12 Sources of Tax-Free Income in the UK (2026/27)

1. Personal Allowance: £12,570

The Personal Allowance is the foundation of tax-free income in the UK. Every UK resident is entitled to receive the first £12,570 of income in 2026/27 without paying any income tax. This applies to employment income, self-employment profits, pension income, rental income and most other taxable income sources.

The allowance has been frozen at £12,570 since April 2021 and will remain frozen until at least April 2028 — a policy known as "fiscal drag" that pushes more people into higher tax bands as wages rise. In real terms, adjusted for inflation, the allowance is worth significantly less than it was in 2021.

Important: the Personal Allowance is tapered above £100,000. You lose £1 of allowance for every £2 of income above £100,000. It is completely withdrawn at £125,140, creating an effective marginal tax rate of 60% in this band.

National Insurance contributions also start at the same threshold: £12,570/year for 2026/27. Below this level you pay no employee NI.

2. ISA Returns: Interest, Dividends and Gains

An Individual Savings Account (ISA) is the most flexible tax shelter available to UK individuals. Any interest, dividends or capital gains generated inside an ISA are completely free of UK income tax and Capital Gains Tax, with no reporting requirement on your tax return.

The annual ISA subscription limit for 2026/27 is £20,000, split however you choose between a Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, or up to £4,000 into a Lifetime ISA (which counts within the £20,000 total). Crucially, there is no limit on how much can accumulate inside an ISA over time — and once inside the wrapper, the money can grow and generate income tax-free indefinitely.

A married couple each using their full ISA allowance for 20 years at 6% average returns could accumulate over £1.5 million of ISA wealth — all generating tax-free income in retirement.

3. Dividend Allowance: £500

The first £500 of dividend income you receive each tax year is taxed at 0% regardless of your income tax band. This is the "dividend allowance" — a nil-rate band rather than a true exemption, meaning it still uses up some of your basic-rate or higher-rate band.

The allowance was £2,000 as recently as 2022/23 before being cut to £1,000 in 2023/24 and then to £500 from April 2024. It has remained at £500 for 2025/26 and 2026/27. Dividends above £500 are taxed at 10.75% (basic-rate), 35.75% (higher-rate) or 39.35% (additional-rate).

Note: dividends within an ISA are completely separate and do not count against this allowance. You could have £500 of dividends outside an ISA tax-free, and unlimited dividends inside an ISA also tax-free.

4. Personal Savings Allowance

The Personal Savings Allowance (PSA) allows basic-rate taxpayers to receive up to £1,000 of savings interest tax-free each year; higher-rate taxpayers receive a £500 PSA; and additional-rate taxpayers receive no PSA at all. Interest within the PSA is taxed at 0%.

The PSA covers interest from bank and building society accounts, peer-to-peer lending income, credit union interest, government and corporate bond interest, and interest from NS&I products (other than Premium Bond prizes, which are always tax-free).

With savings rates at 4–5% in 2026, a basic-rate taxpayer would need around £20,000–£25,000 in savings before the PSA is exhausted. Those with larger savings pots should consider moving balances into a Cash ISA where interest is always tax-free, regardless of amount.

5. Starting Rate for Savings: £5,000 at 0%

This little-known relief allows individuals with very low non-savings income to receive up to £5,000 of savings interest at a 0% "starting rate". It applies if your non-savings income (salary, pensions, self-employment, rental income) is no more than £17,570 in 2026/27 (the Personal Allowance of £12,570 plus the £5,000 band).

The relief is tapered: for every £1 of non-savings income above £12,570, the starting-rate band reduces by £1. So someone with £15,000 of pension income has a starting-rate band of £5,000 − (£15,000 − £12,570) = £2,570. Combined with the £1,000 PSA, a basic-rate pensioner with income of £15,000 could receive £3,570 of savings interest tax-free.

This relief is primarily relevant to retirees and people with low earned income who hold significant savings or NS&I products.

6. Rent-a-Room Relief: £7,500/yr

If you let a furnished room (or rooms) in your main home, the first £7,500 of rental income per year is completely exempt from income tax under the Rent-a-Room scheme. If two people share ownership of the property and both share the lettings income, the threshold halves to £3,750 each.

The scheme covers both long-term lodgers and short-term holiday lets via platforms such as Airbnb, so long as you are living in the property at the same time as the guests. You do not need to register for Self Assessment if your gross receipts are below the £7,500 threshold — the relief is automatic.

If your gross receipts exceed £7,500, you have a choice: (a) pay tax on the profit (receipts minus allowable expenses) in the normal way, or (b) opt into the Rent-a-Room scheme and pay tax only on the excess above £7,500 with no expense deduction. Whichever gives the lower tax bill is preferable.

