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Advanced Taxation (UK) · Income tax: the comprehensive computation of taxable income and the income tax liability

Personal Allowance, Restrictions and Reliefs for ACCA ATX

Updated 11 October 2026 · Fact-checked

The personal allowance is £12,570. It is reduced by £1 for every £2 that adjusted net income exceeds £100,000, and is nil at £125,140 or more. Adjusted net income is total income less gross gift aid donations and gross personal pension contributions. Deduct qualifying reliefs first, then the allowance.

Understand Personal Allowance, Restrictions and Reliefs

The personal allowance is an amount of income you pay no income tax on. In the exam tax tables it is £12,570. It is deducted from your total income after any reliefs, so it reduces taxable income.

For high earners it is withdrawn. The test is adjusted net income, not taxable income. The income limit is £100,000. For every £2 of adjusted net income above that, the allowance falls by £1. At £125,140 or more, it is zero.

This creates an effective 60% marginal rate on income between £100,000 and £125,140. Each extra £2 of income costs £1 of lost allowance. So £2 of income is taxed at 40% (£0.80) and the lost allowance adds 40% of £1 (£0.40). That is £1.20 on £2, or 60%.

Adjusted net income is your net income (total income less reliefs deducted from total income, such as loan interest) minus the gross amount of gift aid donations and gross personal pension contributions paid net of basic rate tax. So gift aid and pension payments can bring adjusted net income back under £100,000 and restore some or all of the allowance. Gift aid and relevant pension payments also extend the basic rate band by the gross amount, which is a separate benefit.

The examiner often wants you to spot this planning point. Also remember the transferable amount of £1,260 (marriage allowance) in the tables, which is for couples where one is not a higher or additional rate taxpayer.

Key rules to remember

Personal allowance
£12,570
From the tax tables. The income limit is £100,000.
Abatement
Reduction = (Adjusted net income − £100,000) ÷ 2
Round down for exam purposes only if the question says so. The allowance cannot go below nil. It is nil where adjusted net income is £125,140 or more.
Adjusted net income
Net income − gross gift aid donations − gross relevant pension contributions (paid net of basic rate tax)
Net income is total income less reliefs deducted in arriving at net income, such as qualifying loan interest. Use the gross amount of gifts and contributions.
Gross from net gift aid
Gross = net paid × 100 ÷ 80
Basic rate tax at 20% is treated as deducted at source.
Extended basic rate band
£37,700 + gross gift aid donation (and gross relevant pension contribution)
Taxable income in the extended band is taxed at 20% instead of 40%, and the higher rate bands move up too.
Marriage allowance
Transferable amount £1,260
Given in the tables. The transferor must not use it fully; the recipient must not be a higher or additional rate taxpayer.

How to solve Personal Allowance, Restrictions and Reliefs questions

Use the same order every time. It keeps the abatement and the band extension separate.

  1. 1List all income and compute total income. Deduct reliefs that come off total income, such as qualifying loan interest, to give net income.
  2. 2Deduct the gross gift aid donation and gross relevant pension contributions to give adjusted net income.
  3. 3Compare adjusted net income with £100,000. If it is above, reduce £12,570 by half the excess, to a minimum of nil.
  4. 4Deduct the personal allowance from net income (not adjusted net income) to give taxable income. Take the allowance against non-savings income first, then savings, then dividends.
  5. 5Extend the basic rate band by the gross gift aid and gross pension amount: £37,700 plus those amounts.
  6. 6Apply the rates to each type of income in the order non-savings, savings, then dividends, using the savings and dividend nil rate bands.
  7. 7State the tax liability and, if asked, the effect of planning such as making a gift aid payment.

Quickest way: Marginal rate shortcut for the £100,000 to £125,140 slice

When to use it: Use when asked for the tax saved by a donation or pension payment, or for the effective marginal rate.

  1. Check adjusted net income. If it is between £100,000 and £125,140, you are in the 60% zone. The 60% is the marginal rate on extra income in this band. It is not the saving per £1 of a gross donation.
  2. Work out the gross donation or contribution. Only the part that brings adjusted net income down towards £100,000 restores allowance. The part below £100,000 restores none.
  3. Within the zone, each £1 of gross payment saves 40%. That is 20% from the band extension (40% less 20%) plus 20% from the allowance restored (£0.50 of allowance × 40%). Apply 40% to the part of the gross payment within the zone. Any part of the gross payment outside the zone saves only the 20% from the band extension, provided that income would otherwise be taxed at 40%.
  4. Check your answer with a full computation if marks depend on figures. Show both versions when time allows.

Common mistakes in Personal Allowance, Restrictions and Reliefs

  • Testing the £100,000 limit against taxable income.

