Imagine your income as a delicious cake. Who wouldn’t want a bigger slice, right? Maximising Your Personal Allowance is all about ensuring you keep as much of that cake as possible, even when the tax office is eyeing a big bite. Today, we’ll explain what personal allowances are and how to make sure you’re enjoying the biggest slice of your income cake.

What is Personal Allowance?

First off, Maximising Your Personal Allowance starts with understanding it. In the UK, your personal allowance is £12,570. This is the amount you can earn before you start paying income tax. Although this figure stays the same until 2028, inflation can impact its real value. So, knowing how to use this allowance effectively is essential for keeping your tax bill in check.

Applying Your Allowance to Different Income Sources

Next, when you have different sources of income, Maximising Your Personal Allowance becomes even more important. If you’re earning from both a job and self-employment, managing your allowance wisely is key. Typically, your personal allowance applies first to your employment income. As a result, any additional income might not benefit from this allowance, which could lead to a surprise tax bill. Therefore, keeping track of how your allowance is used is a smart move.

Handling Mixed Income Streams

Furthermore, if you have mixed income streams, like a regular job and a side business, Maximising Your Personal Allowance is crucial. You need to ensure that your allowance isn’t entirely consumed by your employment income alone. If not managed well, this could lead to unexpected tax costs. Thus, it’s a good idea to regularly review your tax code and manage your allowances accordingly.

Effective Strategies 

Also, to Maximising Your Personal Allowance, consider options like making pension contributions or charitable donations. These can lower your taxable income and help you get the most out of your allowance.

Conclusion

To wrap things up, managing your personal allowance effectively is key to avoiding unnecessary taxes. By understanding how it works and applying it properly, you can ensure you’re not paying more than you need to. If you need any help or have questions about managing your allowance, don’t hesitate to reach out. For more helpful tips on tax management, don’t forget to listen to the I Hate Numbers podcast!

Imagine your income in the form of a cake. Most people like cake, I like cake. Wouldn't you like to have that cake to yourself and eat as much as possible? That cake will be made up of your income from wages and salary, from self-employment, from property income to name but three. One thing that's pretty much guaranteed that wants to take a slice of that cake and have it for themselves is the tax offices as represented by HMRC.

However, one thing that will stop that big chunk, that big bite of that cake, is your personal allowance. And in this week's I Hate Numbers podcast, I'm going to be looking at the topic of personal allowances, how many of us don't actually keep an eye on what our personal allowance is or understand what it might be, and more particularly, how you get yourself into a pickle, especially if you've got mixed income streams.

I'm going to clarify what personal allowances are, how they apply to different sources, and what should you do if you find yourself with income coming from self-employed, your own business, income from wages and salaries if you happen to be having a full-time job and the business is a side hustle or the other way around, and to stop yourself getting into problems with that, and also share some tips of what to do if, for any reason, your allowance is not what it should be. Let's crack on with the podcast.

Now, firstly, what is the personal allowance? More particularly, what is the personal allowance for the United Kingdom? Well, the UK personal allowance is the amount of income that you can earn each individual tax year before you start paying what is called income tax. If you're sitting at home folks and thinking what about national insurance, Mahmood, that's a topic for another day.

I don't want to muddy the waters too much at this stage. One thing, let's have a look first of all at the concept of the tax year. Now the tax year in the United Kingdom doesn't follow common sense, running between the 1st of January and the end of the year. It runs between the 6th of April and the 5th of April the following year.

So if we were to say the tax year 24-25 that's running between the 6th of April, 24 and the 5th of April, 25. If you're thinking that sounds like a peculiar date, Mahmood, well, thank you, Rome, thank you, HMRC. It wouldn't be called HMRC in those days for that very peculiar date that we've got. A topic perhaps for another day.

Now, within that year, your income, typically as far as the tax offices are concerned, which will be represented by your self-employed profits, the gross wages, and salaries that you have, the income from property, more particularly the profits that you make, and perhaps income from dividends and the like, are all lumped together.

You have the personal allowance of 12570, and then anything over that, you pay tax at the appropriate rates. Now as far as that 12570 is folks, by the way, that is the allowance that's set in 21-22, and it's frozen until 2028. Some reality, by the way, as a side note, you're actually being dragged into paying more tax because inflation would have gobbled away at that allowance. Now the personal allowance is available to most people who live in the United Kingdom, and if you do emigrate if you go and live elsewhere, your allowance could still be available to you under what's called a double tax treaty, so you don't lose it if you leave the UK shores, so it could still be potentially available to you. Certainly, if you move to the European Community, if you move to a country where there's what's called a double tax arrangement with the United Kingdom, and you've got income in the UK

that's still there for you to utilise. Now, the personal allowance, as I said, is available to most people living in the UK. However, if your income from all sources goes over the magic 100000 pounds, unfortunately, there's a clawback, and for every two pounds over that figure, your personal allowance is chopped effectively by a pound.

That means if you get to that figure of 125140, then you lose your personal allowance completely. It may not be known, folks, but when you've got income that's in that a hundred to a hundred twenty-five, one forty, the actual rate of tax that applies in that band is at eye-watering 60%. But 100,000, by the way

is something that tax advisors like myself call adjusted net income. We don't use that term with clients, by the way, I certainly don't, but that technically speaking what it is. So for example, if you want to reduce that, you've got income, and you want to try and avoid losing your personal allowance,

think about ways to put yourself at an advantage, so things like gift aid donations, not only good for the charity but also good for your pocket, and also for the impact on losing personal allowances is minimised, and also making private pension contributions has a positive impact. Now let's move forward and think in terms of how the personal allowance is applied in real-time and in real terms. Now if your sole income is from employment, so you've got a job, you're employed, then typically your employer will operate something called a PAYE system, pay-as-you-earn, or some people might call it pain as you earn. Now your employer will be deducting tax from your salary based on what is called your tax code.

