How much income can you earn before HMRC takes a penny in Income Tax? For the 2025/26 tax year, the answer is £12,570, a figure frozen until April 2028. This is your Personal Allowance, and it applies across all your taxable income: salary, dividends, rental income, and most other earnings.
Many directors of software companies and professional services firms miss a straightforward saving: they pay themselves a salary up to the £12,570 threshold, avoiding both Income Tax and National Insurance contributions, provided the salary stays below the primary threshold of £242 per week. This is basic tax-efficient remuneration, yet a surprising number of contractors and sole traders simply take dividends without a salary floor, wasting the allowance.
The real trap lies above £100,000. If your adjusted net income exceeds this figure, your Personal Allowance shrinks by £1 for every £2 of excess. At £125,140, the allowance disappears entirely. The result is an effective marginal tax rate of 60% on earnings in that band, because you lose the allowance and pay 40% higher-rate tax simultaneously. Consider a construction subcontractor earning £110,000 from a mix of salary and dividends: they lose £5,000 of their allowance, pushing an extra £5,000 into higher-rate territory. A pension contribution of £10,000 would restore the full allowance and cut the tax bill substantially.
Do not confuse the Personal Allowance with other reliefs. The Dividend Allowance is just £500 for 2025/26, and the Capital Gains Tax annual exempt amount is £3,000. The Personal Savings Allowance remains at £1,000 for basic-rate taxpayers and £500 for higher-rate payers, but it does not interact with your main allowance.
Married couples or civil partners can transfer up to £1,260 of unused Personal Allowance to the higher-earning partner through the Marriage Allowance, worth a maximum of £252 in tax relief each year. This is often overlooked by hospitality operators and e-commerce sellers where one partner runs the business and the other earns little.
Action for business owners: If your projected total income for 2025/26 approaches £100,000, model your salary and dividend mix now. A well-timed pension contribution or charitable gift can keep you below the taper threshold and preserve the full £12,570 allowance. Ignoring the 60% trap is expensive.