Tax Glossary

Tax-free Income

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Last updated on:
March 17, 2024

Tax-free income refers to earnings on which you don't have to pay any tax. The UK offers a variety of allowances enabling individuals to receive certain amounts without tax implications. Let’s delve into some of the tax allowances for the 2023/24 period that you might find beneficial:

  • Personal Allowance: Available to those earning under £125,140, allowing you to earn up to £12,570 without paying tax.
  • Trading Allowance: Aimed at individuals with self-employed income, providing a £1,000 allowance.
  • Capital Gains Tax Allowance: For profits from the sale of assets, with a £3,000 allowance.
  • Marriage Allowance: For spouses or civil partners, one earning under the personal allowance and the other under the higher rate threshold, enabling a transfer of unused personal allowance.
  • Property Allowance: Especially useful for landlords, offering a £1,000 allowance.
  • Rent a Room Scheme: For live-in landlords, offering a substantial £7,500 allowance.
  • Dividend Allowance: A £1,000 allowance for those with dividend income.

Distinguishing Tax-Free from Gross Income

It's important to understand that tax-free income is specifically that portion of income not subject to taxation, while gross income encompasses your entire earnings before any taxes are deducted.

Taxation of Income in the UK

Income in the UK, whether from employment or self-employment, is subject to Income Tax and National Insurance contributions. Here's how taxation is structured based on income levels:

  • Up to £12,570: 0% tax rate under Personal Allowance.
  • £12,571 to £50,270: Taxed at a 20% Basic Rate.
  • £50,271 to £125,140: Subject to a 40% Higher Rate.
  • Above £125,141: Incurs a 45% Additional Rate.

For Employed Individuals

Your payslip provides a detailed account of deductions such as Income Tax, National Insurance, pension contributions, and student loan repayments, offering clarity on your net earnings.

For the Self-Employed

Self-employed individuals will find similar deduction details on their tax returns, including Income Tax, National Insurance, and any applicable student loan payments. Arranging for private pension contributions is also a self-managed process for the self-employed.

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