Limited Company
Limited company Accounting
Affordable, all-inclusive accounting packages designed for your small and growing business.
Services
Managed Services
Company Secretarial
Related Services
RR Accountants is an award-winning, pay monthly online accountant.
Save money, and get your accounts done fast for as little as £24.50 per month.
Table of Contents
Earnings and Tax: How Much Can I Earn Before Paying Taxes in the UK?
Has the tax enigma ever caught you? Well, we’ve already been targets of this, and we know you would be too sooner or later, unless you’re earning enough!
Whether you’re self-employed or have been working as an employee, your mind must have been grappling with the thought of how much can I earn before paying taxes while living and working in UK!
Living in UK and not paying taxes yet? There is sadly some bad news for you: HMRC will soon charge you with hefty penalties, but hey, it's better late than sorry!
Jump along with us, because today we're jumping into the world of earnings and taxes in the UK, specifically focusing on that magical zone: tax-free income.
Understanding the basics of how much can I earn before paying taxes is crucial for managing your finances effectively. However, if you’re unable to do so, you might be paying more than what you are taxed for.
Besides, you will be unable to fully spend and enjoy your tax-free income, which is indeed your hard-earned reward for working tirelessly for the dream you've been chasing.
Before we move further, let us explain to you about tax-free income. As per the 2023–24 tax year, an average individual living in UK owes a tax-free income of £12,570 a year. This is essentially your tax-free allowance, which you can keep without worrying about taxation.
You can consider this money as your tax-free birthday money—all yours to spend, save, or invest as you see fit!
A twist! There's more to the story than just the £12,570 tax-free zone. If, luckily, you’re earning more than £100,000, HMRC will bite a greater share of your profit, and in such cases, your personal allowance starts to shrink like a forgotten birthday cake in the fridge.
Your allowance decreases by £1 for every £2 you earn above the £100,000 threshold. So, the more you earn, the less tax-free cash you get to keep.
After you cross the free income threshold, HMRC taxes will increase with your increasing income, meaning that the more income you have, the less money you can keep in your pocket. But you don't have to sob like a baby; there is an escape.
Moreover, HMRC has come up with a system. This system has the following three categories, depending on the annual income of an individual:
1. Basic Rate (20%): If you’re earning between £12,571 and £50,270, your annual income will be subjected to a 20% tax rate.
2. Higher Rate (40%): For earnings between £50,271 and £150,000, a 40% tax rate will apply.
3. Additional Rate (45%): If your income exceeds £150,000, you will be subject to the highest applicable tax rate.
People in the UK generally believe that switching to a higher tax bracket entails taxing your entire salary at the new rate. However, this is not the actual case. In fact, you only pay the higher rate on the amount you earn above the previous bracket.
For example, your salary has increased from £50,000 to £55,000. According to the above rate, for £50,000, you would still pay the basic tax rate of 20%. The remaining £5,000 is subject to a 40% tax rate.
So, there's no need to fear a pay raise! However, if there remains some ambiguity, it's time to engage your tax advisors to accurately calculate your taxes and avoid overpaying.
RR Accountants offers you the flexibility to select between employing a dedicated tax advisor or outsourcing your complete finance department, based on your specific needs.
Remember, knowledge is power, and in this case, it does save you plenty of bucks!
Understanding how much you can earn before paying tax is one of the crucial steps in managing both your personal and business finances. It's totally cool to ask us for any tax-related questions; we are here to help you navigate through the maze!
Let's fix your accounting problems with RR Accountants's expert solutions. We're your personal accountants for finance, taxes, company advising, self-assessment and beyond. Use our customised resources to pursue your accounting.
Related Posts
The Birmingham Business Bucket List: 5 Must-Haves for Every Local Entrepreneur