If you’re self-employed or run your own business, it’s highly likely you’ll have to pay tax on your annual income.
Most people can receive a certain amount of income each year without paying tax – this is known as the tax-free allowance (or the personal allowance).
It’s important to understand how the UK tax-free allowance works plus how much income tax you need to pay based on your earnings.
Read on for more information about:
- the tax-free allowance
- how much income tax you should pay
- help with paying your income tax
- overpayment of income tax
- changes to income tax and personal allowance
- understanding the UK tax-free allowance
- FAQs – some common questions
What is the tax-free allowance?
The tax-free allowance is the amount of money you can earn each year without paying income tax. You could have a higher personal allowance if you qualify for tax relief such as the marriage allowance.
Anything you earn above your allowance is subject to tax paid to HMRC. Income tax is paid at different rates depending on how much you earn. This means that the more you earn, the more income tax you have to pay.
Tax-free allowance breakdown for 2024-25
There are a range of tax-free allowances for people who pay income tax. The main one that most people are eligible for is the personal allowance. But how much is the tax-free allowance? For the 2024-25 and 2025-26 tax years, the personal allowance is set at £12,570.
Other tax-free allowances include:
| Allowance | Value | How it works |
| The marriage allowance | £1,260 | The lowest earner of a married couple can transfer some of their personal allowance to their partner |
| The blind person’s allowance | £2,520 | Blind and visually impaired people can claim this on top of the personal allowance |
| The trading allowance | £1,000 | Can be claimed by self-employed people instead of business expenses |
| The home office allowance | Up to £26 a month | Can be claimed by self-employed people instead of home expenses |
| The mileage allowance | Up to 45p a mile | Can be claimed by self-employed people instead of travel expenses |
| Capital gains tax allowance UK | £3,000 | Can be claimed against the profit you make when you sell an asset |
| Dividend tax allowance UK | £500 | Can be claimed against the dividends you earn each year |
Personal tax reductions if you earn over £100,000
For anyone that earns over £100,000 a year, the UK tax allowance is reduced by £1 for every £2 you earn above the threshold. If you earn £125,140 or above, your personal allowance is zero, meaning you’re taxed on all your income.
For example, if you’re self-employed and you earn £110,000 a year with expenses of £3,000, your tax bill would look something like this:
- your personal allowance would be reduced to £9,070
- you’d pay the basic income tax rate (20 per cent) on the next £37,700
- you’d pay the higher income tax rate (40 per cent) on the next £60,230
Income tax breakdown – how much income tax should I pay?
How much income tax you pay depends on how much you earn plus the tax-free allowances you qualify for.
For the 2024-25 and 2025-26 tax years, the income tax rates are as follows:
| Income tax band | Threshold | Tax rate |
| Personal allowance | Up to £12,570 | 0% |
| Basic rate | £50,271 to £125,140 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
Income tax is paid progressively. This means that you only pay the tax rate for the amount you earn over each threshold.
Example: income tax of an individual earning £27,000
If you’re self-employed and earn £27,000 after expenses, your income tax bill would look like this:
- you’d pay 0 per cent on the first £12,570 of your earnings
- you’d pay 20 per cent (£2,686) on the next £13,430 of your earnings
It’s important to note that you’ll also have to pay Class 4 National Insurance Contributions on your earnings.
Example: income tax of an individual earning £57,000
If you’re self-employed and earn £57,000 after expenses, your income tax bill would look like this:
- you’d pay 0 per cent on the first £12,570 of your earnings
- you’d pay 20 per cent (£7,540) on the next £37,700 of your earnings
- you’d pay 40 per cent (£2,292) on the next £5,730 of your earnings
Help with paying your income tax
As well as using the tax allowance and reliefs to reduce your income tax bill, you can also use HMRC’s Time to Pay initiative.
Time to Pay is available to Self Assessment taxpayers who are facing financial difficulty. It allows you to set up a payment plan and pay your tax bill in instalments. You’ll need to meet several other conditions and owe less than £30,000.
