How Much Can You Earn Before Paying Tax in the UK?
How Much Can You Earn Before Paying Tax in the UK?
Tax is an unavoidable part of life, and it’s important to understand how much you can earn before you have to start paying tax in the UK. Knowing your tax obligations can help you plan your finances and ensure that you’re not caught out by any unexpected bills. In this blog post, we’ll look at the rules around how much you can earn before paying tax in the UK and what you need to do if your income exceeds this amount.
Understanding Your Tax-Free Allowance
The amount of money that you can earn before paying tax in the UK is known as your ‘tax-free allowance’. This allowance is set by HMRC (Her Majesty’s Revenue & Customs) and changes each year. For 2022/2023 and 2023/24, the personal allowance is £12,570. This means that if your annual income is below this amount, then you won’t have to pay any income tax on it.
However, it’s important to note that this allowance only applies to income from employment or self-employment – other sources of income such as investments or rental properties may be subject to different rules. It’s also worth noting that if your annual income exceeds £100,000 then your personal allowance will be reduced by £1 for every £2 earned above this threshold. This means your allowance is zero if your income is £125,140 or above.
Income Tax Rates for 2022/23 and 2023/24
Once your annual income exceeds £12,570 then you will begin to pay income tax on any additional earnings. The rate of income tax varies depending on how much money you make each year – for 2022/23 and 2023/24 these rates are as follows:
• Basic rate: 20% on earnings between £12,571 and £50,270
• Higher rate: 40% on earnings between £50,271 and £150,000
• Additional rate: 45% on earnings over £150,000
It’s important to note that these rates are only applicable to taxable income – any money earned from investments or rental properties may be subject to different rules.
Tax Returns and Self Assessment
If you are employed by a UK business you should pay tax before you receive your wages via the PAYE (Pay As You Earn) scheme and therefore do not have to complete a self-assessment tax return in most cases. However, if any of these apply you will need to complete a self-assessment tax return to declare all of your taxable earnings:
you were self-employed as a ‘sole trader’ and earned more than £1,000 (before taking off anything you can claim tax relief on)
you were a partner in a business partnership
you earned £100,000 or more
This form must be completed by 31st January each year (or 31st October if filing by paper) – failure to do so could result in fines or other penalties from HMRC.
It’s also worth noting that even if your annual income does not exceed the personal allowance then it may still be beneficial for you to complete a self-assessment form if there are other sources of taxable income such as investments or rental properties which need declaring.
Conclusion
Knowing how much money you can earn before having to pay tax in the UK is an important part of managing your finances effectively. The current personal allowance for 2022/23 and 2023/24 is set at £12,570 but it’s important to remember that this only applies to certain types of taxable incomes – other sources may be subject to different rules and rates of taxation. If your annual income exceeds this amount then it may be necessary for you to complete a self-assessment form each year in order declare all of your taxable earnings and pay any taxes due by 31st January each year.
Note: The UK tax year runs from 6 April to 5 April each year
Useful resources:
HMRC Guidance on Self-assessment