Personal Allowance 2023-24: An In-Depth Guide for UK Taxpayers

In the UK, the Personal Allowance refers to the amount of income you can earn before you start paying Income Tax. For the tax year 2023-24, the standard Personal Allowance remains unchanged from the previous year at £12,570. This allowance plays a crucial role in determining how much tax you owe based on your income and can be influenced by various factors, such as your total earnings and specific circumstances.

This guide explores what the Personal Allowance is, how it works, who qualifies for it, how it interacts with other tax allowances, and how it changes for higher earners.

What Is the Personal Allowance?

The Personal Allowance is the threshold of income that you can earn each year before being liable to pay Income Tax. For the 2023-24 tax year, the standard Personal Allowance is set at £12,570. This means that individuals who earn £12,570 or less in a tax year will not have to pay any Income Tax on their earnings.

However, once your income exceeds this threshold, the remaining portion of your income becomes subject to taxation based on the UK's Income Tax bands.

Who Qualifies for the Personal Allowance?

The Personal Allowance is available to most UK taxpayers, regardless of whether they are employed, self-employed, or receive income from other sources such as pensions. However, not everyone receives the same Personal Allowance, and several factors can influence the amount of allowance you are entitled to, such as:

• Income: As your income increases, your Personal Allowance may be reduced.

• Marriage Allowance: If you are married or in a civil partnership and one partner earns less than the Personal Allowance threshold, they can transfer a portion of their allowance to the higher-earning partner.

• Blind Person's Allowance: Those who are registered blind or severely sight-impaired may receive additional tax-free allowances.

How Does the Personal Allowance Work?

Your Personal Allowance is deducted from your total income, reducing the amount of income that is subject to tax. For example, if you earn £20,000 in a year, your Personal Allowance of £12,570 will be deducted, leaving £7,430 as taxable income.

This taxable income will then be taxed according to the relevant Income Tax bands. In the UK, the tax bands for 2023-24 are as follows:

• 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.

For those earning more than £125,140, the Personal Allowance is completely removed.

How Is the Personal Allowance Reduced for Higher Earners?

If your annual income exceeds £100,000, your Personal Allowance is reduced by £1 for every £2 earned over this threshold. This means that if your income reaches £125,140 or more, your entire Personal Allowance is withdrawn, and you must pay Income Tax on all of your earnings.

For example, if you earn £110,000 in a tax year, your Personal Allowance would be reduced by £5,000 (£10,000 divided by two). Therefore, your Personal Allowance would be £7,570 (£12,570 minus £5,000).

Marriage Allowance and Personal Allowance

Marriage Allowance is a tax relief available to couples who are married or in a civil partnership. If one partner earns less than the Personal Allowance threshold of £12,570 and the other partner is a basic-rate taxpayer (earning between £12,571 and £50,270), the lower-earning partner can transfer up to £1,260 of their unused Personal Allowance to the higher-earning partner.

This can reduce the higher earner's tax bill by up to £252 in the tax year 2023-24.

To be eligible for Marriage Allowance, both partners must meet specific criteria:

• One partner must have an income below £12,570.

• The other partner must be a basic-rate taxpayer (earning up to £50,270).

• Both partners must be either married or in a civil partnership.

Blind Person’s Allowance

In addition to the standard Personal Allowance, individuals who are registered as blind or severely sight-impaired can claim the Blind Person's Allowance. This allowance provides an extra £2,870 of tax-free income in the 2023-24 tax year. If both you and your spouse or civil partner are eligible, you can each claim this additional allowance.

If your income is too low to benefit fully from the Blind Person's Allowance, you can transfer any unused portion to your spouse or civil partner, provided they are also eligible.

The Personal Savings Allowance and Dividend Allowance

In addition to the standard Personal Allowance, the UK tax system offers other allowances that can increase the amount you can earn without paying tax:

• Personal Savings Allowance: Basic-rate taxpayers can earn up to £1,000 of savings interest tax-free, while higher-rate taxpayers can earn up to £500 of tax-free savings interest. Additional-rate taxpayers do not receive this allowance.

• Dividend Allowance: In the 2023-24 tax year, you can earn up to £1,000 in dividends without paying tax. Once you exceed this threshold, dividends are taxed at different rates depending on your tax band.

Benefits of Maximising Your Personal Allowance

By understanding how the Personal Allowance works and taking advantage of available allowances and reliefs, you can minimise your tax liability and maximise your tax-free income. Here are some strategies for doing so:

1. Marriage Allowance: Ensure that you and your spouse or civil partner take advantage of Marriage Allowance if eligible, as this can reduce your household’s tax bill.

2. Tax-Efficient Savings: Use tax-efficient savings accounts like Individual Savings Accounts (ISAs), which allow you to earn interest and dividends tax-free, without affecting your Personal Allowance.

3. Pension Contributions: Contributions to pension schemes are tax-deductible, meaning they reduce your taxable income. This can also help you preserve your Personal Allowance if your income exceeds £100,000.

4. Charitable Donations: Donations to registered charities through Gift Aid can also reduce your taxable income, helping you maintain or increase your Personal Allowance.

Summary of Personal Allowance 2023-24

In summary, the Personal Allowance for the tax year 2023-24 remains at £12,570, which is the amount of income you can earn before you begin paying Income Tax. For individuals with an income over £100,000, the Personal Allowance is gradually reduced and is completely removed for those earning £125,140 or more.

Additional allowances, such as the Personal Savings Allowance, Dividend Allowance, and Marriage Allowance, can further reduce your tax liability. Maximising the benefits of these allowances can help you keep more of your hard-earned income, so it’s essential to understand how they work and apply to your situation.

By planning ahead and taking advantage of the tax reliefs available to you, you can optimise your tax efficiency and potentially save a significant amount of money over time.