Filing a tax return

How much can you earn before paying tax?

June 28, 2021

Every working person in the UK has a personal allowance, meaning you can earn up to a certain amount without paying any income tax.

In March, the Chancellor of the Exchequer announced that the personal allowance and higher rate threshold would be frozen from the tax years 2022/23 to 2025/26.

However, the government usually evaluates this threshold regularly, meaning the UK tax brackets can change from one tax year to the next.

Your personal allowance could also differ depending on whether you’re entitled to tax breaks, or if you earn more than £100,000 a year.

How much can you earn before paying tax?

For the current tax year – which runs from 6th April 2021 to 5th April 2022 – most people can earn up to £12,570 without paying Income Tax, an amount which is referred to as personal allowance. Income Tax is typically paid by an employer or pension provider through Pay As You Earn (PAYE), a system that takes Income Tax and National Insurance contributions before they pay your wages or pension.

This personal allowance of £12,570 could be smaller if you earn more than £100,000, but bigger if you are eligible to claim for things like blind person’s allowance or marriage allowance.

Tax can be a tricky thing to get your head around, so we’ve explained everything in more detail below.

Tax bands explained

As mentioned above, the amount of tax you pay depends on how much you earn. For an idea of how much Income Tax you might have to pay as a founder, you can head over to gov.uk and calculate a budget for your Self Assessment tax bill if you're self-employed. The tables below also outline the current tax brackets for England, Wales, Northern Ireland, and Scotland, who has their own separate tax brackets from the rest of the UK.

Tax brackets – England, Wales and Northern Ireland

Earnings Tax Rate
Under £12,570 0%
£12,571 to £50,270 20%
£50,271 to £150,000 40%
150,001 and above 45%

You’ll only pay the specified tax rate on that portion of salary. For example, if you earn £60,000 per year you’ll pay:

  • Nothing on the first £12,570
  • 20% (£7,540) on the next £37,700
  • 40% (£3,892) on the next £9,730

Tax brackets – Scotland

Earnings Tax Rate
Under £12,570 0%
£12,571 to £14,6667 19%
14,668 to £25,296 20%
£25,297 to £43,662 21%
£43,663 to £150,000 41%
£150,000 and above 46%

Not everyone’s personal allowance will be the same. If you earn over £100,000, the £12,570 figure is reduced by £1 for every £2 of income, so it could be as low as zero. It might also be smaller if you owe tax from a previous year, however, if you’ve paid too much tax in a previous year, your allowance could be increased.

There are some other circumstances that can affect your personal allowance too, which we’ll outline next.

Tax breaks

There are a handful of ways in which you can increase your personal allowance and reduce the amount of income tax you pay.

Marriage allowance

If you’re married or in a civil partnership, you could be entitled to the marriage tax allowance. If one partner earns less than £12,570 and the other earns between £12,571 and £50,270 (£43,662 in Scotland), the lower earner can transfer up to £1,260 of their personal allowance, which may reduce the tax bill by up to £252.

Blind person’s allowance

Blind people can get an extra allowance of £2,520, in addition to their personal allowance.

Personal savings allowance

This allows you to earn tax-free interest on your savings and is based on the rate of income tax you pay. While additional rate taxpayers don’t qualify for it, higher rate taxpayers can earn up to £500 in savings interest per year without paying tax and basic taxpayers can earn up to £1,000 in savings interest per year without paying tax.

Although Scottish residents have different tax brackets, the English tax bands are used for personal savings allowance. It covers any interest earned from building society and bank accounts, savings accounts, credit union accounts and government and corporate bonds. It also includes interest earned on other currencies if they’re held in UK-based savings accounts, but dividend income from shares or funds isn’t included in the allowance.

Trading allowance

You don’t pay tax on the first £1,000 of income from self-employment, as this is your trading allowance. It also applies to casual services like babysitting and gardening and doesn’t affect the amount of personal allowance you’re entitled to. The trading allowance is capped at £1,000 and if you earn less than £1,000 per year, you can only claim the same amount as your gross income. It’s also worth noting that expenses can’t be claimed.