And your tax code is indicative and reflective of your personal allowance. Now for most people in a normal situation, if there is such a thing, your tax code is going to be made up of numbers and a letter. Those numbers are 1257, that's basically the 12570 with a zero chopped off. And it adds the letter L at the end of it.

What that means is, when you apply that code, the payroll system says, this is somebody who's entitled to a personal allowance in full. We'll split it up into weekly cycles, if that's how often you're paid or monthly cycles. That's the amount of free pay they can have. And we'll pay tax on the excess.

Bear with me folks until later on in the podcast, and I'm going to talk to you about what happens if that is incorrect. Now, if you're self-employed, you don't have a PAYE system that's operating, you have your personal allowance, and obviously that is claimed if your income is purely from self-employment, that allowance is claimed when you file your tax return.

And your tax return is under what's called a self-assessment system. You declare all your income. If it's all from self-employment, we lop this personal allowance off the self-employed profits and apply the tax rates accordingly. Now folks, before we look at the situation about managing multiple income streams, if you own your own company, you're a business owner, and you have registered for PAYE scheme, then obviously you will be the employer, those responsibilities fall on your shoulders.

Now let's have a look at a situation where you've got mixed income streams. Now it's not unusual for businesses to run, but also the business owner may also have part-time or even full-time income from an employer, from PAYE. They may do that because they feel that they want to add the extra dimension of knowledge.

It may be the business at a point in the cycle where additional stable income is required. It may be that you're building your business up and you don't wish to make that transition fully. It's not unusual. However, there's a little bit of a trap you've got to be really careful here. Typically what would happen when somebody who's got that split role of having a job, as well as self-employment, when they are working for the employer, at the very beginning, they should, and I emphasise the word should, have completed what's called a starter form, telling the employer what their situation is, and their tax code, will be allocated accordingly.

Now, unfortunately, many people I've come across, when they've got that split situation, their allowance will be used in full against their employment income. When it comes time to do their tax return, if they've got additional income from elsewhere, they don't appreciate that allowance would have been used up and suddenly their tax is payable on the income outside of employment, and therefore that could be a nasty shock to your bank balance as well as your stress levels as well. So when you've got your mixed-income, remember the personal allowance is not an allowance for each source of income. It's given in total against your total income.

And again, it's not unusual, and I've seen it happen many, many times over the last 30 years, that individuals will give their details to the employer. They won't necessarily check their pay slips. They won't necessarily check their tax code. The employer may have not necessarily gone through all the whole questions.

But whatever happens is, they're claiming an allowance, not realising that's not available for them, for income outside of that. That realisation is normally made when it comes time to complete the tax return. Now, by way of number illustration, supposing you earn 20000 pounds from your job and you earn 10000 pounds from your self-employed business in the 24-25 year.

That's a total income of 30 grand. Take off your personal out of the 12570, and that means you've got approximately 17.5 let's not worry about the odd pound here or there, about 17 and a half thousand that's going to be subject to tax. They will then apply the tax rates, which are, at this moment in time, 20 percent for a basic rate pair,

40 percent for a higher rate taxpayer, and then 45 percent if you exceed the 150 odd thousand as an additional rate taxpayer itself. Now what does this mean in terms of practical terms? If you do have split income or a combination of income and one of those sources of income is your job, you have a choice.

You can either elect to go on what's called a basic rate code, which means that all the money that you earn from your employment, tax will be taken off at the basic rate of 20%. The money's put aside. And then it can all be worked out when it comes to your tax return. You can split your allowance. You can spread it. It can get a bit messy, but it's an option nevertheless.

Alternatively, tap into last week's podcast, where we talked about saving for tax as you go along. And if you have got income where your allowance is used up, and again, that could be perhaps a pension. It could be your job. Then, make sure that every time you do some self-employed work, every time you've got income that arises that hasn't been taxed at all, for example, property income, put some of that away in a separate account.

That way, when it comes time to settling tax, you've got most of the money collated and corrected, and collected already. So plan for those tax payments. Make sure you've got a good idea of what's going on and have a conversation with your accountant and advisor. If you're not in that situation where you've got somebody to talk to, then check out the show notes at the end for a contact and have a chat with us, and we can see where we can help you.

Now folks, before we wrap things up, a thing to note and to check, and it might also be in your financial advantage. If you are somebody with a job from Wages and Salaries, PAYE, make sure your tax code is correct. So what you need to do is have a look at your wage slip. They should be printed on there

your tax code. Now, if it's not quite at all, and again, that could be influenced by other things going on in your tax life. So things like making pension contributions personally, claiming allowances, etc. But look at your code, and does it look right? Does it look too small? If it's got a letter K, that means you're paying tax to the revenue.

But whatever happens is, check your code. It's your responsibility, by the way. It's not your employer's responsibility to check your code is correct. That's yours. Now, it could be, you might be in a situation where your code is wrong and you're paying too much tax, or it could go the other way and you're paying too little tax.

HMRC will eventually catch up with this, by the way, so it's worthwhile checking, and you can go back in time if you have found that you've been overpaying in terms of tax. Remember, that is your responsibility, it's not anybody else's. So managing your allowances effectively, being aware that the allowance is for all income, not just one source, keeping good records,

speaking to somebody who's competent and can advise you are all going to be good moves. Until next week folks, happy allowancing. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode

We look forward to you joining us next week for another I Hate Numbers episode.