Understanding taxes can be tricky, but it’s an important part of running a business. You need to know how much you’re expected to pay in taxes if you want an accurate picture of your profits

Personal allowance is a large part of the picture, so let’s get into it. Specifically, we’ll be covering:

  • What is a personal allowance?
  • How much is the personal allowance 2022/23?
  • Special circumstances
  • Other kinds of personal allowance

What is a personal allowance?

In a nutshell, personal allowance is the amount of income you can earn before you have to pay income tax. 

Income is measured over the course of a financial year – the new financial year starts on 6 April 2022.

How much is the personal allowance 2022/23?

Your personal allowance for regular income is £12,570. Any amount you earn over that allowance, you’ll pay 20-45% tax on your income depending on what you earn. 

You only pay tax on the actual amount that goes over your personal allowance. 

For example, if you earned £22,570:

  • The first £12,570 falls within your personal allowance, so it’s tax-free
  • The remaining £10,000 is charged at the basic rate (20%), which would be £2,000
  • All in all, you’ll pay £2,000 of income tax

Want to learn more about income tax rates? See: What are the income tax rates 2022/23 in the UK?

Special circumstances

There are a few situations where your personal allowance can change:

  • If you’re married
  • If you’re blind
  • If you earn over £100,000 

Marriage allowance

If you have a husband, wife, or civil partner, you can transfer £1,260 of your personal allowance to them by applying for marriage allowance

It only really makes sense to use your marriage allowance if you’re making less than your own personal allowance. You’re essentially giving your partner the allowance that you’re not using. 

For example, if you earned £9,000 and your partner earned £20,000:

  • You can transfer £1,260 of your personal allowance to them
  • Your personal allowance would drop to £11,310, so you’d still pay no income tax
  • Your partner’s personal allowance would increase to £13,830
  • Your partner would only pay tax on £6,170 (£20,000 – £13,830)

Blind person’s allowance

If you’re blind, you can apply for blind person’s allowance and add £2,520 to your personal allowance. So, you’d only start paying tax when you earn over £15,090. 

Earning over £100,000

Once you earn over £100,000 per year, you’ll start losing your personal allowance. It goes down by £1 for every £2 you earn over £100,000. It can even go down to zero! 

Other kinds of personal allowance

On top of your personal allowance for income, there are a few other personal allowances you can have at the same time. 

Trading and property allowance 

If you get any income for trading or renting out property, you’ll get a personal allowance of £1,000. 

HMRC treats them as separate allowances, so you can earn £1,000 from trading and £1,000 from rent without having to pay tax on either. 

Dividend allowance

Dividends are payments made to company shareholders. The personal allowance for dividends is £2,000. 

Dividend payments still count toward your regular income, but they’re taxed at a different rate, like this:

  • Basic rate – 7.5%
  • Higher rate – 32.5%
  • Additional rate – 38.1%

For example, if you earned £3000 in dividends and £22,000 from other income:

  • Your total income would be £26,000
  • Deduct your personal allowance (£12,570) and dividend allowance (£2,000) to get your taxable income (£11,430)
  • £1000 of that is from dividends, so it would be taxed at the basic dividend rate (7.5%)
  • The remaining £10,430 is from regular income, so it would be taxed at the basic income rate (20%)
  • In total, you’d pay £75 of dividend tax and £2,086 of regular income tax 

Savings interest allowance

If you get any interest from savings, you’ll get a personal allowance of up to £1,000. Your interest allowance depends on your income tax band, like this:

  • Basic rate – £1,000
  • Higher rate – £500
  • Additional rate – £0

Any interest over the allowance gets taxed at the normal income tax rates.

Savings starting rate

If you earn less than £17,570 from other sources of income, you can also earn up to £5,000 before having to pay tax on it. This is called your savings starting rate. 

Your savings starting rate decreases as you earn more money from other income. The maximum is £,5000, but every £1 you earn above your personal allowance (£12,570) reduces your savings starting rate by £1. 

Manage your taxes with Countingup 

Taxes can be confusing and time consuming. As a business owner, you need to record your income and expenses, then work out how much you’ll have to pay at the end of the year. 

Luckily, the Countingup business current account can do all that for you, and more!

Countingup is the business current account and accounting software in one app. It automates time-consuming bookkeeping admin for thousands of self-employed people across the UK. 

Start your three-month free trial today. 

Apply now.


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