Understanding how your personal tax allowance impacts your income tax is key to managing your finances and ensuring accurate tax payments. Whether you’re a first-time taxpayer or simply looking to improve your personal budgeting, getting to grips with personal tax allowance can make a significant difference in your take-home pay. In this post, we’ll explore how the personal tax allowance works for the 2024/25 tax year and how it can reduce your tax liabilities.
What Is Income Tax Paid On?
Income tax in the UK applies to most types of income, not just wages from employment. Here are the main sources of income that are subject to tax:
- Wages or salary from employment
- Profits from self-employment
- Certain state benefits
- Pensions
- Rental income
- Employment benefits
- Trust income
- Savings interest
If you’re a UK resident for tax purposes, you will pay income tax on both UK and, in some cases, overseas income, depending on the double taxation agreements in place. Additionally, if you’re employed, you may also need to pay National Insurance contributions, depending on your earnings, with self-employed individuals liable for Class 2 and Class 4 contributions.
What Is Personal Tax Allowance?
The personal tax allowance reduces the amount of income that is subject to tax. For the 2024/25 tax year, the personal tax allowance is £12,570. If your total income is below this threshold, you won’t owe any income tax. The tax is calculated after this allowance is deducted, so only the remaining income is taxed.
It’s important to note that if you don’t use the full amount of your personal tax allowance in one tax year, it cannot be carried over to the next year.
Who Can Claim the Personal Tax Allowance?
Most people who earn income in the UK are eligible to claim the standard personal tax allowance. However, if your income exceeds £100,000, your personal allowance begins to reduce. Those who earn income from the UK while living abroad can also claim, provided they meet certain criteria, such as being a British citizen, a citizen of an EEA country, or having worked for the UK government during the tax year.
Pensioners are also eligible for a personal tax allowance, and there are additional allowances available for those over a certain age, which help reduce their overall income tax burden.
What Happens When Your Income Exceeds £100,000?
For individuals with incomes over £100,000, the standard personal tax allowance begins to decrease. Specifically, for every £2 of income above the £100,000 threshold, the personal allowance is reduced by £1. This means that if your income reaches £125,000 or more, you will no longer be eligible for any personal tax allowance, resulting in higher tax liabilities.
What Other Personal Tax Allowances Can You Claim?
In addition to the standard personal tax allowance, there are other allowances available to reduce your tax liabilities further. For the 2024/25 tax year, some of these include:
- Transferable Marriage Allowance: £1,260
- Savings Interest Allowance: £1,000 (or £500 for higher-rate taxpayers, £0 for additional-rate taxpayers)
- Dividend Income Allowance: £500
The Marriage Allowance is particularly useful for married couples and civil partners. One partner can transfer a portion of their unused personal allowance to the other, which can result in significant tax savings. To ensure you’re making the most of your allowances, it’s advisable to consult with a financial expert, particularly if you’re unsure about which allowances you’re eligible for.
How to Use Your Personal Allowance Effectively
To reduce your income tax liability as much as possible, it’s important to use your personal tax allowance in the most tax-efficient way. The best approach is usually to apply the allowance to your earned income or non-savings profits first. However, if you receive income from dividends, savings, and earnings, it might be more beneficial to apply the personal allowance to your dividend and earned income first, then to your savings interest. This strategy can help you maximise tax savings.
Conclusion
The personal tax allowance is an important tool in reducing your income tax burden. Understanding how to use it efficiently, especially if you have multiple sources of income, can significantly lower your tax liability. Make sure to stay up to date with changes to the tax rules, and consider seeking professional advice to ensure you’re making the most of your allowances.
