What happens to my Personal Allowance if I earn over £100,000 as a sole trader?

In 2026-27 your £12,570 Personal Allowance shrinks by £1 for every £2 of adjusted net income over £100,000, and is gone at £125,140. Each extra £1 of profit in that gap can cost 62p.

The figures below follow GOV.UK and the Income Tax Act 2007, checked on 17 October 2026, for the tax year 6 April 2026 to 5 April 2027. They are for England, Wales and Northern Ireland. The allowance taper works the same way in Scotland, but Scottish tax rates differ.

How the allowance shrinks

The test uses your adjusted net income, not your profit alone. It is all your taxable income added up, such as your trading profit, wages, rent, savings interest and dividends, then reduced by:

• Gift Aid donations, grossed up: £1.25 off for every £1 you give.
• Pension payments where the provider adds basic rate relief, grossed up: £1.25 off for every £1 you pay in.

If that figure is over £100,000, your allowance is cut by half of the excess. At £125,140 or more it is zero.

The 20p comes from the taper. Earn £2 more and you lose £1 of allowance, so £1 that was tax-free is now taxed at 40%. That is 40p on £2, or 20p on each £1. Class 4 National Insurance is 2% on profits over £50,270 and is not affected by the allowance. The 60p and 62p figures are our own sums from those rates. HMRC does not publish them as tax rates.

Worked example: a builder on £115,000

Dan is a self-employed builder in England. His profit for 2026-27 is £115,000 and he has no other income. That is £15,000 over the line, so he loses £7,500 of allowance and keeps £5,070.

His first £37,700 of taxable income is taxed at 20% and the rest at 40%. Now say he pays £12,000 into a personal pension before 5 April 2027. His provider adds £3,000, so £15,000 goes in. That brings his adjusted net income down to £100,000 and his full allowance comes back. His 20% band also grows by the £15,000, to £52,700.

His tax bill falls by £6,000. Half is the extra 20% relief on the £15,000 that goes in, claimed on his tax return. The other half is the £7,500 of allowance he gets back, which would have been taxed at 40%. So £15,000 in his pension costs him £6,000 once the £3,000 top-up and the £6,000 saving are counted. Your own figures will differ.

Other ways the figure comes down

• Pension payments. Relief is only for payments made before you reach 75. It is limited to 100% of your earnings for the year, and the annual allowance for 2026-27 is £60,000, counting everything paid in, including the provider's top-up. If you are also in a defined benefit workplace scheme, what counts from that scheme is the rise in the value of the pension it promises you, not what you pay in, and that can use up much of the allowance. Ask the scheme for your pension input amount before you pay in more. If you have taken cash from a pension pot, such as drawdown, your defined contribution limit is £10,000, the money purchase annual allowance, and unused amounts cannot be carried forward.
• Gift Aid. The charity claims 25p on every £1 you give, and the grossed-up gift comes off your adjusted net income. If you pay 40%, you claim the difference on your tax return.
• Timing of equipment. The annual investment allowance, up to £1 million, lets you deduct the full cost of most equipment from profit in the period you buy it. Under the cash basis, vans, tools and machinery you keep for the business are a normal expense when you pay for them. In our reading this only moves the relief between years.

Two other things depend on adjusted net income. If you or your partner expect it to be over £100,000, you cannot get Tax-Free Childcare. And the High Income Child Benefit Charge takes back all of your Child Benefit once your adjusted net income reaches £80,000.

What this means for you

If your profit is heading past £100,000, the money you put into a pension (under 75) or give to charity before 5 April gets Income Tax relief at an effective 60% of the grossed-up amount, by our sums, against 40% for most higher-rate taxpayers. It does not lower your Class 4 National Insurance, and pension money is locked away until you can take it, so only pay in what you can spare.

Making Tax Digital (MTD) helps you spot this in time. Your quarterly updates build your profit up through the year, and HMRC's guide for software says pension payments can be sent at any time in the year, so your tax estimate can include them. Everything is settled in your tax return, which HMRC calls the final declaration, due by 31 January 2028 for 2026-27.

Steps to take before 5 April 2027

1. Add up your profit so far and what you expect by 5 April, plus any wages, rent, interest or dividends.
2. If the total is over £100,000, work out the excess. Paying 80% of that excess into a pension, if you are under 75, or to charity brings you back to £100,000, once the 25% is added. From age 75 only Gift Aid works.
3. Check your pension room: 100% of your earnings, and the £60,000 annual allowance less anything else counted against it this year, including the pension input amount from any defined benefit scheme. If you have taken pension cash flexibly, it is £10,000 for defined contribution savings.
4. Make any pension payment so it reaches the provider by 5 April 2027.
5. Keep a record of what you paid in and gave to charity. On your tax return, enter pension payments with the provider's 25% added. Enter Gift Aid as the amount you actually gave, because HMRC adds the 25% itself.
6. Leave your own pension payments out of your business expenses.

The free MTD check shows when Making Tax Digital starts for you, and the trades section has more guides.