Income tax is charged on most types of income, such as wages and salary from jobs, your profits if you run a business, pensions, rents you receive if you’re a landlord, and interest and dividends from savings and investments. Most people in the UK have a Personal Allowance, and only big earners are not eligible for this form of tax relief.
You don’t usually pay income tax on all of your taxable income, and this is because most people qualify for one or more allowances.
An allowance is an amount of otherwise taxable income that you can have tax-free each tax year.
The current Personal Allowance is £12,500 per tax year, meaning you are not taxed any income tax on this amount if you are a basic rate taxpayer.
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What is Personal Allowance?
Personal Allowance is a portion of your yearly income that is tax-free.
It also applies to non-savings and non dividend income, not just PAYE.
The current Personal Allowance is £12,500 per tax year, and you are not taxed any income tax on this amount if you are a basic rate taxpayer.
If you earn under this amount per year, you do not need to pay income tax.
The tax year runs from April 6 to April 5 and each year the Personal Allowance is indexed with the Consumer Price Index.
The UK tax system is sorted into three bands – the basic rate, the higher rate and the additional rate.
People in the additional tax rate pay 45 percent tax on their earnings over £150,000.
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Your Personal Allowance begins to shrink by £1 for every £2 that your adjusted net income is above £100,000.
That means there is no Personal Allowance on taxable income over £125,000.
These rates are different in Scotland where income tax is paid to the Scottish Government.
The £12,500 personal allowance is the same in Scotland but there are five tax rates instead of three.
The starter rate sees Scottish people pay 19 percent tax on earnings between £12,501 and £14,549.
They then pay 20 percent tax on incomes from £14,550 to £24,944, 21 percent on £24,945 to £43,430 earnings, 41 percent if they make £43,431 to £150,000 and those earning over £150,00 the rate is 46 percent.
Most people pay income tax through PAYE, which appears on your payslip each month and on your P60 and any P45s you may have.
It is the system your employer or pension provider uses to take income tax and National Insurance contributions before they pay your wages or pension.
Your tax code tells your employer how much to deduct, and the code can take account of taxable state benefits.
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