Understanding how income tax works can initially seem confusing, especially when you’re just starting out in the workplace or working for yourself. As a first-time employee, you may want to check that you’re being paid correctly, while for the newly self-employed, you must be able to budget so as to save for your self-assessment tax bill. The following guide looks at how income tax works, and how the personal tax allowance helps to reduce your liability.
What is the personal tax allowance?
Both those in paid employment and working on a self-employed basis are liable to pay income tax in the UK. This is collected by HMRC on behalf of the government, and is used to help provide funding for public services, such as for the NHS, education and the welfare system, as well as investment in public projects, like roads, railways and housing. If you’re employed, income tax is typically collected at source, deducted from your wages by your employer, to be paid directly to HMRC. If you’re self-employed, income tax is paid at the same rate as those in employment, although this is paid a year in arrears through self-assessment.
Income tax is charged on most types of income, including money you earn from employment and any net profits that you make if you run your own business. You will also be liable to pay income tax on certain state benefits, pensions, interest and dividends from savings and investments, and on any rental income from property that you let out as a landlord.
However, you don’t usually pay income tax on all of your taxable income. This is because each taxpayer resident in the UK gets a personal allowance of tax-free income. This is the amount of income that you can earn before you are liable to pay any tax, and can be offset against any type of income for income tax purposes. Some people may also qualify for more than one type of personal tax allowance, including the marriage allowance or blind person’s allowance.
What are the personal tax allowance rates?
2022/2023
From 6 April 2022 to 5 April 2023, the standard personal tax allowance is set at £12,570, remaining at the same level from the previous year. However, the allowance for 2021/22 represented an inflationary increase of £70 over the 2020/21 level of £12,500.
2023/2024
For the tax year 2023/24, the personal tax allowance is expected to remain at its current level of £12,570. This is because all tax allowances have been frozen until 2026 by the UK government in response to the significant financial impact of the coronavirus pandemic.
Marriage allowance
Marriage allowance for 2021/22, 2022/23 and 2023/24 is £1,260. You can benefit from marriage allowance if you’re either married or in a civil partnership, you don’t pay income tax or your income is below your personal allowance, and your partner pays income tax at the basic rate of 20%. This usually means that their income is between £12,571 and £50,270. You cannot claim marriage allowance if you’re living together as an unmarried couple.
Blind person’s allowance
Blind person’s allowance is currently set at £2,600 for 2022/23, representing an increase of £80 over the 2021/22 level of £2,520. You can claim blind person’s allowance if you’re registered with your local authority as blind or severely sight impaired and have a certificate that says you’re blind or severely sight impaired, or a similar document from your doctor.
How do these allowances apply in practice?
For the 2022/23 tax year, the personal allowance is £12,570. This is the amount of income you do not have to pay tax on. This means that if you earn less than this, you usually won’t have to pay any income tax, although you may still be liable to pay National Insurance (NI) if you earn over the relevant threshold for NI contributions. If you earn more than £12,570, tax is paid on the amount of taxable income remaining after your personal allowance has been deducted.
However, your personal tax allowance can be both bigger or smaller, depending on how much you earn, and whether or not you’re entitled to any additional allowance.
If you’re entitled to claim an additional allowance, such as marriage allowance or blind person’s allowance, your personal allowance might be bigger. The blind person’s allowance is an extra amount of tax-free allowance, meaning those who are registered as blind or severely sight impaired can currently earn £15,170 before they start paying any income tax. The additional allowance is simply added to the standard personal tax allowance (£12,570 + £2,600). If someone has insufficient income to make use of this allowance, it can also be transferred to their spouse or civil partner, even if they’re not blind.
Marriage allowance works slightly differently. This lets eligible couples, where one person’s income is insufficient to make full use of their personal tax allowance, to transfer any unused fraction to their spouse or civil partner, up to a maximum of £1,260. This represents around 10% of their tax-free allowance, the net effect being that this will reduce the tax liability of the other person by up to £252.
When you transfer some of your personal allowance to your spouse or civil partner you might have to pay more tax yourself, depending on how much you earn, but this means that you could still pay less overall as a couple. For example, if you earn £11,500, with no other income, you do not pay tax, as this falls below your standard personal allowance of £12,570. If your partner’s income is £20,000, again with a personal allowance of £12,570, they will pay tax on £7,430. By claiming marriage allowance, your personal allowance becomes £11,310 and your partner will get a tax credit on £1,260 of their taxable income. You will now need to pay tax on £190, but your partner will only pay tax on £6,170. As a couple you will benefit, as you’re only paying income tax on £6,360 rather than £7,430, which will save you £214 in tax.
