Tax-Free Income in the UK: 2026/27 Guide

Updated for 2026/27. Some UK receipts are exempt from Income Tax, while others are taxable but covered by a 0% band or allowance. The distinction matters because an amount taxed at 0% can still affect your tax band, adjusted net income or filing duties.

Personal Allowance

The standard Personal Allowance is £12,570 for 2026/27. It covers qualifying taxable income rather than making the source permanently exempt. The allowance is reduced by £1 for every £2 of adjusted net income above £100,000 and is normally lost at £125,140.

ISA income and gains

Interest, dividends and capital gains arising inside a valid Individual Savings Account are normally tax-free and do not use the Personal Savings Allowance, dividend allowance or Capital Gains Tax annual exempt amount. The overall ISA subscription limit is £20,000 for 2026/27, subject to the current ISA rules.

Premium Bond and lottery prizes

Premium Bond prizes, National Lottery winnings and ordinary gambling winnings are generally tax-free for the winner. Interest earned after investing the proceeds is taxable under the normal rules. Professional activity surrounding betting, promotion or services can have different consequences.

Personal Savings Allowance and starting rate

Savings interest is taxable income but can fall within 0% bands:

• Personal Savings Allowance of up to £1,000 for a basic-rate taxpayer
• Up to £500 for a higher-rate taxpayer
• No Personal Savings Allowance for an additional-rate taxpayer
• Starting rate for savings of up to £5,000 where other income is low

Because these are 0% tax bands, the interest can still affect the rate that applies to other income.

Trading and property allowances

Qualifying gross trading income up to £1,000 and qualifying gross property income up to £1,000 may be covered by separate allowances. Conditions and exclusions apply, particularly for connected-party income. If receipts exceed an allowance, you may deduct the allowance instead of actual expenses where eligible, but not both.

Rent a Room Scheme

Up to £7,500 of gross receipts from furnished accommodation in your main home can be exempt under Rent a Room, reduced to £3,750 when the income is shared. The scheme has conditions and may not suit someone with high actual expenses or a loss. It does not automatically cover a separate buy-to-let property.

Tax-free state benefits

Examples commonly exempt from Income Tax include:

• Child Benefit, although the High Income Child Benefit Charge can apply
• Universal Credit
• Personal Independence Payment
• Disability Living Allowance
• Attendance Allowance
• Housing Benefit
• Pension Credit
• Winter Fuel Payment, subject to the eligibility rules in force

Other benefits—including State Pension and Carer’s Allowance—can be taxable. Check the specific payment rather than assuming all benefits are exempt.

Gifts and inheritances

A genuine personal gift or inheritance is not normally Income Tax income for the recipient. However, Inheritance Tax, Capital Gains Tax, pre-owned-asset rules or anti-avoidance provisions can apply to the transfer. Income generated by the gifted or inherited asset after receipt is normally taxable.

Redundancy and termination payments

The first £30,000 of qualifying termination payments can be exempt, but ordinary salary, holiday pay, bonuses, payment in lieu of notice and some other amounts remain taxable and subject to National Insurance as appropriate. Employer-funded legal costs and injury payments follow specific rules.

Compensation and damages

Tax depends on what the payment replaces. Compensation for personal injury can be exempt, while an amount replacing taxable earnings or business profit may be taxable. Interest added to compensation can have a separate tax treatment.

Pension tax-free cash

Part of a qualifying registered pension withdrawal can often be taken tax-free, subject to the lump sum allowance and scheme rules. The remaining withdrawal is generally taxable pension income. Flexible withdrawals can be emergency-taxed initially even when part is tax-free.

Employer-provided benefits that may be exempt

Statutory conditions can exempt certain workplace pensions, qualifying business travel, necessary work equipment, one employer-provided mobile phone, approved mileage amounts, trivial benefits and staff events within relevant limits. Salary sacrifice and close-company director rules can alter the outcome.

Scholarships, grants and maintenance

Some educational scholarships, bursaries and maintenance payments are exempt, but payments connected with employment, research services or a trade can be taxable. Review the award terms and source.

Maintenance payments

Child maintenance and most modern spousal-maintenance payments are not taxable income of the recipient and are not deductible by the payer. Historic arrangements can require separate review.

Capital receipts

Money from selling an asset, receiving a loan or withdrawing your own capital is not automatically Income Tax income. Capital Gains Tax, loan-benefit or anti-avoidance rules may apply instead. The commercial substance—not the bank description—determines treatment.

Example

Asha receives £600 ISA interest, a £250 Premium Bond prize and £1,200 interest from an ordinary savings account. The ISA interest and prize are exempt. The ordinary interest is taxable savings income, but £1,000 may fall within her Personal Savings Allowance if she is a basic-rate taxpayer, leaving £200 taxable.

Tax-free receipt checklist

1. Identify exactly what the payment represents.
2. Check whether it is exempt or merely covered by an allowance/0% band.
3. Test the current conditions and limits.
4. Consider other taxes and adjusted net income.
5. Keep the statement, award letter or calculation.
6. Report it where a return asks for the amount despite 0% tax.

See HMRC’s official guidance on taxable and tax-free benefits and allowances and bands. Our taxable income guide explains the other side of the calculation.

Frequently asked questions

Do I report income taxed at 0%?

Sometimes. Savings and dividends can still be reportable and affect bands even where an allowance gives a 0% rate.

Are cash gifts taxable?

Genuine personal gifts are not normally Income Tax income, but other taxes and anti-avoidance rules can apply.

Are gambling winnings always exempt?

Ordinary winnings are generally not taxed, but related business, employment, promotional or service income may be.

This guide is general information. The source and conditions determine whether a receipt is exempt.