Your Personal Allowance is the amount of income you can earn each tax year before you start paying Income Tax. For the 2025/26 tax year, the standard UK personal allowance is £12,570, frozen at this level until April 2028.
As an agency founder, your Personal Allowance applies to all your taxable income combined: salary from your limited company, dividends, and any other earnings. This means you can structure your director's remuneration to use the full £12,570 allowance tax-efficiently. A common approach is to pay yourself a salary up to this threshold, which avoids Income Tax and National Insurance contributions (provided it stays below the primary threshold of £242 per week).
However, the Personal Allowance reduces if your adjusted net income exceeds £100,000. For every £2 you earn above £100,000, your allowance drops by £1. So if your total income as an agency founder reaches £125,140, your Personal Allowance is completely removed. This creates an effective marginal tax rate of 60% on income between £100,000 and £125,140, because you lose the allowance and pay higher-rate tax simultaneously. Many agency founders in this bracket consider pension contributions or charitable donations to reduce adjusted net income and restore some or all of their allowance.
Your Personal Allowance is separate from the Dividend Allowance (£500 for 2025/26) and the Capital Gains Tax annual exempt amount (£3,000). It applies to earnings, rental income, and most other income types, but not to savings interest within your Personal Savings Allowance (£1,000 for basic-rate taxpayers, £500 for higher-rate).
If you are married or in a civil partnership, and one partner earns less than their Personal Allowance, you may be able to transfer up to £1,260 of unused allowance to the higher-earning partner via the Marriage Allowance. This is worth up to £252 in tax relief per year.
When this matters for agency founders: Your Personal Allowance directly affects how much tax you pay on director salary and dividends. If your total income approaches £100,000, the allowance taper creates a steep tax trap that makes pension contributions or profit extraction planning essential. Review your projected income each year to avoid losing the allowance unnecessarily.