Taxation (UK) · The use of exemptions and reliefs in deferring and minimising income tax liabilities

Making Full Use of Personal Allowance and Income Tax Bands

Updated 11 October 2026 · Fact-checked

Making full use of allowances and bands means arranging income so that each person's personal allowance, nil rate bands and basic rate band are used, and little income falls in higher bands. In TX-UK you do this by moving income between spouses, and by managing adjusted net income near £100,000.

Understand Making Full Use of Personal Allowance and Income Tax Bands

Every UK taxpayer has a personal allowance of £12,570. Income covered by it is taxed at nil. Unused allowance is wasted, because (apart from the small marriage allowance transfer) you cannot carry it to someone else. So a spouse with no income wastes £12,570 of allowance while the other spouse may pay 40% or more.

Income is taxed in a fixed order: non-savings income first (salary, trading profit, property), then savings income (interest), then dividends. The bands are applied in that order. The basic rate band is £37,700, taxed at 20% on non-savings and savings income and 8.75% on dividends. Above that, the higher rate band runs to £125,140 (40%, 33.75% on dividends). Above £125,140 the additional rate applies (45%, 39.35% on dividends).

There are also nil rate bands. The savings nil rate band (personal savings allowance) is £1,000 for a basic rate taxpayer and £500 for a higher rate taxpayer. An additional rate taxpayer gets none. The dividend nil rate band is £500 for everyone. A starting rate of 0% applies to savings income that falls within the first £5,000 of taxable income. It is lost as non-savings taxable income rises. Nil rate band income still uses up the band it sits in.

When adjusted net income is over £100,000, the personal allowance falls by £1 for every £2 of excess. It is zero once adjusted net income reaches £125,140. Between £100,000 and £125,140 the effective marginal rate is 60% on non-savings income. Planning here means reducing adjusted net income, for example with Gift Aid donations or pension contributions.

Tax planning for couples relies on the fact that spouses and civil partners are taxed separately. If one is a higher rate taxpayer and the other pays little or no tax, moving income-producing assets to the lower earner saves tax. The transfer must be an outright, genuine gift. The marriage allowance also lets a non-taxpayer transfer £1,260 of personal allowance to a basic rate taxpayer spouse.

Key rules to remember

Personal allowance: £12,570; Available in full when adjusted net income is £100,000 or less.
Personal allowance reduction: Reduction = (adjusted net income − £100,000) ÷ 2; Round down the excess to a whole pound if needed. Allowance is zero when adjusted net income is £125,140 or more.
Income tax bands (non-savings and savings): £1–£37,700 at 20%; £37,701–£125,140 at 40%; over £125,140 at 45%; Bands are measured on taxable income, after the personal allowance.
Dividend rates: 8.75% basic; 33.75% higher; 39.35% additional; Dividends are taxed last, on top of other income.
Savings nil rate band: £1,000 basic rate; £500 higher rate; nil for additional rate; Based on the taxpayer's highest band of taxable income. The nil rate income still uses up band.
Dividend nil rate band: £500; Available to all taxpayers. Taxed at 0% but counted in the band.
Starting rate for savings: 0% on savings income within the first £5,000 of taxable income; Reduced by non-savings taxable income. It is not available if non-savings taxable income is £5,000 or more.
Marriage allowance: Transfer £1,260; tax reducer = £1,260 × 20% = £252; For spouses or civil partners where the transferor is a non-taxpayer and the recipient is not a higher or additional rate taxpayer. The transferor's allowance falls by £1,260.
Basic rate band extension: Gift Aid gross donation or gross personal pension contribution added to £37,700; Gross amount extends the basic and higher rate thresholds. It also lowers adjusted net income.

How to solve Making Full Use of Personal Allowance and Income Tax Bands questions

Use this method for any question asking how a person or couple can reduce income tax by using allowances and bands.

1List each person's income by type: non-savings, savings and dividends. Note who is married or in a civil partnership.
2Work out each person's adjusted net income and check for the £100,000 to £125,140 personal allowance restriction.
3Compute the taxable income for each person after the personal allowance, and see which bands each person reaches.
4Find unused allowances: personal allowance, savings nil rate band, dividend nil rate band, starting rate and basic rate band.
5Decide what to move. Transfer income-producing assets (such as shares or savings accounts) to the spouse with unused bands. Consider Gift Aid or pension contributions if income is near £100,000.
6Recompute the tax for both people after the change, applying income in the order non-savings, savings, dividends.
7State the tax saving as the difference between the before and after totals, and note conditions such as the gift being outright and unconditional.

Quickest way: Compare marginal rates, then move income

When to use it: Use when a question asks for the best way to reduce a couple's combined tax and the spouses have different tax positions.

Find each spouse's top band: nil, 20%, 40% or 45%.
Move income from the higher to the lower taxed spouse until their allowance and basic rate band are used. Fill their personal allowance first.
Move dividends first if the lower earner has unused personal allowance, as dividends are taxed at the highest rates.
Check adjusted net income against £100,000. If it is slightly above, use Gift Aid or pension to bring it down.
Quantify the saving using only the income that moved. Compute tax on that income at each spouse's rates.