Exemptions

Not all income is taxable. Savings accounts like Individual Savings Accounts (ISAs) and National Savings Certificates are tax-exempt, you get a dividends allowance on any company shares you might have and premium bond or National Lottery wins are tax-free too. State benefits like Child Tax Credit, Maternity Allowance, Housing Benefit and Universal Credit are also not counted as taxable income. You don’t pay tax on the first £1,000 of income from property you rent – unless you’re using the Rent a Room Scheme – nor on rent you get from a lodger in your house which is below the Rent a Room limit.

Tax relief 

You can get tax relief in one of two ways. You either pay less tax to take into account money you’ve spent on things like expenses, or you get a tax rebate or have it repaid in another way like into a pension fund. Some types of tax relief are automatic, like with pension contributions, but others you have to apply for, such as the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS). These are government initiatives that give tax breaks to people investing in start-ups that are considered to be high risk.

Dividends

In addition to the personal allowance, everyone has a £2,000 dividend allowance.

This means that if you own shares in a limited company, you don't have to pay any tax on profits paid to you by the company that are less than £2,000. The company doesn't pay tax on any dividend pay-outs.

However, the shareholder may have to pay income tax if the dividends are more than £2,000.

Dividend allowance for the tax year 2021/22

Earnings Dividend Tax Rate
£12,571 to £50,270 7.5%
£50,271 to £150,000 32.5%
£150,000 and above 38.1%

Filing a tax return

If you’re self-employed as a sole trader and earned more than £1,000 in the last tax year (6th April to 5th April) before taking off anything you can claim tax relief on – or you’re a partner in a business partnership – you’ll need to send a tax return. If your only income is from your wages or pension, you won’t usually have to send a return, but you may need to if you have any other taxed income like:

  • Money from renting out a property
  • Commission and tips
  • Income from savings, investments and dividends
  • Foreign income

You might also need to send a tax return in order to claim various income tax reliefs or to prove you’re self employed in order to claim things like maternity allowance and tax-free childcare.

Tax returns must be filled in after the end of the tax year (5th April) either on the government website or by post, allowing an extra 20 working days for registration if you didn’t submit one last year. It’s vital that you fill in your return by the deadline (online 31st January; paper 31st October) and pay your tax bill on time (31st January), otherwise you could face a penalty. If your return is up to three months late, you’ll have to pay a penalty of £100 – more if it’s later or you pay your tax bill late – and you’ll also be charged interest on late payments. You can, however, appeal against a penalty if you have a reasonable excuse.

To save yourself time and stress at the end of the tax year you should keep a record of all your business finances, including bank statements and receipts, to ensure that you file your tax return correctly.

Here are a few tips to keep in mind when filing in your tax return:

  • Submit your return even if you think you can’t afford the bill. The last thing you want is a fine that leaves you in an even worse financial situation. There is also a chance that you may qualify for a payment plan, meaning you can pay your tax bill in instalments.
  • Remember any charity donations you’ve made. If you’re a 40% tax payer and claimed gift aid on a charity donation, you can claim the difference between the basic rate (20%) and the rate you pay. It’s easy to forget about this but it can add up, so it could be worth going back through your emails and bank statements to check. There will be the option to submit these details on your tax return form – plus, you don’t have to calculate the relief yourself.

As a small business owner, the main thing to remember is that keeping a record of all of your finances, learning about any tax breaks you may be entitled to and submitting your return to HMRC on time will save you a lot of time and stress further down the line.

With Ember, you can submit your tax return directly to the tax office, as well as reminding you of any tax dates you need to be aware of and any tax breaks you might be entitled to.

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Daniel Hogan

Daniel is a Deloitte-trained, fully qualified Chartered Accountant with experience in the finance software space. It was during his tenure managing a finance system in the UK that he grew dissatisfied with the lack of synergy and automation in the space, compelling him to co-found Ember.