As the self-assessment tax return deadline approaches, millions of Britons are filing into their 2020-2021 accounts.
The biggest possible levy is income tax, a cut of your income once they’ve reached a certain threshold.
But what is that threshold?
There are different tax rates that will increase as you earn more.
There’s also a personal allowance, which means the first part of your earnings is completely tax-free.
Here is how it works.
What is Personal Allowance?
A personal allowance is how much you can earn each year tax-free.
It can vary from year to year and is regulated by the government.
In the current tax year – which runs from 6 April 2021 to 5 April 2022 – the figure is £12,570.
On income between £12,570 and £50,270, you pay a basic income tax rate of 20%.
Wages of £50,271 or more are taxed at a higher rate of 40%.
And the additional income tax rate, which applies to income over £150,000, is 45%.
While this is not a tax increase, it is a small sneaky pay cut as rising levels of inflation are likely to put people in higher tax brackets.
Just be aware that your personal allowance may be different if you are entitled to certain allowances or earn a lot.
The marriage allowance is a tax relief in which one person in a married couple can pass some of their unused personal allowance to someone else.
And people with vision problems can get allowance for the blind, which increases this tax-free amount.
Anyone earning more than £100,000 does not receive any tax-free personal allowance – they pay income tax on everything they earn.
If you earn £12,570 or less, you currently pay no income tax.
How do I check my tax-free personal allowance?
The amount of your tax-exempt personal benefit is usually reflected in your tax code, which can be found on your pay stub.
The L in your tax number signals that you are entitled to the standard tax-free personal allowance.
The letter M means that you have transferred some of your personal allowance to your spouse in marital allowance.
Meanwhile, the letter N signals the opposite – you’ve received some tax-free personal allowance from your partner.
Check if your tax code is correct can save you a small fortune.
We also have a guide on how you can find Best Fixed Rate ISA, which means you can accrue tax-free savings.
And you can enjoy a £125 tax refund if you work from home over 18 months because of the pandemic.
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https://www.thesun.co.uk/money/12739166/how-much-earn-before-tax-salary/ How much can you earn before paying taxes?