What is the tax-free personal allowance

Every individual in the UK who is eligible to receive a salary can earn a certain amount of money before they start paying tax. This is called the Personal Allowance, eligibility is normally subject to an individual having a National Insurance Number.

The Basics

Whether your income is from employment, self-employment or property you will receive a personal tax free allowance if you’re a UK tax resident. As an individual you have one personal allowance, it is not renewed per revenue stream.

In the current tax year, 6th April 2017 and 5th April 2018, the personal allowance is £11,500; that is why those in employment will see 1150L on your payslip. The personal allowance tends to change year on year as part of the budget set by the incumbent governing party.

If you are lucky enough to earn over £100,000 you will start losing your tax free personal allowance as it will decrease by £1 for every £2 you earn, until it reaches £0 so those earning over £123,000 will not have a personal allowance.

Personal Allowance and National Insurance

 The Personal Allowance relates to the amount you can earn before you start paying income tax, however, individuals are not only subject to income tax they must consider National Insurance Contributions too.

Like the income tax, National Insurance Contributions do not start as soon as you earn money, however, the threshold at which you start paying is lower than the Personal Allowance set for income tax.

The National Insurance tax free thresholds start lower. Class 2 national insurance is paid by the self-employed if earnings are over £6,025 and £8,164 for Class 1, for the self-employed and Class 4 for employees. You must make sure you understand National Insurance for the self-employed if you are a Sole Trader.

Who is Eligible for the Personal Allowance?

The Personal Allowance is not restricted to those living and earning in the UK as British citizens abroad can often retain their UK personal allowance. A prime example being someone who was born in the UK but has since moved abroad will receive a UK personal allowance if they were to rent out their property.

You will also receive a UK personal allowance for UK income if you’re a citizen of the European Economic Area or the income in question is part of a double-taxation agreement between the country you live and the UK.

Still Need Help?

The Personal Allowance affects personal tax returns for owners of Limited Companies, tax for additional income and payroll for employees.

If you need help the Personal Allowance our accountants and tax advisors can guide you. We can offer operational support in terms of payroll services or tax guidance for individuals.

With offices in London, Northampton, Rugby and Daventry we work with the self-employed and small businesses across the UK. Talk to us today.

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