Understanding how Income Tax and tax-free allowances work can seem confusing, particularly when starting a new business or setting up as self-employed. Knowing how Income Tax and Personal Allowance work will help you run your business efficiently.
Read our guide to UK tax rates and thresholds for sole traders, limited companies, partners and partnerships, employers, and other businesses.
If you’re looking for an accountant to help you with this, contact us here.
Find out how income and tax and the personal allowance work below.
What is the personal tax allowance for 2022-2023?
The personal tax allowance normally increases each year, but the threshold for 2023/24 has been frozen at the 2022/23 limit of £12,570.
You’ll only pay income tax on any earnings which are above the £12,570 threshold.
What else do I need to pay income tax on?
You’ll have to pay income on your business profits but you’ll also have to pay income tax on
- interest and dividends from savings and investments
- rent payments if you’re a landlord.
You don’t usually pay Income Tax on all your taxable income. This is because most people qualify for one or more allowances.
An allowance is an amount of otherwise taxable income that you can earn each year, without paying tax on it.
What is the income threshold for personal allowance?
Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £125,140.
What is marriage allowance?
Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner.
This reduces their tax by up to £252 in the tax year (6 April to 5 April the next year).
What is a personal savings allowance?
When you put money into savings you’ll get interest. You can claim a certain amount of interest before you have to start paying income tax. Most people can earn up to £1000 in interest before they have to start paying income tax.
| Allowance or threshold | 2022/23 | 2021/22 |
| Personal Allowance | £12,570 | £12,570 |
| Income threshold for Personal Allowance | £100,000 | £100,000 |
| Marriage Allowance | £1,260 | £1,260 |
| Personal Savings Allowance | £1,000 / £500 / £0 | £1,000 / £500 / £0 |
| Dividend Tax Allowance | £2,000 | £2,000 |
How much income tax will I pay?
It’s a common misconception that if you earn more money and move up into a new tax band the new tax rate applies to all of your earnings. This is false as you only pay tax at the rate which affects the part of your earnings within a particular band.
Here are the different tax bands:
| Income | Tax bands 2022/23 |
| £0 to £12,570 | 0% |
| £12,571 to £50,270 | Basic rate: 20% |
| £50,271 to £150,000 | Higher rate: 40% |
| Over £150,000 | Additional rate: 45% |
If you earn a self-employed or salaried income of £60,000 during the 2023/24 tax year, you’ll pay:
- 0% tax on the first £12,570
- 20% basic rate tax on the part of your income which falls into the next tax bracket (£12,571 up to £50,270). This means you’ll pay 20% tax on £37,700.
- 40% higher rate income tax on the next chunk (£50,271 up to £60,000), so you’ll pay 40% tax on £9,730.
Hopefully, you’ll now have a clearer understanding of how income tax and the personal allowance work. If, however, you’re still left confused then we’d love to help you. We have years of experience helping and training business owners to understand and manage their tax affairs. Contact us here.