Income Tax Additional Rate Threshold (ART)
If you’re a high earner, your personal tax allowance may be smaller as the standard allowance of £12,570 is reduced by £1 for every £2 above the income threshold of £100,000, until it reaches zero.
From 6 April 2023, the Income Tax Additional Rate Threshold (ART) will be lowered from £150,000 to £125,140. This is the level at which someone no longer has any Personal Allowance. This is because £1 of the Personal Allowance is being withdrawn for every £2 of income above £100,000 from 6 April 2023. This means that if you earn £125,140, you will be liable to pay income tax on everything you earn, without any entitlement to a tax-free allowance.
What are the income tax bands and rates?
How much income tax you pay in each tax year will depend on how much of your income is above your personal tax allowance and how much falls within each tax band. Income tax is made up of several different bands, where you don’t pay tax at the same rate on all of your income. This means, as your income increases, so does the amount of tax you pay.
Income tax on income from paid employment or self-employed earnings is charged at three rates: the basic rate, the higher rate and the additional rate.
For 2022/23 these three rates are 20%, 40% and 45% respectively. These rates remain unchanged from 2021/22, and will remain frozen for 2023/24.
Below we show both the rates and bands without the personal tax allowance, as well as the tax rates you pay in each band if you apply the standard personal allowance of £12,570:
2023/2024
2023/2024 rates and bands with the personal tax allowance are:
- £0 to £12,570 – 0% personal tax allowance band
- £12,571 to £50,270 – 20% basic rate income tax band
- £50,271 to £125,140 – 40% higher rate income tax band
- Over £125,141 – 45% additional rate income tax band
2022/2023
2022/2023 rates and bands without the personal tax allowance are:
- £0 to £37,700 – 20% basic rate income tax band
- £37,701 to £150,000 – 40% higher rate income tax band
- Over £150,000 – 45% additional rate income tax band.
2022/2023 rates and bands with the personal tax allowance are:
- £0 to £12,570 – 0% personal tax allowance band
- £12,571 to £50,270 – 20% basic rate income tax band
- £50,271 to £150,000 – 40% higher rate income tax band
- Over £150,000 – 45% additional rate income tax band.
This means that if you earn £52,000 for the tax year 2022/23, applying the rates and bands with the standard personal tax allowance, the income tax you must pay will work out like this:
- Up to £12,570 – no income tax payable on the first £12,570 of your income
- Between £12,571 and £50,270 – 20% income tax payable on the next £37,700 of your income (£50,270 – £12,570 = £37,700)
- Between £50,271 and £150,000 – 40% income tax payable on the final £1,729 of your income (£52,000 – £50,270 = £1,729)
- Over £150,000 – no income tax payable at 45%.
If you live in Wales, your income tax rates are set by the Welsh Government. For the 2022/23 tax year, these are currently the same as for England and Northern Ireland. If you live in Scotland, your income tax bands and rates, as set by the Scottish Government, are different.
What other tax-free allowances are available?
There are a number of other tax-free allowances that may be applicable to you and your circumstances, including tax-free allowances for savings interest and dividends, if you own company shares, and trading and property allowances. For example, you’re entitled to a trading allowance of the first £1,000 for income from self-employment or a property allowance of the first £1,000 on income from any property that you rent out as a landlord.
To calculate your liability to income tax, the basic formula is to add up all your taxable income, including taxable state benefits, work out your tax-free allowances and deduct these allowances away from your taxable income. For the current tax year, you can see your payments and work out how much income tax you should be paying. You can also check how much tax you paid last year, and estimate how much income tax you should have paid in a previous year. There’s also a ready reckoner to budget for your self-assessment if you work for yourself.
If you cannot use the online tools and calculators, you can instead check that you’ve paid the right tax by either contacting HMRC or by getting help from an accountant. If you’re self-employed, or earn additional income outside of any wages or salary from paid employment, your tax affairs can become complex, where an expert can help to identify all applicable personal tax allowances to help minimise your overall liability to income tax. You may even be entitled to an unexpected income tax rebate which they can help you to claim.
Personal tax allowance FAQs
What is a personal tax allowance?
A personal tax allowance is the amount of income that you don’t have to pay tax on. If you earn more than this, tax will be payable on the amount of taxable income remaining after your allowance has been deducted.
Who has a personal tax allowance?
Each taxpayer resident in the UK will get a tax-free allowance that can be set against any type of income they receive. This personal tax allowance is the amount of income each individual can earn before paying any tax.
When does the tax year run for the personal tax allowance?
The tax year runs from April to April, where a person will be able to earn up to their personal tax allowance for that year without paying tax.
What is the personal tax allowance for 2023/2024?
The personal tax allowance for the tax year 2023/2024 is set at £12,570.
Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert professional advice should be sought.
