THE AMOUNT of income tax you pay depends on the salary you earn – so how does it work and what is the tax-free amount?
It comes as Rishi Sunak announced he will cut income tax in a huge boost for workers – but it might not come into force for two years.
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Income tax takes out a cut of your earnings once they’ve reached a certain threshold.
These different tax rates increase with the more money you earn.
There’s also the personal allowance, which means the first chunk of the money you make is entirely tax-free.
We explain how personal allowance affects your wages and what changes the Chancellor has announced.
What is my personal allowance?
The personal allowance is the amount you can earn each year tax-free.
It can change from one year to the next and is set by the government.
In the current tax year – which runs from April 6 2021 to April 5 2022 – the figure is £12,570.
However, this amount may be bigger if you claim certain allowances including, blind person’s allowance, marriage allowance and child tax credit.
You will also not have to pay tax on savings interest, dividends and the first £1,000 of income if you are self-employed.
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How do I calculate tax?
If you earn £12,570 or less, you currently pay no income tax.
On earnings between £12,570 and £50,270, you pay the basic income tax rate of 20%.
However, the basic rate could be be cut from 20% to 19%, which was announced in the Spring Statement 2022.
The Chancellor promised to make the changes “before the end of this Parliament, in 2024” in a pre-election giveaway.
Wages of £50,271 and above are taxed at the higher rate of 40%.
And the additional rate of income tax, which applies to earnings above £150,000, is 45%.
Anyone who earns over £100,000 does not get any tax-free personal allowance – they will pay income tax on everything they earn.
The thresholds for income tax generally rise each year so that people can earn more without paying more tax.
Chancellor Rishi Sunak confirmed in the October 2021 Budget that these income tax thresholds will be frozen until 2026.
Though this isn’t a tax rise, it is a small stealth pay cut as rising levels of inflation are likely to carry people into higher tax bands.
Just keep in mind that your personal allowance might be different if you’re entitled to certain allowances or earn a lot of money.
The marriage allowance is a tax break where one partner in a married couple can transfer some of their unused personal allowance to another.
And people with sight issues can get the blind person’s allowance, which increases this tax-free amount.
What changes will there be?
In the Spring Statement 2022, Rishi Sunak revealed plans to slash income tax from 20p to 19p in the pound, but hasn’t said exactly when it will happen.
In the small print of the book, they say it will make the average taxpayer £175 better off.
He told MPs: “For the first time in sixteen years, the basic rate of income tax will be cut from 20 to 19 pence in the pound.
“A tax cut for workers, for pensioners, for savers. A £5bn tax cut for over 30 million people.
“It is fully costed and fully paid for in the plans announced today.”
He promised to deliver the changes before the end of this Parliament, which is in 2024.
How do I check my tax-free personal allowance?
Your tax-free personal allowance amount is usually reflected in your tax code, which can be found on your payslip.
The letter L in your tax code signals that you’re entitled to the standard tax-free personal allowance.
The letter M means you’ve transferred some of your personal allowance to your partner using the marriage allowance.
Meanwhile the letter N signals the opposite – you’ve received some of your partner’s tax-free personal allowance.
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