Income Tax
(The weekly series - Pocket Money - where I explain financial basics in fewer than 200 words. Feel free to make suggestions!)
This is tax you pay on earned money - salary, self-employment, rental and pension income, some benefits and savings above your Personal Savings Allowance (PSA).
Rates for 2024/25 and 2025/26:
Everybody gets a tax-free personal allowance of £12,570.
Basic rate at 20% applies to income between £12,571 to £50,270.
Higher rate at 40% applies between £50,271 and £125,140.
Additional rate at 45% applies over £125,140.
Those who earn over £100,000 have their personal pllowance reduced by £1 for every £2 earned above £100,000 - the Personal Allowance Reduction. So by the time you’re earning £125,141 there is no tax-free Personal Allowance.
Your PSA means you can earn up to £1,000 in savings interest as a basic rate tax payer and £500 as a higher rate tax payer without paying tax. Additional rate taxpayers have no PSA.
Most employees pay through PAYE (it’s taken automatically from your wages) and the self-employed through a Self Assessment tax return.
Income tax doesn’t apply to ISA interest and gains, Premium Bond winnings, inheritance (Inheritance Tax), gifts (usually, but maybe also Inheritance Tax) or capital gains (Capital Gains Tax).
Love Eleanor. xxx
