Understanding income tax in the UK can be overwhelming, especially with allowances, tax rates, and liabilities to consider. One important part of the tax system is the Personal Allowance, the amount you can earn per year without paying income tax.

Understanding the UK Personal Allowance

The Personal Allowance is the money you can earn before paying income tax. It’s a deduction the government gives to all UK taxpayers, updated yearly. This rule helps people who earn less money because they don’t have to pay taxes on their basic income. This means they can keep more money and use it to pay bills or save for the future.

Qualifying for the Personal Allowance

In the UK, taxpayers can benefit from the Personal Allowance. To qualify, you must be a UK resident for tax purposes and have an income below £125,000 per year. Your employer will automatically apply the Personal Allowance to your monthly wages if you are employed. If you are self-employed or have other income sources, you must claim your Personal Allowance through a self-assessment tax return on the HMRC website. The amount you receive depends on your tax code and total income.

How Personal Allowance is Calculated: An Example

A practical example is how the Personal Allowance is calculated. For the tax year 2021/2022, the standard tax code is 1257L, corresponding to a Personal Allowance of £12,570. So, if an individual has an annual income of £10,000, this sum falls entirely within the Personal Allowance bracket. This means the individual is not required to pay any income tax because their earnings are lower than the threshold. It’s important to note that not everyone will have the standard tax code. Various factors can affect this, such as having multiple jobs, owing taxes from previous years, or having taxable state benefits.

The Evolution of the Personal Allowance

Examining the evolution of the Personal Allowance reveals the government’s ongoing efforts to ease the tax burden on low-income earners. A decade ago, in 2010, the Personal Allowance was set at £6,475. This amount almost doubled to £12,570 in 2021, reflecting a government policy to alleviate financial stress for the lower-income segment.

Upcoming Changes to the Personal Allowance

Future changes to the Personal Allowance are significant considerations for tax planning. The UK government has announced its intention to raise the Personal Allowance to £12,570 for the tax year 2022/2023. Beyond this, the government has committed to increasing the Personal Allowance to £12,880 by the end of this parliament term.

These increases have a dual purpose. Firstly, they continue the effort to protect low-income earners from being unfairly taxed. Secondly, they offer extra financial support for those most affected by the COVID-19 pandemic’s economic challenges.

Impact of the Personal Allowance on Tax Liability

The Personal Allowance plays a significant role in determining your tax liability. Generally, the higher your Personal Allowance, the lower your income tax will be. This is because the Personal Allowance reduces the portion of your income subject to tax.

For instance, if you have an income of £50,000 and receive the full Personal Allowance of £12,570, your taxable income is reduced to £37,430 (£50,000 – £12,570). You would only pay income tax on this amount, lowering your overall tax liability.

Example of the Personal Allowance Impact on Tax Liability

To clarify how the Personal Allowance affects tax liability, consider an individual with an annual income of £80,000. If they receive the full Personal Allowance of £12,570, their taxable income becomes £67,430 (£80,000 – £12,570).

The UK uses a progressive tax system, which means different portions of your income are taxed at different rates. In this example, the first £37,700 of taxable income is subject to a 20% basic tax rate, equating to £7,540. The remaining income (£29,730) falls into the higher tax rate bracket of 40%, resulting in £11,892 of tax. This individual would have a tax liability £19,432 (£7,540 + £11,892).

Expert Advice : The UK Personal Allowance is a key component of the tax system, protecting low-income earners from taxation and offering financial relief to all taxpayers. Understanding how it works, how to claim it, and how it affects your overall tax liability is crucial for effectively managing your finances and planning for the future. As the government continues to revise the Personal Allowance, keeping abreast of these changes is more important than ever. If you are self-employed and have received the notice of penalty from HMRC, for late filing or late payment of self-assessment tax, call our number right now at 0800 135 7323 to book an appointment with a specialist Tax Accountant.