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Some income is tax-free for instance, interest from cash Isas and certain National Savings & Investments (NS&I) products. You don't have to tell Revenue & Customs about tax-free income. For more details, see Tax on savings and investments. There are two types of allowances:
those that give full relief and allow you to earn a certain amount of money before paying tax, and those that give restricted relief, which reduce your tax bill by a tenth of their nominal value.
Tax basics explained Basic rate income tax (20%) Higher rate income tax (40%) Additional rate income tax (50% in 2012-13, 45% in 2013-14) Personal allowance (tax-free) Income limit above which you start to lose personal allowance (at rate of 1 for each 2 you earn above limit) Age-related personal allowance (born before 6 April 1948 ) Age-related personal allowance (born before 6 April 1938) Lower earnings limit (above which you start to lose age-related allowance) Upper earnings limit (above which you receive no age-related allowance, just basic personal allowance) 75+ Upper earnings limit (above which you receive no age-related allowance, just basic personal allowance) Married couples allowance (MCA) -born after 6 April 1935 Married couples allowance (MCA) -born before 6 April 1935 only Blind person's allowance 2012-13 0-34,300 (after allowances) Over 34,370 Over 150,000 2013-14 0-32,010 (after allowances) Over 32,010 Over 150,000
8,105 (unless income 9,440 (unless income above 100,000) above 100,000) 100,000 10,500 10,660 25,400 30,190 30,510 N/A 7,705 2,100 100,000 10,500 10,660 26,100 28,220 28,540 N/A 7,915 2,160
Tax basics explained Capital gains tax (CGT) threshold Inheritance tax threshold (IHT) 2012-13 10,600 325,000 2013-14 10,900 325,000
Personal allowance
Most people are allowed to receive a certain amount of income in a tax year before tax is payable. This is known as the basic personal allowance, and is classed as a 'full relief' allowance. In 2012-13 the basic personal allowance for people under 65 was 8,105. For 2013-14 it rises to 9,440. If you earn above 100,000 it is progressively withdrawn, at the rate of 1 for every 2 above 100,000 you earn. This means that if you earn 116,210 (2012-13) or 118,880 (201314) you receive no personal allowance and all your income is taxed.
Example
For example, a 65-year-old with a total income of 26,000 in 2012-13 (600 over the limit) will therefore lose 300 from the higher allowance of 10,500, bringing it down to 10,200. For more details see Tax and allowances for older people.
Unused balance
If your income is not enough to make use of the allowance, any unused balance can be transferred to your spouse or registered civil partner.
Unlike the personal allowance, the married couple's allowance is not an amount you can earn before you start paying tax. Instead, it's a restricted relief allowance, which means you can't claim the whole amount. The tax you pay is reduced by deducting 10% of the allowance from your final tax bill.