Skip to content

Taxation (UK) · The comprehensive computation of taxable income and income tax liability

Personal Allowance and Its Restriction for ACCA TX-UK

Updated 11 October 2026 · Fact-checked

The personal allowance is £12,570 of income taxed at 0%. If adjusted net income is above £100,000, the allowance falls by £1 for every £2 of excess. It is nil at £125,140 or more. You deduct it from non-savings income first, then savings, then dividends.

Understand Personal Allowance and Its Restriction

The personal allowance is the amount of income an individual can receive each tax year without paying income tax. For this exam it is £12,570. You deduct it in the income tax computation after totalling your income. What is left is taxable income.

High earners lose the allowance. The test is adjusted net income. This is total income less certain deductions such as gross Gift Aid donations and gross personal pension contributions. It is not simply your salary. If adjusted net income is £100,000 or less, you get the full allowance.

Above £100,000 the allowance is reduced by £1 for every £2 of adjusted net income over £100,000. Ignore any odd pence in the excess. The allowance reaches zero when adjusted net income is £125,140 or more, because the excess of £25,140 halved is £12,570.

The reduction creates an effective rate of 60% on income between £100,000 and £125,140 for someone paying 40% on that band. Each extra £1 is taxed at 40%. It also removes 50p of allowance, which is taxed at 40%, so a further 20p. The total is 60p. This is why pension contributions and Gift Aid are powerful for people in this band.

The allowance is set against income in a fixed order. You use it against non-savings income (such as employment, trading and property income) first, then savings income, then dividend income. This order matters because the three types are taxed at different rates and savings and dividend nil rate bands apply afterwards.

Key rules to remember

Standard personal allowance
Personal allowance = £12,570
Given in the tax rates and allowances you receive in the exam. Available in full if adjusted net income is £100,000 or less.
Income limit
Income limit = £100,000
The allowance is reduced only on adjusted net income above this figure.
Reduction
Reduction = (Adjusted net income − £100,000) ÷ 2
Ignore any odd pounds or pence in the excess, then halve. Reduce the allowance by this amount, but not below zero.
Adjusted net income
Adjusted net income = Total income − gross Gift Aid donations − gross personal pension contributions (and other specified deductions)
Use the figure after allowable reliefs, not taxable income, because the allowance itself has not yet been deducted.
Nil allowance point
Allowance is nil if adjusted net income ≥ £125,140
Between £100,000 and £125,140 the effective marginal rate on normal income taxed at 40% is 60%.
Order of set-off
Personal allowance: non-savings income first, then savings income, then dividend income
Apply this order every time, since each type of income is taxed at its own rates.

How to solve Personal Allowance and Its Restriction questions

Follow this method for any question that involves the personal allowance.

  1. 1Total all income by type: non-savings, savings and dividends. Include gross amounts.
  2. 2Deduct any reliefs that come off total income to find net income.
  3. 3Calculate adjusted net income by deducting gross Gift Aid donations and gross personal pension contributions.
  4. 4If adjusted net income is £100,000 or less, use £12,570. Otherwise reduce it by half of the excess over £100,000, with a floor of nil.
  5. 5Deduct the allowance from non-savings income first, then savings income, then dividends, to get taxable income of each type.
  6. 6Apply the rates and bands, extending the basic rate band for Gift Aid and pension contributions where relevant.
  7. 7Total the tax and show your workings clearly so you can earn marks for method.

Quickest way: Three-line allowance check

When to use it: Use this in objective test questions and as a first step in any computation.

  1. Find adjusted net income. If it is £100,000 or less, the answer is £12,570.
  2. If it is £125,140 or more, the answer is nil.
  3. Otherwise compute (adjusted net income − £100,000) ÷ 2 and subtract from £12,570. Example: £110,000 gives £5,000 off, leaving £7,570.

Common mistakes in Personal Allowance and Its Restriction

  • Using taxable income or total income instead of adjusted net income for the £100,000 test.

    Students forget that Gift Aid and pension contributions can bring income back under the limit.

    Fix: Always compute adjusted net income by deducting gross donations and gross personal pension contributions first.

  • Reducing the allowance by the full excess over £100,000.

    Students forget that the reduction is £1 for every £2 of excess.

    Fix: Halve the excess. Check: the allowance should hit nil at £125,140.

  • Using net Gift Aid or pension payments in adjusted net income.

    The question gives the amount paid, which is net of basic rate tax.

    Fix: Gross up the net payment by multiplying by 100 ÷ 80 before deducting.

  • Setting the allowance against dividends or savings first.

    Students see the allowance as a general deduction without an order.

    Fix: Use it against non-savings income first, then savings, then dividends.

  • Letting the allowance go below zero or using it when income is below it, creating a negative figure.

    Rushing the final subtraction.

    Fix: Taxable income cannot be negative. Any unused allowance is simply lost (apart from the marriage allowance transfer, which is a separate topic).

Worked examples

Example 1

Jan has employment income of £110,000 in the tax year and no other income. She makes no Gift Aid donations or pension contributions. Calculate her personal allowance and taxable income.

Show the solution
  1. Adjusted net income = £110,000.
  2. Excess over £100,000 = £10,000.
  3. Reduction = £10,000 ÷ 2 = £5,000.
  4. Personal allowance = £12,570 − £5,000 = £7,570.
  5. Taxable income = £110,000 − £7,570 = £102,430.

Answer: Personal allowance £7,570; taxable income £102,430.

Example 2

Sam has employment income of £118,000. He pays £16,000 net (after basic rate tax) into a personal pension. Calculate his personal allowance.

Show the solution
  1. Gross the pension payment: £16,000 × 100 ÷ 80 = £20,000.
  2. Adjusted net income = £118,000 − £20,000 = £98,000.
  3. This is below £100,000, so there is no reduction.
  4. Personal allowance = £12,570.

Answer: Sam receives the full personal allowance of £12,570.

Exam tips

  • In objective test questions, check first whether the question gives net or gross payments. Grossing up is often the trap.
  • Learn the three thresholds: £100,000, £125,140 and the 60% effective rate. They are standard exam hooks.
  • In Section C, show the allowance workings on their own line, including adjusted net income, so you collect method marks even if a later figure is wrong.
  • When a tax planning question mentions income of about £100,000 to £125,140, think pension contributions or Gift Aid to restore the allowance.

Practice questions from The comprehensive computation of taxable income and income tax liability

Personal Allowance and Its Restriction in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Personal Allowance and Its Restriction: frequently asked questions

How much is the personal allowance in ACCA TX-UK?

It is £12,570 for this syllabus period. It is given in the tax rates and allowances provided in the exam, but you should know it. It is reduced when adjusted net income exceeds £100,000.

Why is the effective rate 60% between £100,000 and £125,140?

Each extra £1 of income is taxed at 40%. It also reduces the allowance by 50p, and that 50p becomes taxable at 40%, adding 20p. The total is 60p per £1.

At what income is the personal allowance nil?

It is nil when adjusted net income is £125,140 or more. The excess of £25,140 halved equals the full allowance of £12,570.

Does Gift Aid affect the personal allowance restriction?

Yes. Gross Gift Aid donations reduce adjusted net income, so they can reduce or remove the restriction. Remember to gross up the net payment first.