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Understanding Personal Allowances: How Much Can You Earn Tax-Free?

The personal allowance is a set amount you can earn before income tax kicks in. 

Everyone is entitled to the allowance until their income exceeds £100,000, at which point the allowance starts to reduce, effectively increasing the amount of tax you’ll pay as a higher earner. 

While it sounds straightforward, there are some nuances surrounding the personal allowance that not everyone fully understands – as well as strategies for retaining the allowance if you’re a higher earner. 

In this article, we’ll explain the personal allowance, how it works, and how you can make the most of it to keep your income tax-free.

What is the Personal Allowance?

The personal allowance is the amount of income you can earn each year before you start paying income tax. The standard personal allowance right now is £12,570.

This means that if your total income, from sources such as employment, self-employment, pensions, or investments, is below £12,570, you won’t owe any income tax. 

Calculating Your Personal Allowance

The amount of personal allowance you can claim depends on your individual circumstances. 

The standard £12,570 allowance may be reduced or even eliminated entirely based on your income level:

High-Income Tapering

If your income exceeds £100,000, your personal allowance reduces by £1 for every £2 you earn above this threshold. Your personal allowance is completely eliminated once your income reaches £125,140 or more.

Example 1: Income of £115,000

If your income is £115,000, the amount over £100,000 is £15,000. Since £1 of personal allowance is lost for every £2 over the threshold, your personal allowance reduces by £7,500 (£15,000 ÷ 2).

  • Standard personal allowance: £12,570
  • Reduction: £7,500
  • New personal allowance: £5,070

Example 2: Income of £110,000

If your income is £110,000, the amount over £100,000 is £10,000. The personal allowance reduces by £5,000 (£10,000 ÷ 2).

  • Standard personal allowance: £12,570
  • Reduction: £5,000
  • New personal allowance: £7,570

Example 3: Income of £125,140

At this income level, you are £25,140 over the £100,000 threshold. Your personal allowance reduces by £12,570 (£25,140 ÷ 2), meaning it’s completely wiped out.

  • Standard personal allowance: £12,570
  • Reduction: £12,570
  • New personal allowance: £0

What This Means for You

Once your income hits £125,140 or more, you’ll no longer benefit from the personal allowance, meaning you’ll pay tax on all of your income. 

If your income fluctuates around £100,000, it’s worth exploring ways to keep it below this threshold, such as increasing pension contributions or charitable donations, to avoid losing part or all of your personal allowance. More on this below. 

Transferable Marriage Allowance

If you’re married or in a civil partnership and one of you earns less than the personal allowance (£12,570 for the 2023/24 tax year), you can transfer up to £1,260 of the unused allowance to the higher-earning partner. 

This can reduce the higher earner’s tax bill by up to £252 each year.

For instance, if one partner earns £8,000 and the other earns £40,000, the lower earner can transfer £1,260 to the higher earner, resulting in a tax saving of 20% on that amount, which is £252. 

However, this only applies if the higher earner is paying tax at the basic rate, meaning they earn between £12,571 and £50,270 (or up to £43,662 in Scotland). 

Marriage Allowance is automatic once applied for, and you can backdate claims for up to four years. The personal allowance and other key thresholds, including the amount that can be transferred, are currently frozen until April 2028. 

This means they won’t increase in line with inflation, potentially reducing the benefit over time.

Blind Person’s Allowance

If you’re registered as blind, you can claim an additional tax-free allowance of £3,070 in the 2024/25 tax year. 

This is added to your standard personal allowance, allowing a registered blind person to earn up to £15,640 tax-free (£12,570 + £3,070).

If you don’t use all of the Blind Person’s Allowance, it can be transferred to your spouse or civil partner to reduce their tax bill.

Both the personal allowance and the Blind Person’s Allowance will remain frozen until at least April 2028 as part of the government’s decision to freeze key tax thresholds, which could affect your tax planning over the next few years.

Higher Earner? Here’s How to Pay Less Tax

Suppose you’re over or around the £100,000 threshold.

In that case, there are strategies you can use to reduce your taxable income and keep it below this threshold, ensuring you retain your personal allowance and maximise your tax-free earnings, including:

1. Increase Pension Contributions (Within Limits)

Contributing to your pension is one of the most effective ways to lower your taxable income, but you’ll need to stay within annual allowance limits. The current limit is £60,000 per year (or 100% of your earnings, whichever is lower). 

Contributions to a pension are deducted from your income before tax, reducing your taxable income. For example, if your income is £105,000, contributing £6,000 to your pension reduces your taxable income to £99,000. 

This keeps you below the £100,000 threshold, preserving your personal allowance and allowing you to benefit from more tax-free earnings. 

2. Make Charitable Donations (Gift Aid)

Gift Aid allows UK taxpayers to donate to charities tax-efficiently. The charity can claim 25p from HMRC for every £1 donated. 

However, if you’re a higher-rate taxpayer (earning over £50,270), you can claim back the difference between your tax rate and the basic 20% rate.

Here are two examples:

Higher-rate taxpayer (40%) example

  • You donate £4,000 to charity.
  • The charity claims 25% through Gift Aid, bringing the total donation to £5,000.
  • As a higher-rate taxpayer, you can reclaim the difference between the 40% tax rate and the 20% basic rate on the grossed-up donation (£5,000).
  • This means you can claim back £1,000 from HMRC (20% of £5,000), reducing the actual cost of your donation to £3,000, while the charity still receives the full £5,000.

Additional rate taxpayer (45%) example

  • You donate £4,000 to charity.
  • The charity claims 25% through Gift Aid, making the total donation £5,000.
  • As an additional rate taxpayer (45%), you can reclaim the difference between 45% and 20% on the gross donation (£5,000).
  • This allows you to claim back £1,250 (25% of £5,000), lowering your donation’s actual cost to £2,750, while the charity still benefits from the full £5,000.

3. Salary Sacrifice Schemes

Salary sacrifice schemes allow you to trade part of your salary for non-cash benefits such as additional pension contributions, childcare vouchers, or other perks. 

These deductions are made before tax, which reduces your taxable income. For example, if your income is £103,000, you could sacrifice £4,000 towards a workplace pension or benefits. 

This reduces your taxable income to £99,000, allowing you to keep the full personal allowance and benefit from more tax-free earnings. 

Salary sacrifice schemes are a great way to reduce your income while gaining valuable non-taxable benefits.

Need More Help?

If you need further guidance on personal allowances or any other tax-related matters, the team at Double Point is here to help. 

If you’re a higher earner, keeping your income below key thresholds can save you thousands in taxes each year. 

Our chartered accountants specialise in helping you maximise your earnings, ensuring you stay under the £100,000 tapering limit while making the most of tax relief opportunities like Gift Aid and pension contributions.

Head here and book a consultation with us today. 

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