The personal allowance, which is £12,500 for 2020/21, and £12,570 for 2021/22 is withdrawn where an individual’s income exceeds £100,000. The personal allowance is reduced by £1 for every £2 of adjusted net income in excess of the income limit of £100,000. Accordingly, an individual whose adjusted net income is in excess of £125,000 for 2020/21, or £125,140 for 2021/22 will not be entitled to any personal allowance.

Adjusted net income is calculated, broadly as follows:

Gross income subject to income tax

Less:

• Trading losses
• Payments made gross to pension schemes
• Grossed-up Gift Aid payments
• Grossed-up pension contributions paid net of tax relief at source

Example:

For 2021/22 Joan has a salary of £115,000. She also receives net rental income of £8,000, bank interest (gross) of £200, and dividend income of £5,000. She pays pension premiums of £1,200 net of basic rate tax per month, and Gift Aid payments of £2,000 during the year. Her adjusted net income for 2021/22 is:

As Joan’s adjusted net income exceeds the £100,000 threshold by £7,700, her personal allowance is reduced by £3,850 to £8,720 for 2021/22.

An individual who has adjusted net income in excess of £100,000 will pay tax at an effective marginal rate of 60% on the income on which the personal allowance is withdrawn.

The Personal allowance, age related allowance, married couple’s allowance, and blind person’s allowance are no longer available to certain Commonwealth citizens who are not resident in the UK. These individuals may have a liability to UK tax on, for instance, rental income from UK land and buildings. The above allowances remain available to the majority of these individuals through the UK’s network of double tax treaties, but several of the smaller Commonwealth territories do not have double tax treaties with the UK.