I’ve updated this post on 23 June 2020
The UK personal allowance entitles taxpayers to earn a certain amount tax-free every year. The figure changes every tax year and is announced as part of the Governments Autumn Budget.
A tax year runs from 6 April to 5 April each year.
Here’s a guide to the UK personal allowance, how to claim it and what happens once your earnings exceed it.
What is the UK Personal Tax Allowance for 2020/2021?
The UK personal allowance for 2020/2021 is £12,500.
You may be entitled to more tax-free earnings if you are eligible to claim:
- Marriage Allowance
- Blind Persons Allowance
The allowance is reduced once your income goes over £100,000.
Personal Allowance Restriction
Once you earn over £100,000 your personal tax allowance is restricted by £1 for every £2 of your income over £100,000.
That means once your earnings reach £123,000 in the tax year 2019/2020 you will lose all your Personal Allowance.
How to Claim the Personal Allowance
The way that you claim it depends on how you earn your income.
If you are employed and your employer takes responsibility for calculating your taxes, then they will make sure you received your tax-free earnings.
Employers will you will give you a portion of your allowance every time they pay you.
So if you are paid monthly, for example, you’ll receive 1/12ths of the personal allowance every month (that’s £1,041.67 per month for 2019/2020).
If you are self-employed, when tax time comes and you complete your self-assessment tax return form, your personal allowance will be given to you as part of your tax calculation.
How Much Income Tax Will I Pay?
You pay income tax on any earnings above your personal tax allowance. The more you earn the more tax you pay.
The current income tax bands for 2020/2021 are as follows:
|Basic rate 20%||£12,501 to £50,000||£12,501 to £50,000|
|Higher rate 40%||£50,001 and £150,000||£50,001 and £150,000|
|Additional rate 45%||over £150,000||over £150,000|
You earn £30,000 for the tax year 2020/2021.
He will pay tax of £3,500 and this is worked out as follows:
On the first £12,500 0% = £0
On the next £17,500 20% = £3,500
Do I Need to Tell HMRC About Earnings Below the Personal Allowance Threshold?
There is a common misconception that if you earn below the tax-free amount HMRC do not need to know about it. This is incorrect.
If you earn more than £1,000, you must let HMRC know about it. Even if you earn below the allowance and have no tax to pay on it.
If you earn less than £1,000 in income, you may be eligible to claim the HMRC Trading Allowance meaning you don’t need to register and tell HMRC about your income.
New Here? Learn how to set up the financial side of your business with these easy to understand guides and resources:
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- Tax Records and Bookkeeping – Understand what tax records you’ll need to keep and how to set up your own bookkeeping system;
- How to Fill In Your Tax Return Online – In this step-by-step guide, you’ll find everything you need to know to fill in your tax return online and beat the HMRC deadline.
- Self Employment Taxes Explained – Learn what taxes you’ll pay, how much and when;
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- Invoice Template – Free template and step-by-step guide so you can get paid by your clients.