Limited Companies and Directors Tax Saving Guide 2026-2027
A small change in taxable income can make a large difference to the tax you pay, especially once earnings move above £100,000. The personal allowance sits at the centre of that calculation.
For the tax year ending 5 April 2027, most UK taxpayers are expected to receive a personal allowance of £12,570. This is the amount of income you can usually receive before income tax is charged. Once the allowance has been used, the remaining income is taxed according to the relevant tax bands.
The catch is that not everyone keeps the full allowance. Higher earners can lose it altogether, which creates one of the most expensive zones in the UK tax system.
This guide explains how the personal allowance works, how the tax bands apply across the UK, and where sensible planning may help reduce exposure to higher rates of tax.
What the personal allowance does
The personal allowance reduces the amount of income that is subject to income tax.
If someone earns £35,000 of employment income in the tax year and has the full £12,570 personal allowance, the first £12,570 is covered by the allowance. The balance, £22,430, is taxable.
That does not mean all income is taxed in the same way. The UK tax system separates income into different categories, including:
employment income
self-employment profits
pension income
rental income
savings income, such as bank interest
dividend income
The standard tax bands shown below apply mainly to non-savings income, such as salary, trading profits, pensions and rental income. Savings income and dividends have their own rules, allowances and tax rates.
The personal allowance is most useful when it shelters income that would otherwise be taxable. For many people, it is set automatically through PAYE. For others, especially company directors, landlords, sole traders and people with mixed income sources, it needs closer attention.
Income tax bands in England, Wales and Northern Ireland
For the tax year ending 5 April 2027, the income tax bands for non-savings income in England, Wales and Northern Ireland are as follows:
Band | Taxable income | Tax rate |
Personal allowance | Up to £12,570 | 0% |
Basic rate | £12,571 to £50,270 | 20% |
Higher rate | £50,271 to £125,140 | 40% |
Additional rate | Over £125,140 | 45% |
These bands are often misunderstood because the figures are commonly quoted as income levels. In practice, the tax position depends on the type of income, the allowances available, and whether any reliefs reduce taxable income.
For example, someone with salary income of £60,000 does not pay 40% tax on the whole £60,000. They usually receive the personal allowance first, then pay basic rate tax on the income within the basic rate band, and higher rate tax only on the slice above the higher rate threshold.
That slice-based system matters. It means small planning steps can sometimes keep income out of a higher band.
Scottish income tax rates are different
Scotland sets its own rates and bands for non-savings income. For the tax year ending 5 April 2027, the Scottish bands are:
Band | Taxable income | Tax rate |
Personal allowance | Up to £12,570 | 0% |
Starter rate | £12,571 to £16,537 | 19% |
Scottish basic rate | £16,538 to £29,526 | 20% |
Intermediate rate | £29,527 to £43,662 | 21% |
Higher rate | £43,663 to £75,000 | 42% |
Advanced rate | £75,001 to £125,140 | 45% |
Top rate | Over £125,140 | 48% |
These Scottish rates apply to non-savings and non-dividend income. Savings interest and dividends are taxed under UK-wide rules, so the position can become more complex where someone has several sources of income.
This is why tax planning should not rely only on a headline income figure. Two people earning the same total amount can have different tax bills if the source of that income differs.
The £100,000 personal allowance trap
The most important personal allowance rule for higher earners is the taper.
Once income exceeds £100,000, the personal allowance is reduced by £1 for every £2 of extra income. By the time income reaches £125,140, the full £12,570 allowance has usually been lost.
This creates an effective tax rate of around 60% for many taxpayers in England, Wales and Northern Ireland on income between £100,000 and £125,140.
Here is the basic idea:
Extra income between £100,000 and £125,140 | Effect |
£100 earned | £40 income tax at 40% |
£50 personal allowance lost | £20 extra tax at 40% |
Approximate take-home amount | £40 |
In simple terms, out of every extra £100 earned in this band, around £60 can be lost to income tax because the taxpayer pays higher rate tax and loses part of the personal allowance at the same time.
In Scotland, the cost can be higher because the higher and advanced rates differ from the rest of the UK.
This is one of the areas where planning can make a real difference. The goal is not to avoid tax artificially. It is to understand whether taxable income can be reduced in a legitimate way before the year ends.
Ways to use allowances and reduce taxable income
Tax planning works best when it happens before the end of the tax year. Once 5 April has passed, the options narrow.
The right approach depends on income level, employment status, family circumstances and cash flow. The following points are common areas to review.
Pension contributions can restore some allowance
Personal pension contributions can reduce adjusted net income. This matters because the personal allowance taper is based on adjusted net income, not simply gross salary.
