The UK tax system does not tax the first slice of most kinds of income. Several distinct tax-free allowances sit on top of one another, each covering a different income type, and used together they shield a meaningful amount of income from tax. Understanding which allowance applies to which income is one of the most direct ways to reduce a Self-Assessment bill legitimately, because an allowance unclaimed is tax paid that did not need to be.
This piece walks the personal allowance and its £100,000 taper, the personal savings allowance, the dividend allowance, the trading and property allowances, and marriage allowance. It sits in [the Self-Assessment hub](/guide/definitive-uk-self-assessment-guide/) alongside the companion pieces on [paper versus online filing](/blog/paper-vs-online-filing-digital-only-path/) and [correcting an error on a submitted return](/blog/correct-error-previously-submitted-tax-return/).
The allowances at a glance
| Allowance | Amount | Applies to |
|---|---|---|
| Personal allowance | £12,570 | Most income (tapered above £100,000) |
| Personal savings allowance | £1,000 / £500 / £0 | Savings interest, by tax band |
| Dividend allowance | £500 | Dividend income |
| Trading allowance | £1,000 | Self-employment / casual trading income |
| Property allowance | £1,000 | Rental / property income |
| Marriage allowance | Up to £1,260 transferable | Couples where one is a non-taxpayer |
| Capital gains annual exempt amount | £3,000 | Capital gains |
The personal allowance
The personal allowance is the amount of income a person can receive each tax year before income tax is due. For 2025-26 it is £12,570. It applies to most income, including employment, self-employment, pension, and rental income. The personal allowance is given automatically through the tax code for employees and pensioners, and is applied through the Self-Assessment calculation for those who file a return. A taxpayer with total income below £12,570 generally pays no income tax, though they may still need to file if a Self-Assessment trigger applies.
The £100,000 taper
The personal allowance is reduced once adjusted net income exceeds £100,000. For every £2 of income above £100,000, £1 of personal allowance is withdrawn. This means the allowance is fully withdrawn by the time income reaches £125,140. The effect is a band of income between £100,000 and £125,140 that is taxed at an unusually high effective rate, because the loss of the allowance compounds the headline tax rate. Pension contributions and Gift Aid donations reduce adjusted net income, so they can restore some or all of the personal allowance for taxpayers in the taper band, which is one of the most valuable planning points in the whole system.
The personal savings allowance
The personal savings allowance lets most people receive some savings interest tax-free. Basic-rate taxpayers have a £1,000 allowance, higher-rate taxpayers have a £500 allowance, and additional-rate taxpayers have no personal savings allowance at all. Interest within the allowance is tax-free; interest above it is taxed at the taxpayer's marginal rate. Banks and building societies pay interest gross, so where interest exceeds the allowance the tax is usually collected either through an adjusted tax code or through Self-Assessment.
The starting rate for savings
Separate from the personal savings allowance, there is a starting rate for savings of up to £5,000 taxed at 0%, available to people with low non-savings income. The starting rate is reduced as non-savings income rises above the personal allowance, and is fully gone once non-savings income reaches £17,570. It mainly benefits pensioners and others with modest earned income but meaningful savings interest, and it sits on top of the personal savings allowance rather than replacing it.
The dividend allowance
The dividend allowance is the amount of dividend income that is taxed at 0% each year. For 2025-26 it is £500, having been cut from £1,000 in April 2024 and from £2,000 before that. Dividends above the allowance are taxed at the dividend rates, which depend on the taxpayer's overall tax band. The repeated cuts to the dividend allowance have pulled many small-portfolio investors and owner-directors into Self-Assessment, because dividends above £500 now commonly trigger a filing requirement where £2,000 once would have covered them.
One detail that surprises people is that the dividend allowance does not sit outside the tax bands; it counts towards them. The allowance taxes the first £500 of dividends at 0%, but those dividends still use up part of the relevant rate band, so they can affect how much of the rest of a taxpayer's income is taxed at higher rates. For owner-directors deciding how much salary and how much dividend to take, the interaction between the personal allowance, the dividend allowance, and the rate bands is the heart of the planning, and small changes in the split can move the overall result noticeably.
