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What is a Personal Allowance?

Posted by Jon Norris on Mar 1st, 2020 | Tax

Crunch - What is a Personal Allowance? - Freelancer with tattoos looking at bills

Despite those old adverts insisting that tax doesn’t have to be taxing, the sad truth is that it can often be brain-achingly complex. There’s bucket-loads of jargon to deal with, and one of the terms you’ll hear more frequently is the Personal Allowance.

Thankfully, the Personal Allowance is one element of accounting and tax that’s actually not that difficult to understand. Allow us to elaborate.

Tax-free Allowance

You’ll sometimes hear the Personal Allowance referred to as your “tax-free allowance”, which probably describes it better.

The Personal Allowance is the amount you’re allowed to earn in a given tax year (tax years run from 6th April and 5th April) before you start paying Income Tax.

For employees, the Personal Allowance will be taken into account automatically when the employer runs their payroll.

What is the Personal Allowance for the 2020/21 tax year?

For the 2020/21 tax year, the Personal Allowance is £12,500. just as it was for the 2019/20 tax year.

How does the Personal Allowance affect the self-employed?

For sole traders, your Personal Allowance will be taken into account when HMRC calculates your tax liability when you file your Self Assessment.

Limited company employees will have to take their Personal Allowance into account when running their own payroll or – more likely – use a piece of payroll software that does it automatically just like Crunch’s online accountancy software does!

Usually, limited company directors pay themselves through a combination of a low salary and dividends. We explain all this in our article ‘How much should I take as a salary from my limited company?’.

The Personal Allowance is just one of many allowances and thresholds that might affect you. Our article “Tax rates, thresholds and allowances” has all the information you need.

Find out how Crunch can save you money and time

What if I need a payroll service?

Crunch can provide a payroll service for directors and employees. Our software will automatically calculate and file your payroll with HMRC and produce payslips for you to keep.

Our Real-Time Information (RTI) compliant payroll can be set up in minutes and meets all HMRC requirements, letting you expand your business safe in the knowledge that you’re staying compliant.

Crunch Basic clients receive this service for directors paid up to the relevant National Insurance threshold, which is £8,788 in the 2020/21 tax year.

Our Crunch Plus package includes payroll at any amount for up to four directors. If you need payroll for up to 10 employees then you’ll need to add our Payroll service to your Crunch package or look at our Crunch Small Business package.

What are the benefits of an online accountant?

Get 50% off three months of accountancy heaven!

Refreshingly simple online accounting software. Expert accountants whenever you need them, half price limited company accounting for your first three months.

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