If you can, you should always try to pay your business tax bill on time and in full.
Another way to stay on top of your tax bill is to use the government income tax calculator. By calculating how much you’re likely to owe ahead of time, you can plan your finances accordingly.
Overpayment of income tax
If you think you’ve overpaid income tax, you can amend your tax return within 12 months of the 31 January deadline.
You can do this by finding the relevant Self Assessment in your HMRC account.
You can also claim a tax refund for up to four years, but you’ll need to write to HMRC to say you’re claiming for overpayment relief.
Changes to income tax and personal allowance
There are currently no plans for the personal allowance, tax thresholds, or rates to change for the 2024-25 and 2025-26 tax years.
However, it’s important to note that as your earnings increase, you could be pushed into a higher tax band. As a result, your income tax bill would be higher.
As part of the Autumn Budget 2024, the government confirmed that the freeze on income tax thresholds will be lifted from the 2028-29 tax year. From this point, the personal allowance and thresholds for basic, higher, and additional income tax will increase in line with inflation.
A higher personal allowance and higher income tax thresholds is likely to lead to lower bills for many taxpayers.
Read more about small business tax changes.
Understanding the UK tax-free allowance
Whether you’re self-employed or run a business that employs people, having a solid understanding of how income tax works is crucial.
There are a range of tax-free allowances that you can use to reduce your income tax bill, while it’s also worth knowing what to do if you think you’re due a tax refund or think you might struggle to pay.
If you have any unanswered questions about the UK tax allowance, then it’s worth checking the government website or speaking to a professional accountant.
FAQs: some common questions about income tax
What is the UK tax-free allowance?
The UK tax-free allowance (or personal allowance) is the amount of income you can earn before you start paying income tax. There are also tax-free allowances for things like savings and dividends.
What is the tax-free allowance for 2023-24?
The tax-free allowance for 2023-24 was £12,570. This is the amount people could earn before paying income tax.
What are the tax allowances for 2024-25?
The UK tax-free allowance (or personal allowance) for 2024-25 is £12,570. The tax-free allowance for savings is £1,000 for basic rate taxpayers, £500 for higher rate taxpayers, and £0 for additional rate taxpayers.
The dividend tax-free allowance for 2024-25 is £500, while the trading and property allowance for 2024-25 is £1,000.
How much can I earn before I pay 40% tax in the UK?
You can earn £50,270 before you pay 40 per cent income tax in the UK. Anything you earn between £12,571 and £50,270 is taxed at 20 per cent (the basic rate of income tax). You don’t pay tax on anything you earn up to £12,570.
How does earning additional income from a side hustle affect my income tax?
You’re taxed on any combined income you make from your main form of employment and any side hustles you do.
Side hustlers can earn up to £1,000 without paying any tax, this is known as the trading allowance.
It’s important to note that you’ll need to complete a Self Assessment tax return for anything you earn over £1,000 and that side hustle income could push you into a higher tax bracket.
Can I reduce my taxable income by making charitable donations?
You can claim gift aid when you make a donation to charity. This allows the charity to claim an extra 25p for every £1 donated at no extra cost to you.
You can also donate property, land, or shares to a charity without having to pay tax.
How does the tax system treat one-off bonuses or commission payments?
If you receive a bonus or commission on top of your annual salary, these payments are taxed in exactly the same way.
It’s important to note that receiving a bonus or commission payment could push you into a higher tax bracket.
If I work two jobs, how does my personal allowance get split between them?
It’s possible to split the personal allowance between two jobs. However, most people with two jobs tend to use the personal allowance for their higher paying role.
This is because it could reduce their income tax liability.
Looking for self-employed insurance?
As well as paying income tax, an important part of running your own business is making sure you have the right insurance.
Did you know business insurance is also a tax-deductible expense? Why not get a tailored quote for self-employed insurance today?