The £1,000 trading allowance
The trading allowance gives each individual £1,000 of gross trading or miscellaneous income tax-free each year. Gross trading income below £1,000 does not need to be reported on Self-Assessment at all. Where gross trading income exceeds £1,000, the taxpayer can choose to deduct the £1,000 allowance instead of actual allowable expenses, or deduct actual expenses, whichever gives the lower taxable profit. The allowance is particularly useful for side hustles, casual freelancing, and online marketplace sellers with modest income and low expenses.
The £1,000 property allowance
The property allowance mirrors the trading allowance for property income: £1,000 of gross rental or property income is tax-free each year. Gross property income below £1,000 need not be reported. Above £1,000, the taxpayer can deduct the £1,000 allowance in place of actual expenses, or claim actual expenses, whichever is more favourable. A taxpayer can hold both a trading allowance and a property allowance in the same year, because they cover different income types, so a sole trader who also lets a room or a parking space gets £1,000 against each.
- Each individual has their own £1,000 trading allowance and £1,000 property allowance.
- The allowances cannot be used in addition to actual expenses for the same income; it is one or the other.
- Gross income below £1,000 in either category usually needs no reporting at all.
- A taxpayer with both trading and property income can use both allowances in the same year.
Marriage allowance
Marriage allowance lets a non-taxpaying spouse or civil partner transfer up to 10% of their personal allowance (up to £1,260 for 2025-26) to a basic-rate taxpaying partner, reducing the recipient's tax bill. To qualify, one partner must have income below the personal allowance and the other must be a basic-rate taxpayer. The claim can be backdated up to four tax years where the conditions were met, which can produce a worthwhile lump-sum refund for couples who were eligible but never claimed. It is not the same as the separate married couple's allowance, which applies only where at least one partner was born before 6 April 1935.
The capital gains annual exempt amount
The capital gains annual exempt amount is the amount of gains a person can make each tax year before capital gains tax is due. For 2025-26 it is £3,000, having been cut from £6,000 and previously £12,300. Gains within the exempt amount are tax-free, but reporting can still be required: residential property disposals must be reported within 60 days regardless of size, and a tax year where total disposal proceeds exceed four times the exempt amount triggers a reporting obligation even where no tax is due. Spouses and civil partners each have their own exempt amount, so transferring assets between partners before a disposal can use both allowances.
How the allowances stack
The allowances are not alternatives; they apply to different income types and stack on top of each other. A taxpayer could, in principle, receive the personal allowance against general income, the personal savings allowance against interest, the dividend allowance against dividends, and the trading and property allowances against small amounts of self-employment and rental income, all in the same year. The result is that a person with a diversified, modest income can shelter a surprisingly large total figure from tax simply by allocating each stream to its matching allowance.
The order in which income is taxed matters when allowances and rate bands interact. The general rule is that non-savings income is taxed first, then savings income, then dividend income, with each allowance applied against its own category. This ordering is why a taxpayer can have a relatively high total income but still pay tax at lower effective rates on the savings and dividend slices, provided those slices fall within their respective allowances. Understanding the stacking order helps explain why two people with the same headline income can owe very different amounts of tax depending on where that income comes from.
Do I lose an allowance if I do not use it?
Most of these allowances are use-it-or-lose-it for the tax year; they do not roll forward to a later year. The personal allowance, savings allowance, dividend allowance, and the trading and property allowances all reset each tax year. Marriage allowance is the main exception, because an unclaimed marriage allowance can be backdated up to four years where the conditions were met. For everything else, an allowance not used against the relevant income in the year is simply gone, which is why matching income to allowances each year matters.
Can pension contributions restore my personal allowance?
Yes, and for taxpayers in the £100,000 to £125,140 taper band this is often the single most valuable step. Personal pension contributions and Gift Aid donations reduce adjusted net income, which is the figure used to test the taper. A taxpayer with adjusted net income of £110,000 who makes a £10,000 gross pension contribution brings adjusted net income back to £100,000 and restores the full personal allowance, on top of the pension tax relief itself. Because the effective rate in the taper band is so high, the combined benefit can be substantial.
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Self Assessment Tax Returns in HarrowThis article reflects current HMRC guidance as of April 2026. Key references: HMRC Self Assessment overview, HMRC SA returns collection. Tax rules change annually. Always verify deadlines and thresholds at gov.uk or with a qualified accountant.
Our editorial team includes ACCA-qualified accountants and tax writers with experience across self-employment, rental income, and HMRC compliance. All articles are reviewed annually against current HMRC guidance and updated where rules change.