What is Personal Allowance?

In the United Kingdom, personal allowance is the amount of British pounds that an individual can earn without having to pay taxes. When it’s time to pay taxes to the government, a personal tax allowance is automatically deducted from your total bill before final calculations conclude. 

If you’re a taxpayer in the UK, it’s vital to understand how all of this works. From married couples tax allowance to personal savings allowance and tax allowance for pensioners, all of it makes a difference. 

In this guide, we’ll have a thorough look at the ins and outs of personal allowance. This means reviewing not just the standard personal allowance amount, but also diving into tax rates across UK regions, the implications of moving abroad, adjusted net income, and much more. 

Standard Personal Allowance

While personal tax allowance can vary under individual circumstances, it’s essential to know the baseline standard for tax-free income. After addressing that, we’ll then get into how your annual earnings impact your personal allowance.

Annual Amount

To date, the baseline standard for tax-free income (a.k.a. personal tax allowance) stands at £12,570. This pound amount applies for both self employed individuals and persons working as salaried employees. However, the application of the £12,570 personal allowance varies depending upon how you earn income. 

In the case of self employed individuals, your tax-free income gets automatically reduced from your profit before the UK government determines what you owe. However, for salaried employees, your boss applies your personal tax allowance to your income ahead of ascertaining how many pounds to subtract from your wage.

Adjustments Based on Income

While £12,570 stands as the baseline standard for tax-free income in the UK, this can vary depending upon an individual’s income. 

For example, a person with at least £100,000 in adjusted net income will see their personal allowance of £12,570 drop by £1 for every £2 surpassing £100,000. In layman’s terms, the more money you earn beyond £100,000, the less money you’ll be able to avoid paying taxes on.

Marriage Allowance

A married person’s tax allowance affords them the luxury of transferring no more than £1,260 of their individual personal allowance to their civil partner or legal spouse. Under UK law, a transfer of this nature allows them to save no more than £252 in the present tax year. 

With that in mind, this married couples tax allowance comes with many important nuances and details that you should understand before proceeding. Transferring tax-free income to your partner or spouse may or may not prove to be financially advantageous. 

We’ll now go over the ins and outs of the marriage allowance and how it can impact you during tax season. 

Eligibility for Couples

In order for couples to benefit from the marriage allowance, the lower earner is typically required to have no more than £12,570 in annual income. If either party in the marriage is unsure of their personal income, they can contact the Income Tax helpline for assistance. 

Anyone looking to take advantage of the married person’s tax allowance may also want outside assistance if they receive income from job benefits, savings, or dividends. Having all of these details ironed out before proceeding with the married couples tax allowance is an easy way to avoid problems (and potential penalties) later down the line.

Transferring Allowances

While £1,260 stands as the limit for a married person’s tax allowance, the ability to transfer roughly 10% of your tax-free income to a civil partner or legal spouse doesn’t come without certain caveats. 

In many cases, you could end up with a higher tax bill, even if your partner/spouse’s personal tax allowance gets a booster. Then again, transferring allowance often leads to the couple paying less tax to the UK government. 

Moving Abroad and Personal Allowance

If you’re a UK resident who lives or moves abroad, you’ll want to be clear on how this impacts your personal tax allowance. In most cases, any resident of the UK will be eligible for £12,570 in tax-free income, regardless of whether or not they live abroad.

The same rule also applies for citizens of nations within the European Economic Area (EEA) and individuals who’ve worked for the UK government during the applicable tax year. 

With that in mind, depending on the country in which you currently live, you may be subject to various income tax treaties. In most cases, these tax treaties exist to avoid double taxation.  

Tax Rates Across Regions

Across the collective UK, tax rates fall within the following brackets:

• Personal allowance: £0 to £12,570
• Basic rate: £12,571 to £50,270
• Higher rate: £50,271 to £125,140
• Additional rate: Above £125,140

This applies across England, Wales, and Northern Ireland. 

Scotland, however, has a slightly different income tax system that adheres to the following brackets:

• Personal allowance: £0 to £12,570
• Starter rate: £12,571 to £14,876
• Basic rate: £14,877 to £25,561
• Intermediate rate: £25,562 to £43,662
• Higher rate: £43,663 to £75,000
• Advanced rate: £75,001 to £125,140
• Top rate: Over £125,140

Taxable Income Definition

In the United Kingdom, taxable income is defined as the earnings you receive, typically from a job or other form of employment, that are subject to taxation from the government. 

What Involves Taxable Income?

The following sources of income are generally subject to taxation, especially once they surpass the personal allowance rate of £12,570:

• Rental properties
• Employment
• Pensions
• Trading Profits
• Dividends
• Miscellaneous income

Most income earned in the UK is subject to taxation; however, there are circumstances (outside of the personal tax allowance rate) where this doesn’t apply. The following sources of income are generally non-taxable: 

• Premium bond prizes
• Competition winnings
• Compensation/damages for personal injury
• Statutory redundancy payments

If you have questions about whether or not a source of your income is subject to taxation, consulting with a tax expert or accountant can provide clarity. 