For someone earning between £100,000 and £125,140, a pension contribution may reduce adjusted net income and restore some or all of the personal allowance.
This can be especially valuable because the tax relief may include:
relief at the basic rate added to the pension contribution
higher or additional rate relief claimed through a tax return or tax code adjustment
a reduction in the personal allowance taper where adjusted net income falls below the taper zone
Pension rules include annual allowance limits and other restrictions, so large contributions need care. High earners, people with existing pension benefits, and those already drawing pension income should check the limits before acting.
Gift Aid donations may reduce adjusted net income
Charitable donations made under Gift Aid can also reduce adjusted net income. This can help where income is close to a tax band threshold or within the personal allowance taper zone.
Gift Aid also allows the charity to claim basic rate tax relief. Higher and additional rate taxpayers may be able to claim further relief through Self Assessment.
For example, if someone makes regular charitable gifts but has not claimed higher rate relief, they may be missing out. Accurate records are essential, including the date, amount and charity details.
Salary sacrifice may help some employees
Some employees can use salary sacrifice arrangements for pension contributions or other approved benefits. This means salary is exchanged for a non-cash benefit, often reducing taxable pay.
Pension salary sacrifice can also reduce National Insurance contributions for the employee and, in some cases, the employer. It needs to be set up properly through the employer and cannot normally be backdated.
Salary sacrifice is not suitable for everyone. It can affect mortgage applications, statutory payments, life cover based on salary, and other employment benefits.
Company owners should plan income extraction
Company directors and shareholders often have more control over the timing and type of income they receive. Salary, dividends, pension contributions and benefits can all affect the overall tax position.
This is where Profit extraction planning becomes important. A company owner may need to balance corporation tax, income tax, dividend tax, National Insurance and pension planning. The best mix is not always the same from year to year.
For example, taking an extra dividend could push total income into the personal allowance taper zone. A company pension contribution may produce a better overall outcome, depending on the facts.
The key is to model the full picture before making payments.
Married couples and civil partners should check unused allowances
Some couples can benefit where one person has unused allowances and the other has taxable income. In limited cases, the Marriage Allowance may allow one spouse or civil partner to transfer part of their personal allowance to the other.
This is only available where the income conditions are met. It will not help every couple, especially where the higher earner is already a higher rate taxpayer. Even so, it is worth checking where one partner has low income.
Savings and dividends need separate attention
The income tax bands above do not tell the full story for savings and dividends.
Bank interest, investment income and dividends can all sit on top of other income and affect the tax band they fall into. This can push income into higher rates or reduce available allowances.
Common points to review include:
whether savings interest is covered by a savings allowance
whether dividend income exceeds the dividend allowance
whether investments are held in an ISA
whether income-producing assets are held by the right person in a couple
whether selling assets creates capital gains tax issues as well as income tax effects
This is an area where people often look at each source of income in isolation. A better approach is to place all income on one timeline for the tax year and see how the bands fill up.
A good Tax Saving Guide 2026 should always consider the interaction between allowances, rates and income type, rather than looking at one tax rule on its own.
A practical year-end checklist
Before the tax year ends on 5 April 2027, it helps to run through a short checklist.
Estimate total income for the year from all sources.
Separate salary, trading profits, rental income, savings interest and dividends.
Check whether adjusted net income is close to £100,000.
Review pension contributions already made in the year.
Add up Gift Aid donations and keep records.
Check whether any taxable income can be deferred or reduced.
Review whether ISA allowances have been used where suitable.
For company owners, compare salary, dividends and pension contributions before extracting more funds.
If income is close to a threshold, calculate the effect before taking bonuses, dividends or extra drawings.
Small timing differences can matter. A bonus paid before 5 April may fall in a different tax year from one paid after that date. A dividend declared in one tax year rather than the next can change the rate of tax payable.
The answer is not always to delay income. It may be better to use allowances this year if next year’s income will be higher. The point is to make the decision deliberately.
The main takeaway
The personal allowance is simple at lower income levels, but it becomes much more important as income rises. For 2027, the standard allowance of £12,570 can disappear completely once income moves above £100,000, creating a high effective tax rate before the additional rate even begins.
The best starting point is to calculate total income early, then check whether pension contributions, Gift Aid donations, income timing or company owner planning could reduce taxable income in a legitimate way.
Tax rules can change, and the right answer depends on personal circumstances. This article is for general information only and is not personal tax advice. If income is close to a threshold, or if several income sources are involved, tailored advice before 5 April can prevent an expensive surprise.
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