Know All About UK Personal Allowance

Do you file your tax returns yourself without any professional help? If yes, congrats! You wouldn’t believe it but you are among a few taxpayers who dare to do the same. The reason is that the UK tax system is extremely complicated. Also, navigating the same can prove to be very time-consuming. However, things can become a little easier had you developed a brief understanding of certain key concepts of this tax system. Some of these concepts are income tax, national insurance, capital gains tax, and personal allowance. Of these, the last one is a crucial relief for countless UK taxpayers. After all, it ensures that a part of their income will remain tax-free. So, read the blog and know everything you need to understand about personal allowance.

What is a personal allowance?

It is an allowance that evaluates the amount of your income not liable to any tax in a tax year. At present, it is £12,570. So, if your income is above this threshold, you will have to pay the taxes. However, your personal allowance can go down if your adjusted net income i.e. (Total Taxable Income−Deductions and Adjustments) exceeds £100,000. It will then decrease by £1 for every £2. So, it can be safely concluded that your personal allowance will become nil when your taxable income is £125,140 or more.

Understand the concept with an example:

Your taxable income is £125,140
So, excess income over £100,000 will be (£125,140-£100,000) = £25,140
Now reduction by £1 for every £2 means £25,140/2 = £12,570
However, £12,570 is the standard personal allowance
So, your personal allowance is zero

Bigger personal allowances

There are some scenarios in which your tax-free allowance can be bigger.

Blind person’s allowance

If you are receiving this allowance, you can enjoy a high tax-free allowance as currently, the allowance for a blind person is £3,070. This gets added to the standard personal allowance (£12,570). So, your total tax-free allowance will become £15,640. Moreover, the blind person’s allowance can be transferred to your spouse or civil partner in case, you do not pay tax or cannot use all of your allowance.

Marriage allowance

If you are receiving a marriage allowance and your income is less than £12,570, you can benefit a lot! Your marriage allowance will then enable you to transfer £1,260 of your personal allowance to your spouse or living partner, provided his or her income is subjected to a higher or additional income tax rate. Such a move will lower your income tax as a couple by up to £252 in a tax year.
Some people also opt to contribute to a pension plan to stay within the ambit of personal allowance.

How to claim personal allowance?

Although most taxpayers receive their personal allowance through the PAYE system, others claim it through self-assessment tax returns. Make sure that your tax code is correct so that you can receive the right amount as your personal allowance. If you are an employee, have a look at your payslip, and you will know your accurate tax code. However, things are not easy for self-employed individuals. They must declare their income and allowances via self-assessment.

Why personal allowance is important?

For accurate tax planning, having a good understanding of your personal allowance is inevitable. Again, if you have multiple sources of income or a fluctuating income, this knowledge helps to achieve tax efficiency by avoiding tax over payment. However, remain updated about any changes in tax regulations as these are subject to change. For ensuring complete compliance with your tax obligations, this is necessary.

Personal allowance is indeed a vital component of the UK tax system. It offers significant tax relief to many UK taxpayers. It is essential to understand all the nitty-gritties as then you can manage your overall finances effectively. So, it does not matter that whether you are an employee or a self-employed professional, remain aware of your personal allowance. This will certainly lead to considerable tax savings and overall better financial planning.