4 allowances you may lose as your income and wealth grow

Getting a pay rise or receiving a windfall is usually a win, but it can also bring a few surprises.

Once your earnings or assets pass certain levels, you may start to lose valuable allowances. In some cases, this can cost you a considerable amount if you’re not careful.

Understanding these cut-off points and taking steps to manage them can make a significant difference over time. With the right planning, you can ensure your income and wealth continue to work efficiently for you.

Here are four allowances you may lose as your income and wealth grow.

1. Your Personal Allowance tapers if your income is above £100,000

The Personal Allowance is the portion of income you can earn before paying Income Tax. In 2025/26, it’s set at £12,570, but once your income crosses £100,000, the allowance starts to taper.

For every £2 you earn above this threshold, you lose £1 of your Personal Allowance. This means that by the time you earn £125,140, it’s gone completely, and all of your earnings are subject to Income Tax.

Due to this tapering, the income you earn between £100,000 and £125,140 is effectively taxed at 60%, as you pay both higher-rate Income Tax and lose a portion of your Personal Allowance. You can read more about this in our previous article on the topic.

Pension contributions are one of the simplest ways to avoid this tax trap. Paying more into your pension reduces your taxable income and can restore part or even all of your Personal Allowance. Salary sacrifice can work too, and may be more suitable depending on your situation.

A financial planner can help you determine the best strategy for you.

2. Your Annual Allowance tapers if your threshold income exceeds £200,000

The Annual Allowance is the amount you can contribute to your pension while still receiving tax relief.

In 2025/26, the standard Annual Allowance is £60,000 or 100% of your income, whichever of the two figures is lower. However, once your earnings exceed a certain threshold, the Annual Allowance begins to taper.

The taper applies if both of the following are true:

Your threshold income (taxable income minus your personal pension contributions) is above £200,000
Your adjusted income (including all pension contributions) is over £260,000.

Above these thresholds, your allowance falls by £1 for every £2 over the limit, bottoming out at £10,000 once your adjusted income reaches £360,000.

Salary sacrifice is one of the most effective ways to stay below these thresholds, so it’s worth exploring the options available to you. Additionally, you can carry forward any unused Annual Allowance from the previous three tax years, which can be especially helpful if you’re nearing your current-year limit.

A financial planner can help you review your income, pension contributions, and salary sacrifice strategies to make sure you maximise your Annual Allowance.

3. Your residence nil-rate band tapers if your estate is worth over £2 million

The residence nil-rate band is an additional allowance that can reduce your Inheritance Tax (IHT) liability when passing on your main home to direct descendants. For the 2025/26 tax year, it allows you to pass on up to £175,000 of property wealth on top of the standard nil-rate band, which is currently £325,000.

However, if your estate exceeds £2 million, the residence nil-rate band tapers by £1 for every £2 over the threshold. This means the allowance is completely lost for estates valued at £2.35 million or more.

To minimise the impact of this tapering, you can reduce your estate’s value through lifetime gifts or by placing assets into trusts, which remove them from your estate for IHT purposes.

A financial planner can help you review your estate plan and structure gifts or trusts to maximise the residence nil-rate band while ensuring your retirement goals remain secure.

4. The Lump Sum Allowance is limited to £268,275

Normally, you can take up to 25% of your pension as a tax-free lump sum. However, the Lump Sum Allowance sets the maximum amount of tax-free cash you can withdraw from your pension over your lifetime.

For the 2025/26 tax year, this limit is £268,275. Any amount taken above this limit is taxed at your marginal Income Tax rate.

Because of this, it’s important to carefully plan your withdrawals, particularly if you’re a higher earner or have substantial pension savings.

A financial planner can help you structure withdrawals to maximise your tax-free benefits while avoiding unnecessary exposure to higher tax bands.

A financial planner can help you make the most of your allowances

Higher earnings and greater wealth can bring opportunities, but they can also push you into hidden traps. With careful planning, you can hold onto more of your wealth and keep the rewards of your hard work.

A financial planner can walk you through the rules, help you spot the risks, and put together a strategy that works for your situation.

To speak to a financial planner, get in touch.

Email [email protected] or call us on 01625 466360.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.