Common mistakes in Making Full Use of Personal Allowance and Income Tax Bands

Applying the personal allowance reduction to taxable income instead of adjusted net income.
Students confuse taxable income with the measure used for the £100,000 test.
Fix: Use adjusted net income, which is total income less gross Gift Aid donations and gross pension contributions. Then work out the reduction at £1 for every £2 over £100,000.
Giving a higher rate taxpayer a £1,000 savings nil rate band.
Students remember the basic rate figure and forget that the band depends on the taxpayer's band.
Fix: Basic rate taxpayers get £1,000, higher rate taxpayers £500 and additional rate taxpayers nil. Decide the band first.
Taxing dividends before savings, or ignoring the nil rate band when counting the bands used.
Students tax income in the order given in the question.
Fix: Always list non-savings income first, then savings, then dividends. Nil rate band income still uses up the basic rate band.
Forgetting the starting rate for savings when non-savings income is low.
It looks like a minor rule and is often missed.
Fix: Check non-savings taxable income. If it is below £5,000, up to £5,000 less that amount of savings income can be taxed at 0%.
Using the marriage allowance when the recipient is a higher rate taxpayer, or when the transferor pays tax.
Students remember the £1,260 figure but not the conditions.
Fix: The transferor must not use all their allowance, and the recipient must be a basic rate taxpayer. The tax saving is £252 as a tax reducer, not a deduction from income.
Suggesting income transfers between spouses that are not outright gifts, or between unmarried partners.
Students focus on the numbers and not on the conditions.
Fix: Say the gift must be outright with no strings. The planning works for spouses and civil partners. It does not work for cohabitees.

Worked examples

Example 1

Anna earns a salary of £55,000 and receives dividends of £12,000 from shares she owns. Her husband Ben has no income. Calculate the income tax saved on the dividends if Anna gives the shares to Ben outright. Ignore National Insurance.

Show the solution

Anna's tax on dividends before the gift. Non-savings taxable income = £55,000 − £12,570 = £42,430.
The basic rate band of £37,700 is used by non-savings income. The remaining £4,730 of her salary is taxed at 40%, so all dividends fall in the higher rate band.
Dividends £12,000: the first £500 is at the dividend nil rate. The remaining £11,500 is taxed at 33.75% = £3,881.25.
Ben's tax on the dividends after the gift. Dividends of £12,000 are below his personal allowance of £12,570, so they are covered by the allowance. Tax = £0.
Tax saving = £3,881.25 − £0 = £3,881.25.

Answer: The tax saved is £3,881.25 a year, provided the gift of the shares to Ben is outright and unconditional.

Example 2

Chloe has a salary of £110,000 and no other income. She is considering making a Gift Aid donation of £10,000 (gross). Calculate her income tax before and after the donation, and the saving. Ignore National Insurance.

Show the solution

Before the donation. Adjusted net income = £110,000. Excess over £100,000 = £10,000, so the personal allowance reduction = £10,000 ÷ 2 = £5,000.
Personal allowance = £12,570 − £5,000 = £7,570. Taxable income = £110,000 − £7,570 = £102,430.
Tax: £37,700 × 20% = £7,540. Remaining £64,730 × 40% = £25,892. Total = £33,432.
After the donation. Adjusted net income = £110,000 − £10,000 = £100,000. No reduction, so the personal allowance is £12,570. Taxable income = £110,000 − £12,570 = £97,430.
The basic rate band is extended by the gross donation: £37,700 + £10,000 = £47,700.
Tax: £47,700 × 20% = £9,540. Remaining £97,430 − £47,700 = £49,730 × 40% = £19,892. Total = £29,432.
Saving = £33,432 − £29,432 = £4,000.

Answer: Her tax falls from £33,432 to £29,432, a saving of £4,000. The donation also restores her full personal allowance.

Exam tips

Write the order of income at the top: non-savings, savings, dividends. Then place the bands and nil rate bands carefully in that order.
If income is between £100,000 and £125,140, check the personal allowance first. Mention the 60% effective rate and say Gift Aid or pension contributions could help.
Planning answers should state that gifts between spouses must be outright, and the saving should be quantified with a computation.
In objective test questions, watch for the taxpayer's band: it decides the savings nil rate band amount (£1,000 or £500).
Use the tax rates and allowances ACCA gives you in the exam. Do not rely on memory for the rates, but know where they sit and how they interact.

Practice questions from The use of exemptions and reliefs in deferring and minimising income tax liabilities

Making Full Use of Personal Allowance and Income Tax Bands in other exams

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

ACCA Strategic ProfessionalPersonal Allowance, Restrictions and Reliefs

Making Full Use of Personal Allowance and Income Tax Bands: frequently asked questions

How does the personal allowance taper work for high earners?

The personal allowance is £12,570 if adjusted net income is £100,000 or less. It falls by £1 for every £2 of adjusted net income over £100,000. It is nil when adjusted net income is £125,140 or more.

How can I use my spouse's income to reduce tax in TX-UK?

Look for a spouse with unused personal allowance, nil rate bands or basic rate band. Suggest an outright gift of income-producing assets, such as shares or savings accounts, to that spouse. Then recompute both people's tax to show the saving.

What is the difference between the savings nil rate band and the dividend nil rate band?

The savings nil rate band is £1,000 for a basic rate taxpayer and £500 for a higher rate taxpayer, with none for additional rate. The dividend nil rate band is £500 for everyone. Both are taxed at 0% but still use up the tax band they fall in.

How does the marriage allowance work?

A spouse or civil partner who does not use their personal allowance can transfer £1,260 to the other, who must be a basic rate taxpayer. The recipient gets a tax reducer of £252, which is £1,260 at 20%.