Whether you’re self-employed or need to complete self-assessment for other income purposes, it’s important to understand what income tax is and how the personal allowance affects it. Here are the main things you need to know.
What is income tax?
When you receive any form of income, it may be subject to income tax. Stroud Accountants such as www.randall-payne.co.uk/services/accountancy/stroud-accountants/ can advise you on whether or not your income sources are taxable.
The most common form of taxable income is a job salary or wage, or payments received for self-employed work. You pay income tax against profits if you own a business, dividends, and interest if you have savings and investments, and rent if you’re a landlord.
However, not all income is taxable. This is because the personal allowance is in place too. The personal allowance states how much you can earn each year before you begin to pay tax on it. The thresholds for this change every few years.
How much is the personal allowance?
For 2023/24, the personal allowance is Ł12,570, which is the same as for the previous tax year. This means that you can earn Ł12,570 without paying income tax. Other allowances also exist, such as the marriage allowance which allows you to transfer a portion of your personal allowance to your spouse if they don’t use it completely.
There is also a personal savings allowance which lets you earn Ł1,000 of interest on savings before you pay tax on them. Equally, a dividend tax allowance exists at Ł1,000 for the current year.
If you earn more than Ł100,000, the personal allowance is reduced by Ł1 for each Ł2 that you earn over the limit. So, if you earn Ł125,000, income tax is applied to everything without an allowance.