    Students compute taxable income early and use it by habit.

    Fix: Always compute adjusted net income separately, using net income less gross gift aid and gross pension payments.

  • Using the net gift aid payment to reduce adjusted net income or extend the band.

    The cash paid is the number in the question.

    Fix: Gross up by 100 ÷ 80 first, then use the gross figure for both purposes.

  • Deducting gift aid from total income in the computation.

    It is treated like other reliefs.

    Fix: Gift aid is not a deduction from total income. It reduces adjusted net income and extends the basic rate band only.

  • Forgetting the personal allowance can be nil.

    Students stop the abatement at a small amount.

    Fix: If adjusted net income is £125,140 or more, the allowance is nil. Cap the abatement at £12,570.

  • Applying marriage allowance to a higher rate taxpayer.

    The transfer is remembered but its conditions are not.

    Fix: State the conditions: the recipient must not be a higher or additional rate taxpayer, and the transferor must have unused allowance to give.

Worked examples

Example 1

Ravi has trading profits of £112,000 for 2025/26 and no other income. He pays a qualifying loan interest charge of £2,000 that is deductible from total income. He made no other payments. Calculate his income tax liability.

Show the solution
  1. Total income is £112,000. Less qualifying loan interest £2,000. Net income is £110,000. Adjusted net income is £110,000 as there are no gifts or pension payments.
  2. Excess over £100,000 is £10,000. Abatement is £10,000 ÷ 2 = £5,000. Personal allowance is £12,570 − £5,000 = £7,570.
  3. Taxable income is £110,000 − £7,570 = £102,430.
  4. Tax: £37,700 × 20% = £7,540. £102,430 − £37,700 = £64,730 × 40% = £25,892.
  5. Total income tax is £7,540 + £25,892 = £33,432.

Answer: Income tax liability is £33,432.

Example 2

Mira has non-savings income of £118,000 for 2025/26. She makes a gift aid donation of £16,000 net. Compute her income tax liability and compare it with the position had she not donated.

Show the solution
  1. Gross donation is £16,000 × 100 ÷ 80 = £20,000.
  2. Adjusted net income is £118,000 − £20,000 = £98,000. This is below £100,000, so the full personal allowance of £12,570 is kept.
  3. Taxable income is £118,000 − £12,570 = £105,430.
  4. Basic rate band is extended to £37,700 + £20,000 = £57,700.
  5. Tax: £57,700 × 20% = £11,540. £105,430 − £57,700 = £47,730 × 40% = £19,092. Total £30,632. Gift aid basic rate tax of £4,000 retained by the charity is not Mira's liability.
  6. Without the donation: adjusted net income £118,000. Abatement (£118,000 − £100,000) ÷ 2 = £9,000. Allowance is £3,570. Taxable income is £114,430. Tax £37,700 × 20% = £7,540 plus £76,730 × 40% = £30,692, total £38,232.
  7. Saving is £38,232 − £30,632 = £7,600. Her net cost of the donation is £16,000, so the net cost after tax saving is £8,400.

Answer: With the donation Mira's income tax liability is £30,632. Without it, £38,232. The donation saves £7,600 of tax.

Exam tips

  • Write adjusted net income as its own line in every high-income computation. Marks are given for it.
  • Always gross up gift aid and net pension payments before using them. Show the 100 ÷ 80 working.
  • If income is close to £100,000 or £125,140, look for a planning point: a gift aid payment or pension contribution can restore the allowance. Mention the 60% effective rate.
  • For marriage allowance and blind person's allowance, state the conditions briefly and use the amounts given in the tax tables. Do not quote figures from memory that are not in the tables.

Practice questions from Income tax: the comprehensive computation of taxable income and the income tax liability

Personal Allowance, Restrictions and Reliefs 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, Restrictions and Reliefs: frequently asked questions

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

It is reduced by £1 for every £2 of adjusted net income above £100,000. It reaches nil when adjusted net income is £125,140 or more. Always use adjusted net income, not taxable income.

What is adjusted net income?

It is net income, meaning total income less reliefs deducted from total income such as loan interest, minus the gross amount of gift aid donations and gross relevant pension contributions. It is the figure used to test the £100,000 limit.

Does gift aid extend the basic rate band?

Yes. The basic rate band of £37,700 is increased by the gross gift aid donation. This means more income is taxed at 20% rather than 40%. Gift aid also reduces adjusted net income, which can restore the personal allowance.

Can a higher rate taxpayer receive the marriage allowance?

No. The recipient must not be a higher or additional rate taxpayer. The transferable amount in the tables is £1,260, and the person giving it away must have unused personal allowance to transfer.