Can Reducing Income Actually Benefit Clients Amid Personal Allowance Changes?

Published: 9th March 2026

When an individual’s adjusted net income goes over £100,000, they start losing their personal allowance and access to the government’s tax-free childcare top-up. This can lead to unexpected tax bills and reduced benefits. But could reducing income actually help clients keep more money overall? This post explores how understanding personal allowance rules and adjusted net income can help you guide clients to better financial outcomes.

Understanding Personal Allowance and Its Reduction

Every individual in the UK has a personal allowance, which is the amount of income they can earn before paying income tax. For the tax year 2025/26, this allowance is set at £12,570 and will remain frozen at this level until April 2031.

However, the full personal allowance is only available if the individual’s adjusted net income does not exceed £100,000. Once income goes beyond this threshold, the allowance reduces by £1 for every £2 of income above £100,000. This means the personal allowance disappears completely at an adjusted net income of £125,140.

Example of Personal Allowance Reduction

Gill has an adjusted net income of £120,000 in 2025/26. Since this exceeds the £100,000 threshold by £20,000, her personal allowance reduces by £10,000 (half of the excess). This leaves her with a personal allowance of only £2,570 for the year.

This reduction means Gill will pay more tax than expected if her tax code does not reflect this change. For clients within PAYE, it’s important to check their tax code to avoid surprises at the end of the tax year.

What Counts as Adjusted Net Income?

Adjusted net income is the total taxable income before personal allowances, minus certain reliefs. These reliefs include:

• Trading losses

• Charitable donations made through Gift Aid

• Pension contributions

  
  

When calculating adjusted net income, use the gross amount of Gift Aid donations and pension contributions, not the net amount paid by the client. This includes any basic rate tax relief added by the pension provider.

The Impact of the Marginal Tax Rate

Clients with taxable income between £37,701 and £125,140 pay income tax at 40%. But when the personal allowance reduces, the effective tax rate on income between £100,000 and £125,140 increases sharply. This creates a marginal tax rate of 60% in this income band.

This happens because the loss of £1 in personal allowance effectively adds 40p of tax on top of the 40% income tax rate. This can catch clients off guard and reduce their overall take-home pay.

Strategies to Help Clients Avoid Income Threshold Pitfalls

1. Adjust Income Timing

If possible, clients can defer bonuses, dividends, or other income to the next tax year to keep adjusted net income below £100,000. This helps preserve the full personal allowance and access to tax-free childcare top-ups.

2. Increase Pension Contributions

Making additional pension contributions reduces adjusted net income because these contributions receive tax relief. This can help clients stay under the £100,000 threshold and maintain their personal allowance.

3. Maximise Gift Aid Donations

Encouraging clients to increase charitable donations through Gift Aid can also reduce adjusted net income. Since gross donations count towards reliefs, this can be a useful tool to manage income levels.

4. Review Tax Codes Regularly

For clients on PAYE, ensure their tax codes reflect their actual personal allowance entitlement. This prevents unexpected tax bills after the tax year ends.

Practical Example of Income Reduction Benefits

Consider a client, Sarah, with an adjusted net income of £105,000. Her personal allowance reduces by £2,500, costing her £1,000 in extra tax (40% of £2,500). If Sarah increases her pension contributions by £10,000, her adjusted net income drops to £95,000, restoring her full personal allowance.

This means Sarah saves £5,028 in tax:

• £1,000 saved from personal allowance restoration

• £4,000 saved from 40% tax relief on pension contributions

  
  

This example shows how reducing income strategically can leave clients better off overall.

What to Watch Out For

• Childcare Top-Up Loss: Clients over £100,000 lose access to the government’s tax-free childcare top-up. This can add significant costs for families using childcare services.

• Complex Income Sources: Clients with multiple income streams need careful planning to manage adjusted net income effectively.

• Changing Rules: Tax rules and thresholds can change. Stay updated to provide accurate advice.

  
  
  
  

Final Thoughts

Reducing income may seem counterintuitive, but for clients near the £100,000 adjusted net income threshold, it can protect personal allowance and access to valuable benefits. By understanding how adjusted net income works and using tools like pension contributions and Gift Aid donations, you can help clients keep more of their money.