In the UK, you can earn up to £12,570 before paying tax (as of the 2024/2025 tax year). Your standard personal allowance will be £12,570. Thanks to it. This means you can earn up to this amount without tax. However, this threshold may be contradictory based on your benefits or income level.
- Personal Allowance: The first of your £12,570 is tax-free. This allowance will be reduced if you earn up to £100,000 and will disappear entirely if your income increases to £125,140.
- Tax Bands: After you cross the border of your allowance, you can pay 20% taxes on your income between £12,571 and £50,270. If your income is £50,271 and £125,140, you will pay 40% of your income. And you will be charged anything above £125,140 as taxes from your income.
- Additional Allowances: Additional allowances, such as a blind person or marriage allowance, can be increased by how you earn before paying tax.
What is the Personal Allowance?
Personal allowance in the UK is the amount of income you can earn each day before starting to pay your income tax. For the 2024/2025 tax year, this amount is set at £12,570. This means that the first £12,570 is tax-free. You will have it all for yourself. If you earn less than this, you usually do not have to pay taxes, but if you earn higher than this amount, you have to pay taxes.
If you claim marriage and blind person allowance, your allowance might be bigger. Or it can be smaller if you are a high earner or have been paying your taxes since last year.
| Allowance or threshold | 2024/25 | 2023/24 |
| Personal Allowance | £12,570 | £12,570 |
| Income threshold for Personal Allowance | £100,000 | £100,000 |
| Marriage Allowance | £1,260 | £1,260 |
| Personal Savings Allowance | £1,000 / £500 / £0 | £1,000 / £500 / £0 |
| Dividend Tax Allowance | £500 | £1000 |
How Income Tax is Calculated
Income tax rates in the UK are calculated using different income bands and rated after accounting for your alliance. You can also get to know your rates from us if you are still trying to understand how or need clarification. We will give you a quick breakdown of the tax year 2024/2025.
| Income | Income Tax bands 2024/25 |
| £0 to £12,570 | 0% |
| £12,571 to £50,270 | Basic rate: 20% |
| £50,271 to £125,140 | Higher rate: 40% |
| Over £125,140 | Additional rate: 45% |
Your taxable income here in the UK is determined by subtracting your allowance from your total income. Then, apply these rates to the remaining amount.
Let’s assume that if you earn £60,000, the first £12,570 is tax-free for you. But the next £37,700 is taxed at 20%, and the remaining amount of £9,730 will be taxed at 40%.
Tax-Free Income and Other Allowances
In addition to personal allowance, other allowances in the UK can help reduce taxable income. It includes dividend income, saving interest, and other special benefits.
1. Personal Savings Allowance:
A personal savings account will allow you to earn a small amount of savings without paying taxes on it. Further, the amount depends on your income tax band.
| Income Tax Band | Personal Savings Allowance |
| Basic Rate (20%) | £1,000 |
| Higher Rate (40%) | £500 |
| Additional Rate (45%) | £0 |
2. Dividend Tax Allowance
The dividend tax allowance allows you to earn a certain amount from dividends before paying taxes.
| Tax Year | Dividend Allowance |
| 2024/2025 | £500 |
| 2023/2024 | £1,000 |
3. Marriage Allowance
The marriage allowance lets you transfer 10% of your unused personal allowance to your civil partner or spouse. This reduces their tax bill by £252.
4. Other Tax-Free Allowances
- Rent-a-Room Scheme: You can earn up to £7,500 if you rent out a furnished room in your home.
- Trading Allowance: You can earn up to £1,000 tax-free from trading casually or having some side business.
- Property Allowance: You can generate a side allowance of £1,000 tax-free from income generated by land or any property by renting them.
Impact of Higher Income on Your Allowance
If your income increases to £100,000, your personal allowance automatically starts reducing. For every £2 you earn over this threshold, your personal allowance decreases to £1. This will continue until your income reaches £125,140 when your personal allowance is reduced by zero, and until all your income is taxable.
National Insurance Contributions: What You Need to Know
To be eligible for state pension or other benefits, self-employed individuals, employers, and employees in the UK must make national insurance contributions.
NIC Rates in 2024:
- Class 1 NICs (Employees): These are paid on earnings above £12,570 at 12% on earnings up to £50,270 and 2% on incomes above the threshold.
- Class 2 and 4 NICs (Self-Employed): Flat rate for Class 2; Class 4 is 9% on profits between £12,570 and £50,270 and 2% on earnings above £50,270.
NICs and Tax Liability:
NICs are in addition to income tax, meaning they will increase your overall tax burden. However, they can be crucial for securing long-term benefits.
Income Tax for the Self-Basic Rate
For self-employed people, income tax is calculated on their profits after deducting allowable business expenses. Here is how you will know about the basic self-rate of income tax:
- Personal Allowance: You can earn up to £12,570 tax-free just by employing individually
- Basic Rate (20%): After your personal allowance, £12,571 to £50,270 of your profits are taxed at 20%.
- Deductions: You can also lower your taxable income by deducting legitimate costs, such as transportation, office supplies, and other equipment.
Reducing Your Tax Bill: Reliefs and Allowances
Various allowances and reliefs are available here to effectively reduce your tax bill in the UK. HRMC can easily claim this allowance.
- Marriage Allowance:
You may transfer up to £1,260 of your spouse’s regular personal allowance to any higher earner if you or they make less than that amount while residing in the UK. This can reduce higher earner tax bills by £252 annually.
- Personal Allowance:
As previously stated, the personal allowance is the money you can make yearly without paying taxes. The standard allowance is £12,570, but it decreases if your income exceeds £100,000.
- Other Allowances:
Other relief for those living in the UK, such as a married couple allowance or those born before 6th April 1935, can provide a more substantial tax reduction. There is another relief known as blind person relief that can help increase his allowance.
Key Income Tax Thresholds for the Current Tax Year
For the current tax year in the UK, tax thresholds and allowances are designed to determine how much tax you pay based on your income. The Personal Allowance is the amount you can earn before paying income tax, which is set at £12,570 for the 2024/25 tax year. If your income exceeds £100,000, your Allowance is reduced by £1 for every £2 earned above this level, and it is fully phased out once your income hits £125,140.
The income tax is then levied in bands. The Basic Rate of 20% applies to incomes ranging from £12,571 to £50,270. The Higher Rate of 40% applies to wages between £50,271 and £125,140. Any income exceeding £125,140 is taxed at the Additional Rate of 45%.
Final Thoughts: Planning Your Income and Taxes
To efficiently manage your income and reduce tax payments, begin by maximising your Allowance and, if eligible, the Marriage Allowance, which can lower your spouse’s tax by up to £252.
Keep your savings and dividends within tax-free limits, and use the Trading and Property Allowances if available. Regularly examine your financial condition throughout the year to stay in favorable tax brackets, and seek professional help for more specific tactics.
