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What is my Tax Free Allowance?

The following tax article looks at tax free allowances in general, if you are looking for the 2014 tax free allowances you should read our

Tax Free Allowance: Understanding Tax Calculations

Your Tax Free Allowance is more commonly referred to as your Personal Allowance. The rate of Personal Allowance normally changes each year and is published by the Chancellor as part of the UK Budget. Nearly everyone who lives in the UK is entitled to an Income Tax Personal Allowance and the amount of personal allowance you receive is dependent on:

  • How much you earn. If you earn in excess of £100,000.00, your personal allowance will be reduced by £1.00 for every £2.00 earned over £100,000.00 until your personal allowance reaches zero.
  • Your age. Certain age groups are protected by previous tax laws and conditions.
  • Your situation. If you are blind you are entitled to an increase in your personal allowance via Blind Person's Allowance. Blind Person's Allowance figures change with each budget.

You can review current and historical Personal allowance figures here. The graph below illustrates how the amount of personal allowance has changed. This graph is based on an individual earning 40k per year and includes PAYE tax payments only.

Current and historical Personal Allowance graph with tax paid trend

1999200020012002200320042005200620072008200920102011201220132014
Personal Allowance4,3354,3854,5354,6154,6154,7454,8955,0355,2256,0356,4756,47574758,1059,44010,000
Higher Rate Threshold28000284002940029900305003140032400333003460034800374003740035000343703201031865
Tax due lower rate4733480349735057517753315501565358755753618561855505525345144373
Tax Due Higher rate4800464042404040380034403040268021602080104010402000225231963254
Total Tax Payable9533944392139097897787718541833380357833722572257505750577107627

As we can see from the figures:

  • The amount of Personal Allowance has steadily increased over the past 15 years to more than double the amount of Personal Allowance 10 years ago. That's excellent news for workers.
  • The figure for the higher rate threshold (the point at which you start to pay 40% tax rather than 20% tax) consistently rose during the labour government. The net impact when coupled with the increase in personal allowance was that the average worker was paying less tax (in 2009, an individual earning 40k per year paid over 2k less teax per year than in 1999, have almost an extra £175 per month in their pocket).
  • Since coming into power in 2009, the Conservative Government have continued to increase Personal Allowance but have consistently reduced the Higher Rate Threshold. The net impact is that our example worker earning 40k is starting to pay more tax at the Higher Tax Rate of 40%.
  • At the low point in 2009, our example worker was paying circa £7225 per year in tax, in 2014 they are paying nearly £500 more (circa £45 per calendar month).

So, what does it all mean. iCalculator is apolitical, we have no interest in a political party and the figures above are not indicative of one party being better than another or having more of a vested interest in individual workers. We have to remember that during the labour term we had a boom, t was easier to spend money and be flamboyant, the conservatives have had to balance austerity in their figures. So, forget the parties, this is what you need to understand about Personal Allowances and its relationship to the Higher Rate Tax threshold.

  • The higher the Personal Allowance, the more you can earn before being taxed.
  • The lower the Higher Rate Tax threshold, the sooner you will have to pay tax at 40%.
  • Cost of living increases and salary increases mean that we are all slowly earning more, the average person is getting closer and closer if not exceeding the Higher Rate Threshold.

Personal Allowance and the Annual Inflation Rate

The rates of Personal Allowance, The Higher Rate Tax Threshold are not married to The Annual Inflation Rate (AIR). Lets look at what the figures would look like from 2009 onwards in they were.

The Graph below illustrates how Personal Allowance and the Higher Rate Tax threshold would look if they were linked to the annual Inflation Rate.

A Graph which illustrates what Personal Allowance figures would look like if based on the Annual Inflation Rate

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Annual Inflation Rate (%) 1.3 0.8 1.2 1.3 1.4 1.3 2 2.3 2.3 3.6 2.2 3.3 4.5 2.8 2.5
PA if at AIR 4391 4426 4479 4537 4601 4661 4754 4863 4975 5154 5268 5442 5686 5846 5992
HR if at AIR 28364 28590 28934 29310 29720 30106 30708 31415 32137 33294 34027 35150 36731 37760 38704
Tax due lower rate 4794 4832 4890 4954 5023 5089 5190 5310 5432 5628 5751 5941 6209 6382 6542
Tax Due Higher rate 4654 4563 4426 4275 4111 3957 3716 3433 3144 2682 2389 1939 1307 895 518
Total Tax Payable 9448 9396 9317 9230 9135 9046 8907 8744 8577 8310 8140 7881 7516 7278 70601

PA = Personal Allowance || HR = Higher Rate Tax Threshold || AIR = Annual Inflation Rate

By linking to the annual Inflation Rate our example worker on 40k a year would have paid more tax during the 'good times' and less tax now during periods of austerity. There are many good arguments for 'paying your way' during the good times to make the bad times easier to manage. Clearly this is just a snapshot and there are also good arguments for manually setting Personal Allowance and the Upper Tax Threshold but we trust this provides food for thought.

Summary

In summary, your Personal Allowance (Tax Free Allowance) is the amount of income you can receive each year without having to pay tax on it. Depending on your circumstances, you may also be able to claim certain other allowances. The amount of Tax Free Allowance varies between individuals and is based on specific circumstance and criteria such as Age and the Total Income (Gross Pay, money from savings and Pensions etc. before Tax has been deducted) for the Tax Year.

Further Reading

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