Please note: your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
How much money you earn can have an impact on the amount of tax you pay, whether that’s on the salary you earn from your job, or any interest you gain on the money in your savings account. But it can be tricky knowing how much this might be.
However, being aware of which Income Tax bracket you fall into (and what your Personal Tax Allowance is) can make this clearer — so hopefully you don’t end up with any surprises!
But what are the Income Tax brackets? And what is a Personal Allowance? Well, the good news is this guide is here to explain it all for you.
Let’s start with the basics: what is a Personal Tax Allowance?
Your Personal Tax Allowance (also sometimes called your ‘Income Tax Allowance’ or just your ‘Personal Allowance’) is the amount of money you can pocket before you have to pay tax on it. We’ll go into this in more detail below, but basically, we mean how much you can earn before you start paying tax.
For the 2024/25 tax year, the Personal Allowance is £12,570, meaning you can earn up to this amount without having to worry about tax. However, it could change, as you’ll get a new Personal Allowance each tax year (which always begins on 6th April).
The Income Tax bracket you fall into will determine how much tax you pay on anything you earn above this threshold (something that we’ll get into later).
Does everyone get a Personal Tax Allowance?
Personal Tax Allowances aren’t a one-size-fits-all affair. So, although the above will likely apply to most of us in the UK, there are some exceptions to keep in mind:
- If your income is over £100,000 per year, you’ll have a smaller Personal Allowance
- If you earn over £125,140 a year, you won’t have one
- If you claim Marriage Allowance or Blind Person’s Allowance, yours could be higher
The official Government website has more information on how tax-free Personal Allowances work.
What counts towards my Personal Tax Allowance?
The most obvious thing this applies to is the earnings from your day job, regardless of whether you work for someone else or are self-employed.
However, the below will also count towards your Personal Tax Allowance (or Income Tax Allowance, or whatever you want to call it):
- Profits from any side hustles you have alongside your main job
- Dividends from any investments you hold (outside of ISAs)
- Interest on the money you have tucked away in savings accounts
- Rent you get from tenants (as a landlord)
Is there any income that doesn’t count?
Yes, there are other tax free allowances – such as your ISA allowance. ISAs (Individual Savings Accounts) give you the option to save and invest up to £20,000 each tax year, without paying tax on any gains you make from your money.
If you want to invest tax-efficiently, then you could consider a Stocks and Shares ISA. If you simply want to earn interest on your savings without paying tax, then a Cash ISA may be more your thing.
However, something to keep in mind is that with investing, your capital is at risk. This means the value of your investments could go up and down, and you could end up with less money than you put in.
And another thing you might want to consider is whether you’re getting the best savings account rate with the option you choose.
There’s a tax-free interest allowance on savings outside of ISAs, meaning you may be able to find a high yield savings account that pays better interest. So, consider doing your research before deciding where to put your hard-earned money.
As we could be here all day explaining all the different types of allowances, the official Government website has a full list of income you don’t have to pay tax on that you might want to check out.
What are the income tax brackets?
Which Income Tax bracket you’re in will determine how much tax you’ll pay on any earnings you make beyond your Personal Tax Allowance.1 And, as you might expect, which one you fall into depends on the amount of money you earn.
| Income Tax bracket | Earning threshold | Income Tax percentage |
|---|---|---|
| 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% |
However, there are different Income Tax brackets if you live in Scotland2:
| Income Tax bracket | Earning threshold | Income Tax percentage |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Starter Rate | £12,571 to £14,667 | 19% |
| Basic Rate | £14,668 to £25,296 | 20% |
| Intermediate Rate | £25,297 to £43,662 | 21% |
| Higher Rate | £43,663 to £150,000 | 41% |
| Top Rate | Over £150,000 | 46% |
When you’re employed by a company, the tax you pay on your salary is taken before it gets paid to you (through a system called PAYE: Pay As You Earn).
Does my Personal Tax Allowance impact my savings account?
We’ve briefly touched on this above, but the interest gained from money in your savings account does count as taxable income (if you’re not saving through a Cash ISA).
When it comes to tax on regular savings accounts, you get something called a ‘starting rate’ for savings, and a Personal Savings Allowance (alongside your Personal Tax Allowance).
Both of these are essentially a tax-free interest allowance and, once you hit the limit of the amount of interest you can earn, you’ll need to pay tax on it.
These allowances are impacted by how much income you get from your job and other sources, as well as how much interest you earn.
Head to GOV.UK to learn more about the ‘starting rate’ for savings and Personal Savings Allowance and find out whether they apply to you.
So, if you’re worried that putting your money in a high yield savings account (that pays a lot of interest) will tip you over these allowance amounts, we have a guide to tax on savings. This explains what these allowances are and how much tax you’ll need to pay.
What else do I need to think about?
Getting a high yield savings account that pays the most interest is probably at the top of your priorities list when choosing where to grow your savings. After all, who says no to getting more money?
However, there are other things you might want to weigh up, such as:
- How much you’re aiming to save over time
- How much the fees are (not everyone will charge them)
- How easy it is to withdraw your money when you need it
- Whether you’d want a digital savings account
And by digital savings account, we basically mean one that can be managed online. You won’t have to go into a physical branch of a bank to open it, and you can do things like top-up your account, request withdrawals, and check your balance online — all from the comfort your home, too!
However, if you want the ease of being able to pop into a physical branch to speak to someone face-to-face or check your balance at an ATM rather than through a website or app, a digital savings account may not be what you’re looking for.
Whatever type of savings account you go for, the key is to make sure you know what to expect when it comes to tax and fees. Likewise, you need to choose one that’s right for you, something that’ll depend on your financial situation and what you’re tucking the money away for.
Wealthify does not provide advice. If you’re not sure whether investing is right for you, please speak to a financial adviser.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
