MOST people can earn a certain amount of money before they start paying tax.
This is known as the personal allowance and is currently £12,570 a year.
But for some people it can be more and for others less, depending on your circumstances.
The amount of income tax you pay over the personal allowance will then also depend on your total income.
Here, we explain how the personal allowance works and how much money you can make free of tax.
What’s the personal allowance?
The personal allowance is the amount you can earn each year tax-free.
It can change from one year to the next and is set by the government.
In the current tax year – which runs from April 6 2024 to April 5 2025 – the figure is £12,570.
On earnings between £12,570 and £50,270, you then pay the basic income tax rate of 20%.
Wages of £50,271 and above are taxed at the higher rate of 40%.
And the additional rate of income tax, which applies to earnings above £125,140, is 45%.
These income tax thresholds are frozen until 2027-28 under the current government.
Although these tax thresholds are frozen, more people are set to pay tax as their income rises.
They could be drawn in to paying tax for the first time if their income goes over the £12,570 limit. Or their earnings could take them in to the next tax bracket.
This is known as a “stealth tax” and recent estimates suggest 637,500 Brits will be pushed into paying income tax in 2024 to 2025.
Just keep in mind that your personal allowance might be different if you’re entitled to certain tax breaks or earn a lot of money.
When does the tax year start and end?
Tax years run differently to the standard January to December year
Instead, it runs mid-year from April to April.
Many other countries around the world have tax years that run with the calendar year.
In Ireland, the US, France and Germany for example, it starts on January 1 and ends on December 31.
But in the UK for historical reasons, our tax year starts and finishes mid-way through.
The 2023-2024 tax year starts on April 6, 2023, and ends on April 5, 2024.
The 2024-2025 tax year runs from April 6, 2024, to April 5, 2025.
The marriage allowance is a tax perk where one partner in a married couple can transfer some of their unused personal allowance to another.
And people with sight issues can get the blind person’s allowance, which increases this tax-free amount.
Anyone who earns over £100,000 does not get any tax-free personal allowance – they will pay income tax on everything they earn.
If you earn £12,570 or less, you currently pay no income tax at all.
It’s also worth noting that the tax-free allowance and income tax rates apply to a range of income.
As well as money you earn through a job, it can also apply to money you make through a side hustle or second job, or income via a pension.
The tax-free allowance applies to income you make from all sources combined.
There is a separate annual tax-free allowance on the first £1,000 you make if you sell items online, known as the trading allowance, or from renting out a room in your home, unless you’e using the specific rent a room scheme.
There is a separate tax-free allowance on savings interest – that is the amount you can make from interest on savings that’s free of tax.
If you haven’t used all your personal income tax allowance, it can be used to earn income tax-free.
You also have the personal savings allowance.
It’s an allowance of up to £1,000 if you are a basic-rate taxpayer, £500 if you pay tax at the higher rate.
Those earning over £125,140 do not get the allowance.
How do I check my tax-free personal allowance?
Your tax-free personal allowance amount is usually reflected in your tax code, which can be found on your payslip.
The letter L in your tax code signals that you’re entitled to the standard tax-free personal allowance.
The letter M means you’ve transferred some of your personal allowance to your partner using the marriage allowance.
Meanwhile the letter N signals the opposite – you’ve received some of your partner’s tax-free personal allowance.
Checking your tax code is correct could save you a small fortune.
What does my tax code mean?
- L – You’re entitled to the standard tax-free Personal Allowance
- M – Marriage Allowance: you’ve received a transfer of 10% of your partner’s personal allowance (£1,260)
- N – Marriage Allowance: you’ve transferred 10 per cent of your personal allowance to your partner
- S – Your income or pension is taxed using the rates in Scotland
- T – Your tax code includes other calculations to work out your personal allowance, for example, it’s been reduced because your estimated annual income is more than £100,000
- 0T – Your personal allowance (which is currently £12,570) has been used up, or you’ve started a new job and your employer doesn’t have the details they need to give you a tax code
- BR – All your income from this job or pension is taxed at the basic rate (usually used if you’ve got more than one job or pension)
- D0 – All your income from this job or pension is taxed at the higher rate (usually used if you’ve got more than one job or pension)
- D1 – All your income from this job or pension is taxed at the additional rate (usually used if you’ve got more than one job or pension)
- NT – You’re not paying any tax on this income
- Tax codes starting with K mean you have income that isn’t being taxed another way and it’s worth more than your tax-free allowance
We also have a guide on how you can find the best fixed rate ISA, which means you can build up tax-free savings.
And you could be entitled to a £125 tax refund if you worked from home over the past 18 months because of the pandemic.
What do I do if it’s wrong?
Talk to your employer to find out why.
Act quickly – it’ll be much harder to get your money back after three months from the date the problem arose, according to Citizens Advice.
You can also contact HMRC on 0300 200 3300 or by sending a letter to the following address, Pay as You Earn and Self Assessment, HM Revenue and Customs, BX9 1AS, United Kingdom.
If you are on the wrong tax code and have been paying too much, HMRC will adjust it and also reimburse any tax you’ve already overpaid on, or ask to be paid back.
If you’ve been underpaying tax, you will usually have to pay the money back over 12 months.
Time limits in place to reclaim any overpaid tax are currently four years from the end of the tax year in which you are trying to claim.
So, if you’re in any doubt you’ve overpaid tax, you should contact HMRC as early as possible.
