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Let’s start with simple.
My personal allowance for cake is 1 small slice per sitting.
Now for you, your personal cake allowance may become 3 slices if you haven’t had cake for 2 days.
HMRC have a stricter policy and you only have one personal tax allowance per year, no negotiations.
In fact, when you make 6 figures you won’t have one at all (but I’ll take the 6 figures).
(You still get the cake)
So, let’s cut to the chase.
‘Most people’s Personal Allowance is £10,000, unless you were born before 6 April 1948 or your income’s over £100,000’.
That 10 grand allowance (for most people) changes every year so you need to check. It’s not hard, a handy search will do the trick. Unlike a lot of allowances, this one goes up every year.
It means that in one tax year you can earn £10,000 before you pay any income tax. Hooray!
So £10,000 is your personal income tax allowance, everything earned above that you have to pay income tax on.
Boring and needed side note – There is also an allowance for National Insurance so you can start to pay tax at a lower amount than the personal allowance for income tax. If you’re thinking this is complicated, you would be right. The government has said they are going to simplify it.
The allowance for the current tax year 2014 – 2015 is £10,000
The allowance for the tax year 2013 – 2014 was £9,440
It changes every year, but this change is good for you. Like cake. And Marmite on hot buttered toast when it’s a cold horrible winter’s morning.
‘Most people’ start paying basic rate tax on income over £10,000 (subject to change, don’t forget).
Basic rate tax is 20%.
If you earned £22,000 for all your earned income (that includes your business profits-for-tax and your job if you have one), you only pay income tax over your personal income tax allowance.
This is tax on your profits-for-tax, remember?
If you want to know more about expenses, capital items and reducing your tax bill, read this.
Profits-for-tax is the amount you make in a year that you are taxed on. It is NOT the same as your actual profits. There are also lovely legal and ethical ‘wavy magicky wand’ type things that can be done to reduce the amount of tax you pay. Contact me if you’re interested in wavy magicky wand tax relief.