Understanding how your taxes are worked out can be a real headache! However, it’s crucial that you stay on top of knowing what your UK personal allowance is and how much of your hard earned cash is taxed. In this guide to the UK personal allowance, I’ll explain how to claim it and what happens once your earnings exceed it. You need to know your self-employed personal allowance in order to avoid paying too much or too little tax.
Updated 1 November 2021
Table of contents
Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
1. What is the Personal Tax Allowance for 2020/2021?
The UK personal allowance entitles UK individuals to earn an amount tax-free every tax year. For example, in 2020/2021, it is £12,570. (You can find out the income tax and National Insurance changes from April 2022 announced in the Autumn Budget). You may be entitled to more tax-free earnings if you are eligible to claim:
The personal allowance is reduced for anyone that earns over £100,000 (this is known as the personal allowance restriction). It is restricted by £1 for every £2 of your income over £100,000. That means once earnings reach £125,140, all personal allowance is lost.
2. How to Claim the Self-Employed Personal Allowance
The way that you claim the self-employed personal allowance depends on how you earn as your income.
If you are employed by someone who issues you with a payslip, your employer should give you your personal allowance entitlement every time they pay you. For the tax year 2021/2022 the most common tax code is 1257L (previously 1250L). This equates to receiving 1/12th of the personal allowance each time you are paid; that’s £1,047.50 per month (£12,570 ÷ 12). If your tax code doesn’t use 1257L, then HMRC make adjustments for the amount of free pay you are entitled to. Want to know more? Read this guide about understanding tax codes to help you understand.
If you are self-employed, you’ll receive your tax-free allowance when you fill in your tax return online. It is automatically applied when HMRC calculate how much tax you owe so you don’t need to do anything to claim it.
If you are employed and self-employed, then you should check whether your employer is giving you your tax-free pay or whether you should claim in on your tax return. This is to ensure you aren’t missing out, or worse, claiming it twice, which will mean you owe money back to HMRC.
3. Do I Need to Tell HMRC About Earnings Below the Personal Allowance Threshold?
In most cases, you need to tell HMRC about your earnings below the personal allowance threshold. This applies even if you have no tax to pay.
If you have decided to work for yourself or earn money from odd jobs like babysitting or gardening, then you don’t need to tell HMRC if you get paid an income (not profit) of less than £1,000 during one tax year. This is known as the HMRC Trading Allowance and it means you can avoid registering as self-employed.
- Income Tax Explained
- UK Income Tax Bands
- Do I Need to Complete a Self Assessment Tax Return?
- Do I Need to Do a Tax Return If I Earn Under £10,000?
Taxes are changing! From April 2024 sole traders will need to report their earnings and pay tax on a quarterly basis. This is known as Making Tax Digital, which you can read more about in this guide to help you get prepared.