Income Tax is a charge on the money you earn including wages and salaries from jobs, profits on businesses for business owners, pensions and rents if you are a landlord. You do not usually have to pay Income Tax on all of your income. But how much exactly can you earn before paying tax?
What is Income Tax?
Income Tax is a charge on income including:
- Earnings from employment, including benefits in kind such as a company car
- Earnings from self-employment
- Most pensions income, including state, occupational and personal pensions
- Some social security benefits
- Interest on most savings
- Income from shares (dividends)
- Rental income
- Income from a trust.
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How much can you earn before paying tax?
The standard personal allowance for 2020/2021 is £12,500.
If you earn less than this, you normally should not have to pay income tax.
For people earning more than £100,000, the personal allowance figure of £12,500 is reduced by £1 for every £2 earned.
When someone earns £125,000 there is no tax-free allowance and they pay Income Tax on everything they earn.
What are the Income Tax rates for 2020/2021?
The Income Tax rates for 2020/2021 in England and Wales are as follows:
- £0 to £12,500: 0 percent
- £12,501 to £50,000: 20 percent (basic rate)
- £50,001 to £150,000: 40 percent (higher rate)
- More than £150,000: 45 percent (additional rate).
You can estimate your Income Tax amounts for the current tax year using the Government’s website here.