What Is Tax Free Income? UK Allowances and Exemptions

Tax-free income is money you can receive without any Income Tax becoming due on it. In the UK it takes two different forms. Some income is exempt by nature and never enters a tax calculation at all, including ISA returns, Premium Bond prizes and lottery wins.

The rest is taxable in principle but covered by an allowance, starting with the £12,570 Personal Allowance for the 2026/27 tax year. The difference matters more than it sounds. Exempt income does not need to be reported to HMRC and cannot affect what you pay on anything else.

Income covered by an allowance is taxed at 0% but still counts towards your total for the year, so it can still push you into a higher band.

Here is what that looks like in practice. You earn £49,900 and receive £500 of savings interest. The interest is covered by your Personal Savings Allowance, so no tax is charged on it.

But it still counts, taking your total income to £50,400. That sits above the £50,270 higher rate threshold, which makes you a higher rate taxpayer, halves your Personal Savings Allowance from £1,000 to £500 and puts any further interest at 40%. The same £500 held inside a cash ISA would leave your total at £49,900 with your full allowance intact.

Beyond the Personal Allowance, separate allowances cover savings interest, dividends, self-employment, property income and pension contributions.

Each has its own threshold and each is claimed independently, so the total you can receive tax free is considerably more than £12,570.

The sections below cover each allowance in turn, including the ones that apply automatically and the ones you have to claim.

Tax Free Income and Your Allowance

The tax free personal allowance is the foundation of what you can earn without paying tax. For the 2026/27 tax year the Personal Allowance is £12,570, and most people receive that much free of income tax.

It applies to wages, salary, self-employed profits, and pension income. The tax free personal allowance has been frozen at this level since 2021/22.

Originally set to last until April 2026, the freeze was extended to April 2031 in the 2025 Autumn Budget.

Economists call this fiscal drag. It’s effectively a stealth tax increase without any change to headline rates.

Not everyone gets the full amount. If your adjusted net income exceeds £100,000, the allowance reduces by £1 for every £2 above that threshold.

It disappears entirely at £125,140.

Scottish taxpayers receive the same personal allowance but face different income tax rates above it.

How much can I earn before paying tax? For most people, £12,570 — but the sections below show how other allowances push that figure much higher.

Tax Free Savings Interest and Dividends

Several allowances cover tax free savings interest, dividend income, and other investment returns. Each operates independently of the personal allowance.

Savings allowances

The personal savings allowance covers interest from bank accounts and building societies. Basic rate taxpayers get £1,000 tax free, higher rate taxpayers get £500.

Additional rate taxpayers receive no personal savings allowance at all.

Below that sits the starting rate for savings, sometimes called the starter rate savings allowance. It is worth up to £5,000, and in full only if your non-savings income is at or below £12,570.

For every £1 of earned income above the personal allowance, the 0% savings rate band reduces by £1. That makes the starting rate for savings allowance most valuable for people on very low incomes.

Tax free investment income from ISAs sits in a separate category — covered further down. The ISA tax free allowance of £20,000 per year shelters all returns from income tax and capital gains tax.

Dividend allowance

The dividend allowance for 2026/27 is £500 per person. Any dividend income within this amount is tax free.

Above it, dividends are taxed at 10.75% (basic rate), 35.75% (higher rate), or 39.35% (additional rate).

Allowances for Work and Property Income

Income from side work, letting property and taking in a lodger has its own set of allowances, each separate from the Personal Allowance and from each other.

• The trading allowance £1,000 covers income from self-employment, casual sales, or side hustles. If your gross trading income is under £1,000 you do not usually need to report it to HMRC.

A separate property income allowance of £1,000 applies to rental income. Each allowance works per person, not per source of income.

• The Marriage Allowance lets a spouse or civil partner earning less than the Personal Allowance transfer £1,260 of it to their partner, who must be a basic rate taxpayer.

It is worth £252 a year to the receiving partner, given as a reduction in tax owed rather than a reduction in taxable income. Claims can be backdated up to four tax years.

• Married Couple’s Allowance: separate from Marriage Allowance and available where one or both partners were born before 6 April 1935.

For 2026/27 the full allowance is £11,700, given as a 10% reduction in tax, so it is worth up to £1,170. It reduces where income exceeds £39,200. You cannot claim it and Marriage Allowance at the same time.

