Most people are allowed to receive a certain amount of income each year before paying tax. This is known as the basic personal allowance. But what is a Personal Allowance, when can you get it, and what sort of earnings is it actually set against?
What is a Personal Allowance?
Your Personal Allowance is the amount of money that you can earn each tax year before you pay income tax. It will vary depending on your circumstances.
Will I get a bigger Personal Allowance if I’m over 65?
In previous tax years, your Personal Allowance could have been more than the standard Personal Allowance as a result of when you were born. But this is no longer the case. For the 2020/21 tax year — running from 6 April 2020 to 5 April 2021 — the Personal Allowance is £12,500.
If you have a standard Personal Allowance of £12,500, the following table breaks down the tax rates you will pay for each area of your income:
|UK PAYE tax rates and thresholds|
|UK personal allowance||Up to £12,500||0%|
|UK basic rate||£12,501 to £50,000||20%|
|UK higher rate||£50,001 to £150,000||40%|
|UK additional rate||Over £150,000||45%|
|Scotland PAYE tax rates and thresholds|
|Scottish personal allowance||Up to £12,500||0%|
|Scottish starter tax rate||£12,501 to £14,585||19%|
|Scottish basic tax rate||£14,586 to £25,158||20%|
|Scottish intermediate tax rate||£25,159 to £43,430||21%|
|Scottish higher tax rate||£43,431 to £150,000||41%|
|Scottish top tax rate||Over £150,000||46%|
However, your Personal Allowance could be higher or lower if you meet certain criteria:
Why you could get more
- Are you married, or in a civil partnership?
If you are, the Government's Marriage Allowance offers the opportunity to transfer £1,250 of your Personal Allowance to your husband, wife or civil partner. Your partner's income could then be tax free for the first £13,750 they receive. However, you must earn less than your partner and have an income less than £12,500 per annum to be eligible. Your partner's income will also need to be between £12,501 and £50,000 per annum (or £43,430 per annum if you are in Scotland). Please note that these are figures for the 2020/21 tax year. Your partner’s tax bill would be reduced by £250 (£1,250 x 20%).
- Are you registered with your local council as blind, or severely sight impaired?
Should the answer be 'yes', then you can contact HM Revenue and Customs (HMRC) to apply for Blind Person's Allowance. If you are eligible, this adds a further £2,500 to your yearly tax-free Personal Allowance. Please note that these are figures for the 2020/21 tax year.
Why you could get less
- You earn over £100,000
Your Personal Allowance goes down by £1 for every £2 that your income is above £100,000. This means your personal allowance could reduce to zero if your income is above a certain level.
If you earn £110,000 then £10,000 of your salary is above £100,000.
10,000 / 2 = 5,000
So your Personal Allowance would reduce by £5,000.
£12,500 - £5,000 = £7,500.
Adjusted Personal Allowance = £7,500.
- You earn £125,000 or over
In this case no personal allowance is available.
What counts as income for the Personal Allowance?
Income refers to not only earnings from employment, but also rent income, any dividends from shares you may own, your pension income and any interest you earn on savings (before the tax is taken off). But it's worth bearing in mind that from 6 April 2016 the Government introduced a Personal Savings Allowance and a Dividend Allowance.
Your Personal Savings Allowance is a tax-free allowance from any income that you receive from savings or any interest that you earn on your savings. This is currently £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers do not get any Personal Savings Allowance.
The first £2,000 of any payments that you receive from dividends (which you would get if you own any shares in a company) are also tax free. You’ll pay tax on any dividends you receive over £2,000 at the following rates:
- 7.5% on dividend income within the basic rate band
- 32.5% on dividend income within the higher rate band
- 38.1% on dividend income within the additional rate band
Please note that dividends received in shares held in an ISA will continue to be tax free.
Where can I find out more?
The best place to find every up to date detail of the Personal Allowance is the Gov.uk website. Read their webpage about Personal Allowances rates here.