In letters of recommendation, how are the different percentiles of ability perceived by the admissions committee?
Great question. It is one of the most ridiculous of all the forms we have to fill out when recommending people. Despite the illusion of being a quantitative measure, in reality it is qualitative and subjective. I imagine most people (certainly in my case) do not do what you have done and actually calculated where the student fell in terms of actual percentage. So if you do the honest thing, and say 25%, you may indeed be putting your student at a disadvantage. I have heard some professors say "oh, anything not top 5% or 10% is code for mediocre student." I'm not defending that view, but it definitely exists and is another symptom of how ridiculous the form is. As the comment by Bryan Krause states, people tend to rate higher, so your student will gain little from your honesty. Top 25% might even be perceived as a red flag. I also agree that admissions committees look at other measures (including the text of the letter) for a better indication of the student's promise.