• Blind Person’s Allowance: if you are certified blind or severely sight impaired and on a local authority register, you get £3,250 for 2026/27 on top of your Personal Allowance. Any unused amount can be transferred to a spouse or civil partner.
• Rent a room scheme tax free income is £7,500 per year or £3,750 if shared with another person. Only furnished rooms in your main residence qualify.

Tax Relief on Pension Contributions

Tax relief on pension contributions is one of the most valuable ways to reduce your tax bill. Contributions receive relief at your marginal rate: 20% basic, 40% higher, 45% additional.

This effectively makes pension saving partly tax free.

Basic rate relief is usually applied automatically by your pension provider. Higher and additional rate taxpayers need to claim the extra through self assessment.

You can contribute up to 100% of your annual earnings and still get relief, subject to an annual allowance of £60,000. The allowance tapers for very high earners and drops to £10,000 once you have flexibly accessed a defined contribution pension.

PAYE employees can also claim tax relief expenses of employment — costs incurred doing their job that aren’t reimbursed. HMRC calls these expenses of employment.

Common employment expense claims include:

• Washing and maintaining a work uniform or protective clothing.
• Business mileage above what your employer pays.
• Tools and equipment bought for work.
• Professional fees and union subscriptions.

The form itself is straightforward enough, the difficulty is knowing you can claim in the first place.

Charitable donations through Gift Aid also provide tax relief. Higher rate taxpayers can claim the difference through self assessment.

Gift Aid relief is another way to reduce the income tax you owe.

What Income Is Not Taxable?

Some income sits entirely outside the tax system. You don’t need to declare it, and it doesn’t count toward your total.

This is where it gets interesting, because many people don’t realise how much income falls outside the tax system altogether.

Benefits that are not taxable

Not all state benefits are taxable. Benefits that are not taxable include:

• Universal Credit.
• Personal Independence Payment (PIP) and Disability Living Allowance.
• Housing Benefit.
• Child Benefit, though the High Income Child Benefit Charge claws some of it back once either partner’s adjusted net income exceeds £60,000, and all of it above £80,000.
• Pension Credit.

One common misconception: the state pension is taxable. It counts as income and uses up part of your personal allowance.

Tax free income for pensioners comes from other sources, including ISAs, premium bonds, and the 25% tax-free pension lump sum. But the regular state pension itself is taxed.

Jobseeker’s Allowance and Carer’s Allowance are also taxable.

ISAs, premium bonds, and savings certificates

The ISA tax free allowance shelters up to £20,000 per tax year from income tax and capital gains tax. Within an ISA, interest, dividends, and growth are completely tax free.

The capital gains tax allowance for 2026/27 is a separate £3,000. Premium bond prizes from NS&I are entirely tax free, as is interest on NS&I Savings Certificates.

None of these need to be reported to HMRC. These are genuinely tax-exempt, and there is no limit on how much you can receive.

Other exempt income

Several other types of income are fully exempt:

• The first £30,000 of a genuine redundancy payment.
• Up to 25% of a UK pension pot taken as a tax-free lump sum, capped across all your pensions by the Lump Sum Allowance of £268,275.
• Maintenance payments received after divorce or separation.
• Compensation for personal injury.

According to HMRC guidance on non-taxable income, exempt income doesn’t need to be included on a self assessment return unless specific reporting rules apply.

The £100,000 Income Trap

HMRC’s guidance on this is clear enough, but people still get caught. Once your adjusted net income crosses £100,000, your personal allowance starts shrinking.

The taper removes £1 of allowance for every £2 earned above that threshold. Between £100,000 and £125,140, the effective marginal tax rate hits 60%.

That is higher than the headline 45% additional rate, and it applies to a much lower income band.

Salary sacrifice into a pension is one of the most effective responses. A £1,000 contribution in this band saves far more than in a lower band, because it recovers lost allowance too.

Charitable donations through Gift Aid also reduce adjusted net income. Both are legitimate ways to reduce the tax bill earners face in this band.

The taper is unchanged for 2026/27. GOV.UK confirms the personal allowance taper rules and the methods for managing it.

How Much Can You Earn Tax Free?

Each tax free income allowance operates independently. They combine and the total can be much larger than most people assume.

Here’s the maximum each allowance can contribute in 2026/27:

• Personal allowance: £12,570.
• Starting rate for savings allowance: up to £5,000.
• Personal savings allowance: £1,000.
• Trading allowance: £1,000.
• Property income allowance: £1,000.
• Dividend allowance: £500.

