How Much Can You Earn Before Tax?

Tax is never going to be anyone’s favourite thing, is it? But whatever your opinion on the tax system is you’ll have to pay it won’t you? Well, actually you might not let’s look at how much you can earn before tax is deducted in more detail.

Tax allowances are what give people money tax-free but there are many different kinds of tax allowances. To make things more complicated not everyone will be able to use all these different allowances, some tax allowances will only be available if specific conditions are met.

Tax allowances come in many different forms and in this piece I’ am going to examine many of them. So, you will know exactly how much you can earn before you need to pay tax. So, without further ado let’s begin, shall we?

Basic Personal Allowance

The personal allowance is something that benefits many people although not everyone really knows how it works. Basic personal allowance rates change but let’s look at what the current rules state.

Personal allowance can be broken into four main bands although it is only the first band you won’t need to pay tax on. The first band means you can earn up to £11,850 without paying tax on any income. This tax allowance rate will be increased for the 2019-2020 tax year to £12,500.

If you earn more money than this then you will be taxed on it, the rate you are taxed will depend on how much you earn. It sounds confusing but what it basically all means is that you can earn up to £11,850 or £12,500 depending on when you’re reading this without needing to worry about being taxed.

For many people their personal allowance will be their main source of tax-free income, if you only work part-time then you might not earn over the threshold to even have to worry about paying tax. However, while basic personal allowance is very important it isn’t the only tax-free allowance you need to know about.

Trading Allowance

If you are self-employed or even work part-time in a self-employed capacity then you will be entitled to a trading allowance. This will give you a further £1000 of tax-free income, most self-employed people will be labelled as sole traders but you could also be a partner in a business partnership or even set-up your own public limited company.

The trading allowance doesn’t just govern professional freelancers and other self-employed people either. It also covers casual work like babysitting and gardening to give just two of the most common examples.

Property Allowance

Property allowance works in a similar manner to a trading allowance in some respects, it offers you a further £1000 of tax-free income however as the name tells you this allowance is based around rental properties.

If you rent a property then you won’t need to pay tax for the first £1000 you earn. Anything higher than that will need to be reported to HMRC however, if you are using the rent a room scheme then this allowance won’t apply.

Savings Interest Tax

Saving for a rainy day is a common saying in the UK and many of us will have our own saving accounts set-up for just this purpose but how does tax work when it comes to your savings and are savings tax-free?

The bad news is no, savings are not tax-free because you will be charged tax on the interest you earn. However, the good news is you will be able to save some money without paying tax. But this is again quite complex, everyone will have a starting rate of saving which is currently £5000.

Your personal allowance earnings will also affect how much of this £5000 you can actually use though. The Direct Gov website explains how this work more effectively so I’ve copied in their example below.

How Saving Interest Tax Works:

You earn £16,000 of wages and get £200 interest on your savings.

Your Personal Allowance is £11,850. It’s used up by the first £11,850 of your wages.

The remaining £4,150 of your wages (£16,000 minus £11,850) reduces your starting rate for savings by £4,150. Your remaining starting rate for savings is £850 (£5,000 minus £4,150). You do not pay tax on your savings interest.

All kinds of saving are affected by the saving interest tax, bank and building accounts, trust funds, investment trusts, unit trusts, government bonds, life insurance contracts and peer to peer lending to name some of the common examples. For joint accounts, any interest will be split amongst the account holders.

Marriage Allowance

Finally, let’s look at marriage allowance, this is designed for both married couples and civil partners and it allows one member of the couple to transfer some of their personal allowance to their partner. How exactly this allowance works will depend on a number of different factors.

One member of the partnership will need to be earning below the £11,850 personal allowance (£12,500 for the 2019-2020 tax year) while the other will be earning above the £11,850 threshold. The exact amount you can save will depend on the earnings of both parties.

So How Much Can You Save?

Well now that we have looked at all the different things that can affect how much tax you need to pay, how much can you save? Well, it all depends on your earnings and current situation but as a general rule, you can follow the personal allowance tax as a general guide. So, for the majority of people, they will at least have earnings up to £11, 850 tax-free.

Remember though rules in regards to tax do change often and sometimes without much warning. We already know that the rate of the personal allowance is going to increase to £12,500 for the 2019 – 2020 tax year so it is always a good idea to stay up to date on the latest developments.

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