Workers could lose part of their tax-free Personal Allowance due to an HMRC earnings rule. The allowance is the amount you can earn, either through work or other forms of income like property income, without paying tax on it.
Currently, it’s set at £12,570, which means you can earn that amount in a single tax year without owing any tax to HMRC.
It’s been frozen in place for five years now and the tax-free Personal Allowance is set to be stuck at that level for another five years after the government announced it would keep the freeze until 2031. But it’s not the only threshold that’s been frozen. In fact, all of the Income Tax bands have also been held in place at the exact same amount too. It means that people start paying 40% tax at £50,270 and 45% tax on earnings over £125,140.
Worse, the tax-free Personal Allowance is also slowly removed from you if you earn over £100,000.
Thanks to ‘fiscal drag’, these thresholds are worth less and less every year as inflation moves wages up, bringing more people up to or in excess of them, meaning more and more people pay more and more tax as wages go up but thresholds stay the same.
Under the current HMRC earnings rules, your tax-free Personal Allowance will be reduced by £1 for every £2 over £100,000 you earn.
For example, if you earn £102,000, you will lose £1,000 of your tax-free Personal Allowance for the year because HMRC will cut it with a tax code change.
That would change your tax to £11,570 tax-free Personal Allowance, down by £1,000 from £12,570.
In its guidance online, HMRC explains: “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.
“The standard Personal Allowance is £12,570, which is the amount of income you do not have to pay tax on.”