Understanding Your Personal Tax Allowance

How the UK personal allowance works and how to make the most of it for you and your family.

What Is the Personal Allowance?

The personal allowance is the amount of income you can earn each year before paying income tax. For 2024/25, it's £12,570. This applies to most people in the UK. You can earn up to this amount completely tax-free.

Who Gets the Full Allowance?

Most people get the full £12,570 allowance. However, if you earn over £100,000, your allowance reduces by £1 for every £2 you earn above this threshold. By £125,140, you've lost the entire allowance – creating an effective 60% tax rate.

The £100,000 Trap

Earning between £100,000 and £125,140 means losing your personal allowance gradually. Combined with 40% tax, you effectively pay 60% on this band. It might be worth making extra pension contributions to stay below £100,000.

Using Your Spouse's Allowance

If you're married or in a civil partnership, one partner earning less than £12,570 can transfer £1,260 of their unused allowance via Marriage Allowance. This saves up to £252 per year.

Personal Savings Allowance

In addition to your personal allowance, you get a personal savings allowance. Basic rate taxpayers get £1,000 of savings interest tax-free. Higher rate taxpayers get £500.

Dividend Allowance

There's also a £500 dividend allowance for 2024/25. Beyond this, dividends are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate). Using ISAs for dividend-paying investments avoids these taxes.

Trading Allowance

If you have a side hustle, there's a £1,000 trading allowance. If your self-employed income is below this, you don't have to report it or pay tax on it. This is separate from your personal allowance.

Property Allowance

Similarly, there's a £1,000 property allowance for rental income. If you rent out a room in your home, you might also benefit from the Rent a Room scheme, which gives £7,500 tax-free per year.

How We Can Help

At Harmond Capital, we help clients structure their affairs to make full use of available tax allowances. We'll review your income and identify opportunities to preserve your personal allowance.