The Personal Allowance represents the threshold of income up to which UK individuals do not have to pay Income Tax. As of now, this threshold stands at £12,570 annually. This means that any income earned up to this amount within a fiscal year is exempt from taxation.
An essential aspect to note about the Personal Allowance is its gradual reduction for high-income earners. Specifically, for those whose annual earnings surpass £100,000, the allowance diminishes by £1 for every £2 of income above this threshold. This reduction continues until the Personal Allowance reaches zero. Consequently, for individuals with an income of £125,140 or more, the Personal Allowance is completely phased out. As a result, the effective tax rate on earnings between £100,000 and £125,140 escalates to 60%, taking into account the combined effects of losing the Personal Allowance and paying higher rate Income Tax.
