and potential penalties. For example, forgetting to include rental income or not accounting for pension contributions can skew calculations.

If your income is near or above £100,000, consider getting professional advice. Edward Harris offers plain-English guidance to help you optimize your tax position and avoid surprises, especially if you're a business owner or contractor in Oldham.

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