HMRC tax rule means some workers lose £12,570 Personal Allowance

However, the allowance begins to decrease once a person's income exceeds £100,000.

For every £2 earned above this threshold, £1 is removed from the tax-free allowance.

This means higher earners may gradually lose part or all of their Personal Allowance depending on their total income.

For example, someone earning £102,000 annually would be £2,000 above the threshold.

Under HMRC rules, this would reduce their Personal Allowance by £1,000.

Instead of receiving the full £12,570 tax-free allowance, that individual would be entitled to £11,570.

The adjustment is applied automatically through an individual's tax code and is reflected in their payslip.

HMRC says: "Your personal allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £125,140 or above."

Once income reaches £125,140, the Personal Allowance is fully removed.

This creates an effective higher tax burden for some earners within the income range between £100,000 and £125,140.

Although the UK tax system officially applies a 40 per cent higher rate of Income Tax above £50,270, the withdrawal of the Personal Allowance means the effective tax rate in this income range can reach 60 per cent.

This happens because additional earnings are taxed at the higher rate while the reduction of the allowance simultaneously increases the amount of income subject to tax.

For instance, an individual earning £100,000 who receives a £1,000 pay increase would pay £400 in higher rate tax on that additional income.

At the same time, the increase would reduce their Personal Allowance by £500.

That lost allowance would then become taxable income, resulting in an additional £200 in tax.

In total, £600 would be paid in tax on the £1,000 increase in earnings.

Tax thresholds in the UK have been frozen for several years.

The Personal Allowance and the Income Tax bands have remained at the same levels since 2021.

Under the current structure, individuals begin paying the 40 per cent higher rate of Income Tax once their earnings exceed £50,270.

The 45 per cent additional rate applies to income above £125,140.

Economists often describe the impact of frozen tax thresholds as fiscal drag.

This occurs when wage increases push more workers into higher tax brackets even if their real purchasing power has not increased significantly.

As wages gradually rise with inflation while tax thresholds remain fixed, a greater number of workers can become liable for higher rates of tax.

The policy has led to growing numbers of taxpayers being pulled into higher tax bands over time as incomes increase but the thresholds remain unchanged.