We are sharing this update from ACCA, our professional body, for the interest of clients and contacts. The content is (c) ACCA
Includes an example for a higher rate taxpayer
We know that the personal allowance is frozen for 2025/26 at £12,570. If you have an annual income exceeding £100,000 you will have lost £1 of your personal allowance for every £2 of income above £100,000. This is unchanged.
The additional rate threshold of £125,140 is the threshold where the entire personal allowance is lost.
The loss of the personal allowance means a person is taxed at 40% on the additional £2 of income, and they also pay an extra 40% on the £1 of personal allowance lost. This results in a marginal rate of 60%, which continues up to £125,140 (£100,000 + (£12,570 x 2)). At the £125,140 point the entire personal allowance has been lost.
Current year 2024/25 and future years to 2031
For the current year and future years to 2030 the personal allowance is removed at £1 of the personal allowance for every £2 of income above £100,000. This results in the marginal rate of 60%, which continues up to £125,140.
To provide an example, Joe has an income of £115,000 in both years. As Joe earns £15,000 over £100,000, he loses £7,500 of his personal allowance (£1 of personal allowance for every £2 of income over £100,000), leaving only £5,070 of personal allowance.
The personal allowance loss of £7,500 gives rise to extra taxable income (at 40%) meaning that Joe pays £3,000 (£7,500 at 40%) more income tax on top of the £6,000 due on the £15,000. Therefore, the total of £9,000 income tax resulting from the extra £15,000 income in excess of the £100,000 threshold gives an effective tax rate of 60%.