7. Trading Allowance: £1,000/yr

The Trading Allowance provides up to £1,000 of miscellaneous trading or casual self-employment income per year free of tax. If your total trading income is below £1,000, you do not need to register as self-employed or file a Self Assessment return for that income. If it exceeds £1,000, you can either deduct actual expenses (in the usual way) or claim the £1,000 allowance as a flat deduction — whichever gives the lower tax bill.

Common situations covered: selling items on eBay or Vinted (above the separate HMRC online platforms rules), occasional freelance work, gardening or cleaning services, handyperson work. Note the allowance applies to trading income only — it does not cover employment income, rental income (separate £1,000 property income allowance exists) or dividends.

8. Marriage Allowance: Up to £252/yr

Marriage Allowance allows a spouse or civil partner who earns below the Personal Allowance to transfer up to £1,260of their unused Personal Allowance to their partner, provided the recipient is a basic-rate taxpayer. The recipient's tax bill is reduced by 20% × £1,260 = £252 per year.

The relief can be backdated up to four tax years, so a couple who has never claimed could receive a lump sum repayment of up to approximately £1,008 from HMRC, plus £252 for 2026/27. Claims are made via gov.uk and are straightforward.

The allowance is not available if the recipient is a higher-rate or additional-rate taxpayer — it is specifically targeted at basic-rate couples where one partner has unused allowance.

9. Redundancy Pay Exemption: Up to £30,000

Genuine statutory and contractual redundancy payments are tax-free up to £30,000 under Section 401 of the Income Tax (Earnings and Pensions) Act 2003. This includes the statutory redundancy pay (calculated by age and service) and any enhanced ex-gratia payment your employer makes.

Payments above £30,000 are taxable as income and subject to income tax (but not National Insurance for genuine redundancy). Importantly, notice pay (PILON), holiday pay arrears, bonuses and commission that were due are fully taxable and do not reduce the £30,000 threshold.

You can also combine redundancy with a pension contribution: excess redundancy pay above £30,000 can sometimes be paid directly into a pension (as an employer contribution), which would then be outside income tax.

10. Employer Pension Contributions

When your employer pays contributions directly into your pension scheme, those contributions are not taxable as income in your hands — no income tax, no National Insurance. This is significantly more tax-efficient than receiving the money as salary and contributing personally.

Under auto-enrolment, employers must contribute at least 3% of qualifying earnings into a workplace pension. Many employers contribute 5%, 10% or even match employee contributions pound-for-pound. Employer contributions count towards the Annual Allowance (£60,000 in 2026/27) but for most people this is not a binding constraint.

Additionally, under salary sacrifice arrangements (where you agree to a lower salary in exchange for higher employer pension contributions), both you and your employer save National Insurance — adding further to the effective tax-free benefit.

11. Child Benefit: Tax-Free Up to £60,000 Household Income

Child Benefit is paid at £25.60/week for the eldest child and £16.95/week for each additional child in 2026/27. It is not taxable income in the conventional sense — it is a cash payment.

However, the High Income Child Benefit Charge (HICBC) claws back Child Benefit if either parent/partner has "adjusted net income" above £60,000. Below £60,000, Child Benefit is entirely tax-free. Between £60,000 and £80,000, it is gradually clawed back at 1% of the benefit per £200 of income. Above £80,000, the full benefit is clawed back.

For households where both parents earn below £60,000, Child Benefit remains entirely free. Pension contributions and Gift Aid donations reduce adjusted net income and can bring you below the £60,000 threshold.

12. Capital Gains Tax Annual Exempt Amount: £3,000

The CGT Annual Exempt Amount (AEA) allows you to realise up to £3,000 of capital gains each tax year without paying any Capital Gains Tax. This applies to gains on shares, investment property, cryptocurrency, collectibles and most other chargeable assets.

The AEA has been heavily cut in recent years (from £12,300 in 2022/23 to £6,000 in 2023/24 to £3,000 from April 2024). It cannot be carried forward to future years, so using it each year — by crystallising gains on your investment portfolio — is good practice.

Gains within an ISA are not subject to CGT at all (separate from the AEA). The AEA can be combined with bed-and-ISA transactions (selling assets, realising the gain within the AEA, and repurchasing inside an ISA) to progressively shelter your portfolio from future CGT.

How Much Tax-Free Income Can You Combine?

Many of these allowances can be stacked. Consider a basic-rate taxpayer in 2026/27 with a diverse income portfolio:

A homeowner with a lodger, some eBay income, a modest savings pot, a dividend-paying share portfolio, and an ISA could receive well over £22,000 of income per year without paying a penny of tax, even before considering their ISA returns.