Understanding the role of personal tax allowance in an individual income tax gives a clearer grasp of how much the taxpayers’ take-home pay and tax payments should be. This makes personal budgeting easier and more accurate. However, how income taxes affect their paycheck usually confuses many first-time employees.
Read on for more information about personal allowance for the current tax year, especially how it affects one’s income tax liability.
What Is Income Tax Paid On?
Most forms of UK income are subject to income tax. Usually, the main forms are salary or wage from employment, but income tax is also charged on the following:
- self-employment profits
- some state benefits
- most types of pensions
- rental profits
- employment benefits
- trust income
- savings interest
UK residents for tax purposes are liable to income tax. That means they pay on both incomes derived from the UK and/or overseas, subject to the double taxation agreement.
If they are employees, they may also have to pay Class 1 National Insurance contributions, and if self-employed, Class 2 and 4, alongside income tax.
Click on the current income tax rates guide to find out about the changes in tax brackets/rates, especially in Scotland, which has a different tax system from other parts of the UK.
What Is Personal Tax Allowance?
Not all portions of income are taxed due to the personal tax allowance. This allowance reduces individuals’ taxable income, preventing them from falling into higher tax brackets. The income tax bill is only worked out after the personal allowance deduction is made.
The personal tax allowance 2024/25 is £12,570. If the total income is below this amount, the individual is not liable for income tax. Any unused amount cannot be used for the next tax year.
Visit UK Tax Calculator: Quick Guide to Income Tax for relevant information.
Who Can Claim the Personal Tax Allowance?
Almost everyone who earns UK income can claim the standard deduction of personal allowance unless their income exceeds £100k (see below for more information). Those who live overseas but earn UK income have specific criteria to meet, including the following:
- being a British citizen
- being a citizen of a European Economic Area (EEA) country
- having worked for the UK government at some point within that tax year
- the country where they live in has a double taxation treaty with the UK
There is also a personal tax allowance for pensioners. Other age-related allowances help pensioners curb more of their income tax. See income tax on state pension for more information.
What Is the Personal Tax Allowance Over 100k?
The income threshold for personal allowance is £100,000. The standard allowance deductions of £12,570 for those who earn over this amount are reduced by £1 for every £2 of profits exceeding £100k. When their total annual income reaches more than £125,000, they can no longer benefit from any tax-free personal allowances.
What Other Personal Tax Allowances Can I Claim?
Aside from the standard allowance, taxpayers may also be eligible for other personal allowances that can further reduce their tax liabilities. See table below for the current tax-free limits:
| Allowance Type | 2024/25 Thresholds |
|---|---|
|
Transferable Marriage Allowance |
£1,260 |
|
Savings Interest Allowance |
£1,000 / £500 / £0 |
|
Dividend Income Allowance |
£500 |
Learn more about marriage allowance here. This transferable allowance also applies to civil partners. It is highly recommended for married or civil partners to seek help from financial advisors on which tax reliefs and allowances to claim to ensure most optimum tax savings.
How Do I Use Personal Allowance Tax Efficiently?
There are some tax-efficient ways taxpayers can use their personal exemption allowance in such a way they can minimise their income tax liability to as low as possible. One of the best ways is to use the personal allowance against earned income or non-savings profits first.
However, this may not always be the best strategy for those with dividends, savings, and earned income at the same time. In this case, they can have more tax savings when they set their personal tax allowance against their dividend and earned income first, and then savings interest afterward.
Check out more tips to reduce income tax on investments here.
Relevant FAQs
The portion of the total income covered by the personal tax allowance is still ‘taxable income’. However, it is considered exempt from income tax.
PAYE workers normally do not need to file tax returns, and if they earn less than £1,000. Other than these criteria, generating income, even if it is within the personal allowance, will still hold the taxpayer liable to submit a tax return.
Yes, but only on their UK incomes.
Offshore incomes brought into the UK are tax-free if they are within £2,000. Over that amount, overseas incomes must be reported to HMRC via self-assessment.
Individuals are considered UK residents for tax purposes if they have spent more than 183 days in the UK within that tax year. As there are several other considerations, they must take the statutory residence test.
How Legend Financial Can Help
Strategic use of personal tax allowance always leads to greater tax savings. This is Legend Financial’s commitment to every client. We do not just help with preparing tax returns, but we also advise and provide hands-on support on how they can optimise their tax position.
You can increase your take-home pay by simply being tax-efficient. Consult with our tax planning experts today and see for yourself why so many of our clients choose to work on their tax affairs with us!
