What is Personal Allowance?
Personal Allowance refers to the amount of income each individual in the UK can earn tax-free each year. HMRC has set this amount at £12,570 for the 2023/24 tax year. As a result, if your annual income is below this threshold, you won’t have to pay any Income Tax.
This threshold remains unchanged the previous tax year (2022/23) and is expected to stay the same until April 2026.
Tax Bands and Rates
This is how income is taxed beyond the Personal Allowance in the current tax year:
- Basic Rate: Income between £12,571 and £50,270 is taxed at 20%.
- Higher Rate: Income between £50,271 and £125,140 is taxed at 40%.
- Additional Rate: Income over £125,140 is taxed at 45%.
Taxpayers should understand where their income falls within these bands, as it directly impacts how much tax they must pay.
Application of Personal Allowance
The application varies based on your source of income:
- For Self-Employed Individuals: If you’re self-employed, you’ll deduct your Personal Allowance from your profit before calculating the Income Tax due on your Self-Assessment tax return at the end of the year.
- For Salaried Employees: If you’re employed, your Personal Allowance is deducted from your gross salary before your employer calculates the deducts Income Tax from your wages.
Importance and Exceptions
Understanding your Personal Allowance and how it applies to your income can help you plan your finances better. Additionally, it ensures you are not caught off-guard by tax obligations and helps you maximize your take-home pay.
The value of your Personal Allowance could be higher if you qualify for additional allowances such as Marriage Allowance. Conversely, if your income exceeds £100,000, the allowance decreases. It reduces by £1 for every £2 that your adjusted net income is above £100,000.
If your income reaches £125,140 or higher, your allowance will drop to zero.
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