In the UK, the income tax system plays a significant role in revenue generation. However, amidst the complexities of tax rates and income sources, there is a concept that can provide valuable relief for taxpayers. The Personal Allowance is particularly beneficial for low earners, as it ensures they can keep more of their hard-earned money.
In this article, we will delve into the intricacies of personal allowances, exploring how they work and their impact on your overall tax liability.
What Is the Personal Allowance?
The personal allowance is a fundamental aspect of the UK tax system that applies to all individuals, including students, who earn income. It refers to the threshold of income that individuals can earn tax-free before they are required to start paying income tax.
In the tax year 2023/2024, the personal allowance stands at £12,570, providing tax relief for eligible earners. Let’s consider an example to illustrate how it works: If your annual income is £11,000, you will not owe any income tax. Similarly, if you earn £15,000, you will only pay tax on the amount that exceeds the personal allowance, which in this case is £2,430 (£15,000 – £12,570).
It’s worth noting that individuals who qualify for additional benefits such as blind persons or those getting marriage tax allowance may be entitled to a higher personal allowance. On the other hand, high earners with an income exceeding £100,000 may have a reduced personal allowance compared to the standard £12,570.
You might be also interested in, “Household Income: 5 Things You Should Know.”
What Happens If I Earn More Than £100k?
If you earn over £100k, your personal allowance threshold will become limited. For every £2 you earn over £100k, the personal allowance becomes reduced by £1. When a person’s income level has reached £125,140, they are no longer entitled to a personal allowance. People need to pay tax on 100% of their income with these salaries.
Blind Person’s Allowance
A registered blind person is entitled to an additional tax-free allowance. For the 2023/2024 tax year, the blind person’s allowance is £2,870, thus will only start paying tax if their income is more than £15,440 (which is £12,570 + £2,870).
A blind person can also transfer their allowance to their civil partner or spouse who is not blind. It is useful if a blind person earns a low salary or not on any kind of income. For instance, if a blind person does not earn an income and their partner has a wage of £25,000, they can transfer the blind person’s allowance to their partner such that the partner only pays tax on £22,130 (which is £25,000 – £2,870).
Married Couples Allowance
Married couples are entitled to a marriage allowance of £1,260. The £1,260 can be transferred to the other person to reduce their tax bill. The scheme works when one person earns less than £12,570, and the other earns more than £12,570. For example let’s say:
- The wife earns £10,000
- The husband earns £25,000
- The wife “transfers” £1,260 to her husband, which results in the husband needing to pay income tax on £23,740 (£25,000 – £1,260) while the wife’s earning is now classified as earning £12,260 (£11,000 + £1,260).
Though income tax needs to be paid on most types of income, tax-free allowances exist for certain types of earnings. This includes:
- Some benefits
- Dividend income
- Savings interest
- £1,000 trading allowance for self-employed people
- £1,000 from property rental income
Income Tax After Personal Allowance
Tax needs to be paid on all income that exceeds the personal allowance. The amount works on a banding scheme (i.e., tax brackets), as shown in the table below:
|Income tax bands
|Income that’s taxable
|The Tax Rate
|The Personal Allowance
|The Basic Rate
|£12,571 – £50,270
|The Higher Rate
|£50,271 – £125,140
|The Additional Rate
Minimise Your Tax Burden
The personal allowance serves as a crucial mechanism to minimise your tax burden and maximise your income. By granting you the freedom to earn a certain amount tax-free, it empowers you to retain a greater portion of your hard-earned money. In the tax year 2023/2024, the personal allowance stands at £12,570, ensuring that you only need to pay income tax once your earnings surpass this threshold.
By understanding and utilizing personal allowances effectively, you can optimize your tax planning and ensure that you make the most of the financial benefits available to you. Embrace the power of personal allowances and take control of your tax liability, securing a brighter financial future.