These allowances stack, but the total depends on the shape of your income rather than the amount.

The £5,000 starting rate for savings only survives in full if your non-savings income is at or below £12,570. It falls by £1 for every £1 above that, so someone earning £20,000 gets none of it.

The maximum of roughly £21,070 therefore applies to a specific profile: earnings at or just under the Personal Allowance, with the rest arriving as savings interest, dividends and small amounts of trading or property income.

For most people with a normal salary the realistic total is the Personal Allowance plus the £1,000 Personal Savings Allowance, the £500 dividend allowance and the two £1,000 allowances.

What is changing from April 2027

Three changes announced at the November 2025 Budget take effect on 6 April 2027 and reduce the value of the allowances on this page.

Savings and property income tax rates rise by two percentage points from 6 April 2027, to 22%, 42% and 47%. Interest held outside an ISA becomes more expensive to hold.

The cash ISA subscription limit falls to £12,000 from 6 April 2027 for savers under 65. The overall £20,000 ISA limit is unchanged, so anyone under 65 wanting to use it in full must put at least £8,000 into stocks and shares or another qualifying wrapper. Savers aged 65 and over keep the full £20,000 in cash.

From 6 April 2027 the Personal Allowance must also be set against employment, self-employment and pension income before any remainder can be applied to property, savings or dividend income.

For people with several income streams that ordering alone can move investment income into a higher band.

Check Your Tax Free Income Position

Tax free income in the UK goes well beyond the personal allowance. Between savings thresholds, exempt income categories, and pension relief, there are genuine ways to keep more of what you earn.

Your most practical next step is checking which HMRC tax free allowances are being applied to your income. A personal tax account shows your current tax code and the allowances built into it.

Allowances and thresholds change. Reviewing which tax free income allowances apply to you — after a change in income or circumstances — is the simplest way to avoid overpaying.

Key Takeaways

Here’s what to remember about tax free income in the UK:

• The personal allowance for 2026/27 is £12,570 and is frozen until at least April 2031 — fiscal drag means more income falls into taxable bands each year.
• Tax free allowances and tax exempt income are different — allowances reduce the amount taxed, while exempt income sits outside the tax system.
• Stacking allowances (personal, savings, trading, property, dividend) can total around £21,070, but only where earnings sit at or below the Personal Allowance and the rest of your income arrives as savings interest, dividends or small amounts of trading and property income.
• The state pension is taxable, but Universal Credit, PIP, and Housing Benefit aren’t — a distinction that catches many people out.
• Earnings between £100,000 and £125,140 face an effective 60% marginal tax rate due to the personal allowance taper.
• Check your personal tax account on GOV.UK annually to confirm which allowances apply to your tax code.

Tax Free Income UK Questions

These are some popular questions about tax free income, allowances, and how they apply across the UK.

Can I carry unused personal allowance to the next tax year?

No. The personal allowance resets on 6 April each year and can’t be carried forward. If you don’t use it, it’s gone.

All other allowances — savings, dividend, trading, property — work the same way. Each is a use-it-or-lose-it annual entitlement, unlike capital losses which carry forward indefinitely.

Does tax free income count toward benefit calculations?

It depends on the benefit. Universal Credit uses net earnings after tax and National Insurance, so allowances reduce the figure used in calculations.

Child Benefit’s High Income Charge uses adjusted net income, which includes income before the personal allowance. Genuinely exempt income — ISA returns or premium bond prizes — doesn’t count toward most benefit calculations.

Do I need a tax return to claim these allowances?

The personal allowance, personal savings allowance, and dividend allowance are applied automatically. Trading and property allowances are also automatic if income stays under £1,000.

Marriage allowance requires a GOV.UK application. Employment expense relief needs a P87 form or self assessment return. Higher rate pension tax relief must be claimed through self assessment.

Are tax free allowances different in Scotland?

The personal allowance is the same across the UK — it’s set by the UK Parliament, not devolved. Scottish taxpayers get the same £12,570.

What differs is the income tax rates above the allowance. Scotland has more bands, starting with a 19% starter rate. Savings and dividend allowances are UK-wide too.

What happens to allowances if I have two jobs?

Your personal allowance applies once across all income — it doesn’t double. Typically, HMRC assigns the full allowance to your main job through a 1257L tax code.

Your second job gets a BR code, meaning all earnings are taxed at 20%. If the first job doesn’t use the full allowance, you can ask HMRC to split it between both employments.