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Income Tax: How much can you earn before paying tax?

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Income Tax is a charge on the money you earn including wages and salaries from jobs, profits on businesses for business owners, pensions and rents if you are a landlord. You do not usually have to pay Income Tax on all of your income. But how much exactly can you earn before paying tax?

What is Income Tax?

Income Tax is a charge on income including:

  • Earnings from employment, including benefits in kind such as a company car
  • Earnings from self-employment
  • Most pensions income, including state, occupational and personal pensions
  • Some social security benefits
  • Interest on most savings
  • Income from shares (dividends)
  • Rental income
  • Income from a trust.

You may also be required to pay UK income tax on foreign income including:

  • Wages if you work abroad
  • Foreign investments and savings interest
  • Rental income on overseas property
  • Income from pensions held overseas.

Foreign income is any income earned outside of the UK (England, Scotland, Wales and Northern Ireland).

The Channel Islands and the Isle of Man are classified as foreign in terms of Income Tax.

What is the current rate of Income Tax for 2020/2021?

The current tax year is from April 6, 2020, to April 5, 2021.

How much you pay each tax year depends on two factors:

  • The value of your income above your Personal Allowance
  • How much of your income falls into each tax band

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What is a Personal Allowance?

Everyone who earns any of the income listed above has a Personal Allowance, which means an amount of money they are allowed to earn before paying Income Tax.

A Personal Allowance may be larger for some people if they claim Marriage Allowance or Blind Person’s Allowance.

But it may be smaller if someone owes tax from a previous year.

How much can you earn before paying tax?

The standard personal allowance for 2020/2021 is £12,500.

If you earn less than this, you normally should not have to pay income tax.

For people earning more than £100,000, the personal allowance figure of £12,500 is reduced by £1 for every £2 earned.

When someone earns £125,000 there is no tax-free allowance and they pay Income Tax on everything they earn.

What are the Income Tax rates for 2020/2021?

The Income Tax rates for 2020/2021 in England and Wales are as follows:

  • £0 to £12,500: 0 percent
  • £12,501 to £50,000: 20 percent (basic rate)
  • £50,001 to £150,000: 40 percent (higher rate)
  • More than £150,000: 45 percent (additional rate).

You can estimate your Income Tax amounts for the current tax year using the Government’s website here.

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