Skip to content

Taxation (UK) · The scope of income tax

Personal Allowance and Reductions for High Income in ACCA TX-UK

Updated 11 October 2026 · Fact-checked

The personal allowance is £12,570 of income taxed at 0%. It is reduced by £1 for every £2 that adjusted net income exceeds £100,000. It reaches zero when adjusted net income is £125,140 or more. Adjusted net income is net income less gross Gift Aid donations and gross personal pension contributions.

Understand Personal Allowance and Reductions for High Income

Every individual taxpayer gets a personal allowance. For this exam it is £12,570. It is deducted from total income in the income tax computation, so the first £12,570 of income is not taxed.

The allowance is lost gradually by high earners. The test is not total income or taxable income. The test is adjusted net income. You start with net income (total income after deducting reliefs such as trading losses and qualifying interest paid). Then you deduct the gross amount of Gift Aid donations and the gross amount of personal pension contributions paid under relief at source.

The income limit is £100,000. For every £2 of adjusted net income above £100,000, the allowance falls by £1. At £125,140 or more the allowance is zero. This produces an effective tax rate of 60% on income between £100,000 and £125,140 for someone paying 40% tax, because each extra £1 of income is taxed at 40% and also loses 50p of allowance, which is taxed at a further 40%, giving 20p.

Personal allowance and adjusted net income are different things. The allowance is a deduction you receive. Adjusted net income is the measuring figure that decides how much of the allowance you keep. Gift Aid and pension contributions reduce adjusted net income, so they can restore some or all of the allowance. This is a common planning point.

The allowance is deducted from income in a set order: non-savings income first, then savings income, then dividend income. The allowance is never given as a tax reduction. It only reduces income.

Key rules to remember

Personal allowance
Personal allowance = £12,570
Standard amount for the 2025/26 tax year as provided in the ACCA tax tables for this exam.
Adjusted net income
Adjusted net income = Net income − gross Gift Aid donations − gross personal pension contributions
Net income is total income less reliefs deducted in arriving at net income. Use gross amounts, not the cash paid.
Reduction in allowance
Reduction = (Adjusted net income − £100,000) ÷ 2
Round down to a whole pound is not required in the tables; apply only if adjusted net income exceeds £100,000.
Reduced allowance
Allowance = £12,570 − reduction (not below nil)
Allowance is nil where adjusted net income is £125,140 or more.
Gross from net
Gross = Net paid × 100 ÷ 80
Used for Gift Aid and relief-at-source pension payments, which are paid net of basic rate tax.

How to solve Personal Allowance and Reductions for High Income questions

Use this method for any question asking for the personal allowance or the tax of a high earner.

  1. 1Work out total income from all sources and deduct any reliefs allowed in arriving at net income, such as trading losses or qualifying interest.
  2. 2Deduct the gross amount of any Gift Aid donations and gross personal pension contributions to find adjusted net income.
  3. 3Compare adjusted net income with £100,000. If it is at or below, the allowance is the full £12,570.
  4. 4If above £100,000, deduct half of the excess from £12,570. If the result is negative, the allowance is nil.
  5. 5Deduct the allowance from total income (net income) in the order non-savings, savings, then dividends, to get taxable income.
  6. 6Extend the basic rate band by the gross Gift Aid and gross pension payments, then calculate tax at the right rates.
  7. 7Check that you used net income for taxable income but adjusted net income only for the allowance test.

Quickest way: Fast allowance check

When to use it: Use in Section A or OT case questions that ask only for the allowance or the amount of income taxed.

  1. Write adjusted net income in one line.
  2. Subtract £100,000 and halve the excess.
  3. Subtract that from £12,570 and stop at nil.
  4. If the answer is nil, check that adjusted net income is at least £125,140 as a sense check.

Common mistakes in Personal Allowance and Reductions for High Income

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

    Students see 'income' and use the first figure they calculate.

    Fix: Always build adjusted net income from net income, then deduct gross Gift Aid and gross pension payments.

  • Deducting the net cash paid for Gift Aid or pensions when finding adjusted net income.

    The question gives the amount paid and students forget it is net of basic rate tax.

    Fix: Gross up by 100 ÷ 80 first, then deduct the gross figure.

  • Reducing the allowance by £1 for every £1 over £100,000.

    Confusion with other thresholds where the reduction is pound for pound.

    Fix: Remember the ratio: £1 lost for every £2 over the limit.

  • Leaving the allowance at a negative figure instead of stopping at nil.

    Applying the formula mechanically to very high incomes.

    Fix: If adjusted net income is £125,140 or more, the allowance is nil. Do not go below zero.

  • Deducting the Gift Aid or pension amount from income before the allowance, so reducing taxable income twice.

    Students think the payment is a deduction from income as well as from adjusted net income.

    Fix: Gift Aid and relief-at-source pensions only extend the basic rate band and reduce adjusted net income. They are not deducted from net income.

  • Applying the allowance to dividends or savings first.

    Students forget the set order.

    Fix: Set the allowance against non-savings income first, then savings, then dividends.

Worked examples

Example 1

Priya has employment income of £110,000 and no other income. She makes no Gift Aid donations or pension payments. Calculate her personal allowance for the tax year.

Show the solution
  1. Net income and adjusted net income are both £110,000.
  2. Excess over £100,000 is £10,000.
  3. Reduction is £10,000 ÷ 2 = £5,000.
  4. Allowance is £12,570 − £5,000 = £7,570.

Answer: Priya's personal allowance is £7,570.

Example 2

Tom has employment income of £118,000. He pays £8,000 net to a personal pension under relief at source. Calculate his personal allowance and taxable income.

Show the solution
  1. Gross pension payment is £8,000 × 100 ÷ 80 = £10,000.
  2. Adjusted net income is £118,000 − £10,000 = £108,000.
  3. Excess over £100,000 is £8,000, so reduction is £4,000.
  4. Allowance is £12,570 − £4,000 = £8,570.
  5. Net income for the computation is £118,000, as the pension is not deducted from income.
  6. Taxable income is £118,000 − £8,570 = £109,430.

Answer: Tom's personal allowance is £8,570 and his taxable income is £109,430. His basic rate band is extended by the £10,000 gross pension payment.

Exam tips

  • Look for Gift Aid and pension payments in any question where income is near £100,000; they usually change the allowance.
  • Always show the adjusted net income line so you earn the method mark even if you slip later.
  • Gross up Gift Aid and relief-at-source pension payments before using them anywhere.
  • In OT questions, check whether the answer asks for the allowance, taxable income or tax; they are different numbers.
  • Remember the allowance is nil at £125,140 or more, which is also where the additional rate starts.

Practice questions from The scope of income tax

Personal Allowance and Reductions for High Income 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 Reductions for High Income: frequently asked questions

What is the personal allowance for TX-UK?

It is £12,570 in the tax tables ACCA provides for the Finance Act 2025 exams. It is given against income, not as a tax credit. It reduces if adjusted net income exceeds £100,000.

How is the personal allowance reduced above £100,000?

It falls by £1 for every £2 of adjusted net income above £100,000. It is nil where adjusted net income is £125,140 or more.

What is the difference between personal allowance and adjusted net income?

The personal allowance is the amount of income you can receive tax-free. Adjusted net income is the measure used to decide how much allowance you keep. It is net income less gross Gift Aid and gross personal pension payments.

Can I get my personal allowance back by paying into a pension?

Yes, in part or in full. Gross personal pension contributions reduce adjusted net income, which can bring it back toward £100,000 and restore allowance. Gift Aid donations work the same way.