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Accounting terms explained in a simple way

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  1. Income Tax
  2. Self assessment
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  4. VAT

Personal allowance - What is personal allowance?

In accounting, personal allowance refers to the amount of income that can be earned tax-free

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In many countries, there is a certain amount of income that an individual can earn before they are taxed. Any income that exceeds that amount is subject to tax. The amount for personal allowance varies by country and is typically adjusted based on economic changes such as inflation, etc.

How much is your personal allowance

When it comes to determining how much of your income is subject to taxation, it’s best to stay on top of your local regulations, whether you’re self-employed or an employee in a company.

The personal allowance amount is typically clearly stated on the website of your tax authority. In filing tax, it is likely that you’ll also see the amount during this process (as part of your self-assessment).

What happens above the personal allowance

Generally, any income above the specified personal allowance is subject to taxation. In the UK, the amount of tax depends on your earnings. Any income under the current personal allowance of £11,850 (2018) is not taxed. However, above that, the tax rate changes depending on earnings:

  • Income between £11,850 and £46,350 is taxed at 20%
  • Income between £46,351 and £150,000 is taxed at 40%
  • And income above £150,000 is taxed at 45%

  • Note that the tax rates differ for Scotland.

Earnings above £100,000 are subject to a different personal allowance. If this is the case, then your personal allowance of £11,850 decreses by £1 for every £2 that you earn, all the way to £0.

Changes to the personal allowance

When the personal allowance is adjusted, this is typically announced in a budget speech. For example, the Autumn Budget was just announced, wherein the personal allowance for 2019 was increased to £12,500.

Changes will be shared publicly when your local tax authorities come to the decision. This information is generally available with a quick internet search in your country, and it is useful to be aware of any updates.

Personal allowance and Debitoor

It can be helpful to know whether you’re over the personal allowance threshold and by how much before it comes time to file your tax. The easiest way to do so is to keep through records of your incoming and outgoing payments.

Accounting & invoicing software like Debitoor gives you the tools to easily register payments and add expenses quickly from anywhere. It also gives you an overview of your accounts so you can see your profits and stay on top of your income.