How Income Tax and the Personal Allowance works

Published on November 02, 2023

Income TaxPersonal AllowanceNational Insurance

Dividends Tax

Understanding the intricacies of Income Tax is essential, especially when you are new to the workforce. This guide will explain how Income Tax and the Personal Allowance function, providing you with the knowledge to determine if you are being paid the correct amount and helping you with budgeting.

Should I Pay Income Tax?

Income Tax is a tax that applies to various types of income. The most common source of Income Tax is your wages and salary from work. However, you may also need to pay Income Tax on the following:

  • Profits if you run a business.
  • Interest and dividends from savings and investments.
  • Rent you receive if you are a landlord.

It's important to note that you don't typically pay Income Tax on all of 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.

Income Tax Allowances and Thresholds for 2023/24 and 2022/23

Allowance or Threshold2023/242022/23
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£1,000£2,000

If your earnings exceed the threshold, your Personal Allowance is reduced by £1 for every £2 you earn above it until it reaches £0. The Marriage Allowance is provided as a reduction in your tax bill, unlike the Personal Allowance and Age Allowance, which are deducted from your taxable income before tax calculation.

To calculate your Income tax, you can use the following tool Take Home Pay Calculator .

To compare differences between two salaries, you can use the following tool Compare two salaries .

To calculate your marginal rate tax , you can use the following tool Marginal tax rates.

What Is a Personal Allowance?

Everyone, including students, is entitled to a Personal Allowance, which is the amount of money you are allowed to earn each tax year before you start paying Income Tax. For the 2023/24 tax year, the Personal Allowance is £12,570. If your income is below this threshold, you generally won't have to pay any income tax.

Your Personal Allowance may be higher if you claim the Marriage Allowance or Blind Person’s Allowance, and it may be lower if you are a high earner or if you owe tax from a previous tax year. For the most up-to-date Personal Allowance figures, you can check the GOV.UK website.

The Personal Allowance if you earn over £100,000

If your income exceeds £100,000, the £12,570 figure will be reduced by £1 for every £2 earned over the £100,000 limit. This means that if you earn £125,000 or more, you pay Income Tax on your entire income, and there is no tax-free allowance.

What Is Income Tax Used For?

Your Personal Allowance is deducted from your earnings before you start paying Income Tax. Income Tax is collected by HMRC on behalf of the government and is used to fund various public services, including healthcare, education, and the welfare system. It also contributes to investments in public projects such as roads, rail infrastructure, and housing.

How Much Income Tax Will I Pay?

Income Tax consists of different tax bands. As your income increases, the amount of Income Tax you pay also increases. The Income Tax rates for 2023/24 are as follows:

Rates of Income Tax

Income RangeIncome Tax Rate
£0 to £12,5700%
£12,571 to £50,270Basic rate: 20%
£50,271 to £125,140Higher rate: 40%
Over £125,140Additional rate: 45%

It's important to understand that you don't pay Income Tax at the same rate on all your income. You only pay the rate of Income Tax on the income within each bracket. For example, if you earn £52,000 a year, the Income Tax you pay is calculated as follows:

Income Tax Calculation for Earnings of £52,000 per Annum

Income RangeIncome Tax BandTax Amount
Up to £12,5700%No income tax on the first £12,570
Between £12,571 and £50,27020%20% Income Tax on the next £37,500 of income
Between £50,271 and £125,14040%40% on the final £1,730 of income
Over £125,14045%No Income Tax paid at this rate

It's worth noting that in Wales, Income Tax rates are set by the Welsh Government, which currently aligns with the rates for England and Northern Ireland for the 2022/23 tax year. However, in Scotland, Income Tax rates are set by the Scottish Government and differ from those in the rest of the UK.

To compare two salaries, you can use the following tool Compare two salaries .

National Insurance

Income Tax is not the only deduction made from your income. You may also make National Insurance contributions, which contribute to your entitlement to various state benefits, including the State Pension and Maternity Allowance. For more information on National Insurance contributions and how much you'll pay, please refer to our guide "How does National Insurance work and should you be paying it?"

Tax if You're Self-Employed

If you're self-employed, you are subject to the same Income Tax rates as everyone else. However, you pay Income Tax a year in arrears through Self Assessment. You can find more details in our guide "Tax and National Insurance when you're self-employed."