How Much Can You Earn Before Paying Tax?

In the UK, everyone has a tax-free allowance, which is the amount of income you can earn before paying any Income Tax. This allowance is determined by various factors, including your total earnings, age, and personal circumstances. The most common tax-free allowance is the Personal Allowance, but there are other allowances and thresholds that can affect how much tax you pay.

Understanding Your Personal Allowance

The Personal Allowance is the amount of income you can earn each year before paying Income Tax. For the tax year 2023/2024, the standard Personal Allowance is £12,570. This means that if your total income is £12,570 or less, you will not have to pay any Income Tax.

If you earn more than the Personal Allowance, you will start paying tax on the income above this threshold, depending on your tax band.

How Does the Personal Allowance Work?

Your Personal Allowance is deducted from your total earnings to calculate your taxable income. Here’s an example:

• If you earn £15,000 in a tax year, your Personal Allowance of £12,570 will be deducted, leaving you with £2,430 of taxable income.

• You will only pay tax on the £2,430.

Higher Earners and Personal Allowance Reduction

If your income exceeds £100,000, your Personal Allowance is reduced by £1 for every £2 of income over £100,000. This means that if you earn £125,140 or more, your Personal Allowance will be completely removed, and you will pay tax on all your earnings.

Tax Bands and Rates in the UK

Once you exceed the Personal Allowance, your earnings will be subject to Income Tax at different rates depending on your total income. The tax bands and rates for the 2023/2024 tax year in England, Wales, and Northern Ireland are:

• Basic Rate (20%): Income between £12,571 and £50,270

• Higher Rate (40%): Income between £50,271 and £125,140

• Additional Rate (45%): Income over £125,140

Note that these tax bands apply to taxable income, which means any income you earn above your Personal Allowance.

Other Tax-Free Allowances

In addition to the Personal Allowance, there are several other allowances that can affect how much you can earn before paying tax:

1. Personal Savings Allowance

The Personal Savings Allowance allows you to earn interest on your savings without paying tax. The allowance depends on your Income Tax band:

• Basic-rate taxpayers (20%): £1,000 tax-free savings interest.

• Higher-rate taxpayers (40%): £500 tax-free savings interest.

• Additional-rate taxpayers (45%): No savings allowance.

2. Dividend Allowance

If you own shares in a company and receive dividend income, you can earn up to £1,000 of dividend income tax-free for the 2023/2024 tax year.

• After the allowance, dividend income is taxed at 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers, and 39.35% for additional-rate taxpayers.

3. Trading and Property Allowance

If you earn money from self-employment or renting out property, you can earn up to £1,000 in gross income each year without paying tax, thanks to the trading and property allowance.

4. Marriage Allowance

Marriage Allowance allows you to transfer £1,260 of your Personal Allowance to your spouse or civil partner if they earn more than you. This can reduce their tax bill by up to £252.

To be eligible, the lower earner must have income below the Personal Allowance threshold of £12,570, and the higher earner must be in the basic tax band (earning between £12,571 and £50,270).

How Does National Insurance Affect Your Earnings?

While this article focuses on Income Tax, it’s also important to mention National Insurance Contributions (NICs), which are another form of tax that applies to earnings. For employees, NICs are paid on earnings above £12,570 (2023/2024 tax year). The rates for NICs are as follows:

• 12% on earnings between £12,570 and £50,270.

• 2% on earnings over £50,270.

If you’re self-employed, you’ll pay Class 2 and Class 4 National Insurance on your profits. Class 2 is a flat rate, while Class 4 is paid on earnings over £12,570 at similar rates to employees.

Tax-Free Income for the Self-Employed

If you're self-employed, you can also benefit from the trading allowance of £1,000, as mentioned earlier. Additionally, you can deduct allowable business expenses from your total income to reduce your taxable income.

How to Maximise Your Allowances

To make the most of your tax-free allowances, here are some tips:

1. Use your Personal Allowance: Ensure you're using the full £12,570 Personal Allowance. If your income is lower than the allowance, you can transfer part of it to your spouse or civil partner via Marriage Allowance.

2. Take advantage of savings and dividend allowances: If you have savings or investments, ensure you're not missing out on your tax-free allowances for savings interest and dividends.

3. Maximise pension contributions: Contributions to pensions are tax-efficient. You can reduce your taxable income by paying into a pension scheme, and higher-rate taxpayers can claim additional tax relief on pension contributions.

4. Utilise tax-efficient accounts: Use tax-efficient savings vehicles like Individual Savings Accounts (ISAs) to shelter savings and investments from tax.

Conclusion

In the UK, most people can earn up to £12,570 per year before they start paying Income Tax, thanks to the Personal Allowance. Additionally, there are other tax-free allowances for savings, dividends, and self-employment income that can further increase the amount you can earn tax-free. Higher earners may see their Personal Allowance reduced, but with careful planning and awareness of the various allowances available, it’s possible to maximise your tax efficiency.

It’s always a good idea to seek professional financial advice to ensure you're making the most of the tax allowances and reliefs available to you.