Gaining a better understanding of tax-free allowances and tax bands is important for self-employed people. It will also help small business owners as they manage their earnings and plan tax payments.
This is because how much income tax you pay in each tax year (from 6 April to 5 April the following year) will depend on how much of your taxable income is above your tax-free allowance, and how much falls within each tax band.
In short, your annual tax allowance is the amount of income you don’t have to pay any tax on at all. After that, you’ll need to pay a rate of tax which will change as you earn more money.
In this guide, we look at:
- An overview of tax-free allowances
- How much is the tax-free allowance in 2024/25?
- Annual tax allowance adjustments for 2025
- What are the 2025 income tax bands and rates?
- Other frequently asked questions
Tax-free allowance – an overview
Whether you’re self-employed or own a limited company and pay yourself in dividends, you’ll be given a Standard Personal Allowance for income tax.
This means you can earn up to this amount in each tax year tax-free. You might also be eligible for other allowances, such as the Blind Person’s Allowance or Marriage Allowance.
You can deduct your tax allowance from your overall net income to help find out how much tax you’ll have to pay each year.
How much is the tax-free allowance 2024/2025?
The tax-free allowance 2024/2025 is £12,750. If you earn over £100,000, your personal allowance will go down by £1 for every £2 of income above the £100,000 limit.
Having a tax-free allowance will reduce your tax bill by X, because you don’t have to pay basic rate tax on that initial amount.
Annual tax allowance adjustments for 2025
From 2028-29 (at the end of the freeze brought in by the previous government), the thresholds for these taxes will rise in line with inflation. In the government’s Autumn Budget, Chancellor Rachel Reeves decided not to extend the current freeze on income tax and National Insurance thresholds.
While this means that there will be no adjustments to the tax-free allowance 2025/26, it may be worth factoring a growing personal allowance into your long-term financial planning.
How will my personal allowance show up in my tax code?
Tax codes are a simple series of numbers and letters which employers or pension providers use to work out how much income tax to take from wages.
Employees will find their tax code on payslips and P60 forms. The tax code showing if you’re entitled to the full personal allowance is 1275L.
What are the 2025 income tax bands and rates?
Once you earn over your Personal Allowance, you’ll need to start paying tax. The amount you will need to pay – called basic rate, higher rate, or additional rate – depends on how much you earn.
Check the table below for the 2024/25 income tax rates and bands.
| Band | Taxable income | Tax rate |
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | over £125,140 | 45% |
This means that for anything you earn over your personal tax allowance in the UK up to £50,270, you’ll pay 20 per cent of that amount in tax. You’ll then pay 40 per cent tax on any amount between £50,271 and £125,140, and 45 per cent on any amount over £125,140.
Self-employed people need to fill in a Self Assessment tax return every year by 31 January for the previous tax year’s earnings. So for the current 2024-2025 tax year, you’ll need to do your Self Assessment and pay your bill by the end of January 2026. The tax return deadline is earlier if you’re filing a paper return, on 31 October.
Submitting your return early will help you budget for the tax you owe well ahead of the deadline. You can actually file one for the previous tax year any time after the new tax year starts – meaning you can submit your return for this tax year after April 6 2025.
Find out how to do self-assessment on your tax return with our full guide.
Other tax allowances
You also have tax-free allowances for income from savings interest and dividends. On top of your personal allowance, you can also earn up to £5,000 in interest on any savings you have without paying any tax. There is also a separate dividend allowance for any income you receive through dividends if you own shares in a company. For the 2024/2025 tax year, the dividend allowance is £500. For any dividends earned in 2023/2024, the dividend allowance was £1,000.
All about tax allowance – FAQ
If you need to know more about your annual tax allowance, these frequently asked questions should help, plus read our business tax guide to learn even more about business tax.
Will tax-free allowance increase in 2025?
The current freeze on income tax thresholds means that the tax-free allowance in the UK won’t increase in 2025. However, from the end of the freeze in the 2028-29 tax year, the thresholds for income tax will rise in line with inflation.
How much can I earn before I pay 40% tax in the UK?
You can currently earn up to £50,271 before paying the higher rate of tax at 40 per cent in the UK. Once you earn over £125,140, you’ll need to pay the additional rate tax of 45 per cent.
How will the tax I pay be affected by my personal allowance?
You usually don’t have to pay any tax on the first £12,750 you earn each year. This is known as your personal allowance. Having a tax-free allowance in the UK reduces the amount of tax you need to pay overall.
What is the personal tax allowance for 2024/25?
The personal tax allowance 2024/25 is £12,750. Generally, you’re only eligible for UK tax allowances if you’re a resident in or a nation of the United Kingdom, an EEA country, or the Isle of Man or Channel Islands, or employed in service of the Crown.
At what salary do you lose the tax-free allowance?
Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £125,140 or above.