Pensions and Savings Considerations

When navigating the personal savings allowance and varying tax rates, it’s understandable to have questions about pensions and savings considerations. At this point in the guide, we’ll explore some important details you need to know.

Under current UK regulations, pensions are typically counted as part of your earnings and thus subject to taxation. As for your savings, in the case of taxpayers who fall under the basic rate bracket of £12,571 to £50,270 in annual earnings, up to £100,000 of any earned interest on your savings is typically tax-free.

Tax Allowance for Pensioners

When tax season rolls around, it’s important to be clear-eyed about the personal allowance afforded to individuals with pensions. In most cases, any pension income that exceeds the tax-free baseline of £12,570 is subject to taxation in the UK. 

With that in mind, tax allowance for pensioners does come with certain perks. UK residents who are 55 or older generally have eligibility for 25% of their pensions to be free of taxes, provided that they don’t take a greater amount than the lump sum allowance (LSA) of £268.275.

In April 2028, the minimum age threshold for this park will increase from 55 to 58.

It’s also crucial to remember that if you do take a lump sum amount, you may end up having to pay higher taxes.

Adjusted Net Income

As this guide explores the nuances of personal allowance, we’d be remiss not to cover how adjusted net income factors into all of this. 

In a nutshell, your adjusted net income is the totality of your taxable income before any personal tax allowance or other tax relief benefits are applied. Benefits that are often included before you receive your tax bill include the following: 

• Charity donations given via Gift Aid
• Losses from trading
• Pensions contribution

To have a clear understanding of your adjustable net income, you’ll want to take the following steps: 

• Figure out your total income by adding up taxable sources and then subtracting your personal allowance and any other tax relief benefits you’re eligible for
• Subtract Gift Aid donations
• Subtract pension contributions
• Add any applicable back tax benefits for payments made to police organisations or trade unions

If you’re still uncertain or need extra clarity about your adjusted net income, consult with a tax expert or accountant.

Resources for Managing Personal Allowance

Working through the complexities of a married person’s tax allowance, personal savings allowance, and how much of your income qualified for personal allowance can feel like a daunting task. Thankfully, this isn’t an endeavor that you have to pursue on your own. 

Government Resources

Basic questions about your income taxes and personal tax allowance can be directed towards His Majesty’s Revenue and Customs (HMRC). Through the contact form, it’s simple enough to let HMRC know what form of support you need. You can also authorize a relative, friend, or professional to contact HMRC on your behalf for tax assistance. 

Next Steps for Tax Planning

As you might have gathered from this guide so far, there are a lot of different circumstances that often determine tax allowance for pensioners, married couples, and even just individual UK residents. 

To avoid running into late payments, penalties, and other avoidable issues, it’s a good idea to set up an action plan for handling your taxes each year. 

Reviewing Your Allowances

Reviewing your personal allowance with the support of government resources or online calculators and tools is a great starting point. Your income can vary from year to year, especially if you’re self employed, or even if you’re a salaried employee who recently got a raise. 

Depending on which tax bracket you fall under, your personal tax allowance could very well deviate from the standard £12,570. Even if you’re pretty sure of what tax benefits you may be eligible for, it never hurts to double check by running your numbers through an online calculator. 

Seeking Professional Advice

Across the UK, many people who’ve run into challenges with their taxes later wish they’d sought out professional advice. If you’re expanding income streams, engaging in business ventures, or even if you’ve taken a recent hit to your finances, having a professional in your corner makes a huge difference. 

Having an accountant or tax expert in your corner means increasing your tax efficiency. With this comes peace of mind, punctual filings, and awareness of any legislative changes that impact your finances. 

Time is another factor. Having to oversee complex tax matters and fill out your own returns eats up a lot of hours. This applies doubly so for individuals who are self employed or otherwise managing a business. 

In many cases, seeking professional advice gives you more bandwidth to focus on other pressing matters without allowing anything to fall by the wayside. 

In Summary

Throughout this guide, we’ve had a close look at the personal tax allowance in the UK. In doing so, we’ve also been able to explore various benefits of the married couples tax allowance, while also explaining how Scotland’s tax rates vary from those in England, Wales, and Northern Ireland. 

Regardless of your marital status or income levels, though, you’ll want to have a solid understanding of your personal allowance, taxable earnings, and adjusted net income. Seeking out support from government resources, online tools/calculators, an accountant, and/or a tax expert is a great way to get ahead of the curve. 

If you live in the UK or know someone who’s a UK resident, passing along this personal allowance guide is a great way to help them prepare for tax season.

Frequently Asked Questions