Loss of Personal Allowance

Loss of personal allowance is a UK tax rule that reduces your tax-free income threshold if you earn above certain limits. This can significantly increase your tax bill, making it crucial for high earners, business owners, and directors to understand how it works and how to manage it.

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How Loss of Personal Allowance Works

In the UK, everyone gets a personal allowance – an amount of income you can earn tax-free each year. For the 2024/25 tax year, this is £12,570. However, if your adjusted net income exceeds £100,000, you start to lose this allowance.

The tapering rule reduces your personal allowance by £1 for every £2 you earn above £100,000. This means your allowance is completely gone once your income reaches £125,140. Adjusted net income includes all taxable income minus certain deductions like pension contributions.

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What Income Can Trigger Loss of Personal Allowance

Several types of income contribute to your adjusted net income and can push you over the £100,000 threshold. Here are the key sources to monitor in your tax planning:

Salary and wages from employment or directorships above £100,000
Dividends from company shares or investments, which are added to your total income
Rental income from properties after allowable expenses are deducted
Pension income or withdrawals that count as taxable income
Interest and savings income from bank accounts or investments
Capital gains from selling assets, included if they exceed the annual exempt amount
Benefits in kind from employment, such as company cars or health insurance
Foreign income that's taxable in the UK after any double taxation relief
Income from self-employment or partnerships, reported on your Self Assessment
Any other taxable income streams like royalties or trust distributions

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Common Mistakes and How to Manage Loss of Personal Allowance

A common mistake is not accounting for all income sources or missing deductions that reduce adjusted net income. For example, making pension contributions can lower your taxable income and help retain your personal allowance. Failing to plan can lead to unexpected tax bills and penalties.

If your income is near or above £100,000, professional advice can help you optimize your finances. DG Accountancy offers responsive tax planning services to minimize tax and manage compliance, giving you clarity and confidence. Contact us for tailored strategies to handle loss of personal allowance effectively.

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You can reach us by phone, email, or using the contact form below. We'll get back to you quickly to discuss how we can help with compliance, tax planning, or business growth.

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DG Accountancy Ltd provides fixed monthly accountancy services for small businesses and contractors in Torquay and across the UK. Contact us for reliable support to help your business thrive.