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Author: Keri
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UK Personal Tax Allowances that let you make money tax-free
The UK has a marginal tax system and numerous tax allowances that allow individuals to earn certain types of income tax-free. In this article, we cover some of the main tax allowances available to UK individuals, together with details of the three income tax bands and rates. Below are some of the UK personal tax-free allowances that let you make money tax-free.
Allowance Tax-free amount Personal allowance £12,570 Dividend allowance £500 Capital gains allowance £3,000 Personal savings allowance – basic rate taxpayers £1,000 Personal savings allowance – higher rate taxpayers £500 Trading allowance £1,000 Personal allowance
The main tax-free allowance individuals in the UK benefit from is the annual personal allowance of £12,570, which lets individuals earn income up to this amount before paying any tax or PAYE.
Reducing personal allowance
The personal allowance reduces once taxable income exceeds £100,000. The allowance is reduced by £1 for every £2 earned over £100,000. You lose the personal allowance once your annual income exceeds £125,140.
Tax bands and rates
England, Wales, and Northern Ireland have three tax band thresholds and income tax rates. The first £12,570 of income is tax-free. Income between £12,570 and £50,270, or the next £37,700, falls in the basic rate tax band and is taxed at 20%. The higher rate tax band of 40% tax, applies to income over £50,270 and up to £125,140. And finally, the additional rate tax band of 45% applies to income over £125,140. Note that Scotland has different tax bands and rates than the rest of the UK.
Tax band Taxable income Tax rate 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% Reduced or enhanced personal allowance
If you have underpaid or overpaid tax during a tax year, HMRC may amend your tax code. This means you will have a different personal tax-free allowance to the standard £12,570 and different tax band thresholds. If you have underpaid tax you will have a reduced personal allowance. For example, if you have a tax code of 950L, you have a reduced tax-free allowance of £9,500 which means:
- The first £9,500 of income is tax-free
- You pay tax of 20% on the next £37,700 of income.
- You pay 40% tax on income above £47,200 (£9,500 + £37,700) and up to £125,140.
If you’ve overpaid tax during a previous tax year, HMRC may reimburse this by increasing the amount of your personal allowance or tax code. For example, if your tax code is 1300L, you will have an enhanced personal allowance of £13,000 and your tax band thresholds will be:
- The first £13,000 of income is tax-free.
- You pay tax of 20% on the next £37,700 of income.
- You pay tax of 40% on income above £50,700 (13,000 + 37,700) and up to £125,140.
Marginal tax
In a marginal tax system, higher tax rates only apply to that portion of income falling within the next tax band. For example, someone making £53,000 a year pays 20% tax on their earnings between £12,570 and £50,270. They pay 40% tax on their remaining pay of £2,730 (£53,000 less £50,270) which falls in the higher rate band.
Personal savings allowance
Basic rate taxpayers benefit from the full £1,000 annual personal savings allowance, letting them earn up to £1,000 of interest from savings tax-free. Higher-rate taxpayers have a reduced allowance of £500, while additional-rate taxpayers have a nil allowance.
Capital gains allowance
The current UK annual capital gains allowance is £3,000.
When you sell certain assets, profits up to £3,000 per annum are tax-free. Basic rate taxpayers pay 18% tax on any profits from the sale of assets over £3,000, while higher and additional rate taxpayers pay 24%.
Dividend allowance
The current dividend allowance is £500 per year, meaning you can earn up to £500 of dividend income tax-free annually from shareholdings.
Dividends falling within the basic tax rate band are taxed at 8.75%, whilst those falling within the higher rate band are taxed at 33.75%. Dividends falling in the additional tax rate band are taxed at 39.35%.
You can avoid dividend and capital gains tax on share income and disposals by investing in the stock market using tax-free stocks and shares ISAs.
Trading allowance
Individuals in the UK receive an annual tax-free trading allowance of £1,000. The allowance lets you earn up to £1,000 in trading income each tax year without having to report the income to HMRC or pay tax on the earnings. If your gross trading income exceeds £1,000, you must register for self assessment and submit an annual tax return. You can either deduct the £1,000 allowance from your income or deduct the allowable business expenses, whichever is more tax efficient, but you cannot deduct both.
Structure your income and allowances
Having an understanding of personal tax-free allowances can help you structure your income and allowances in a more tax-efficient way, potentially reducing your tax. Below are some examples of how tax strategies can save you money:
- Only withdraw capital gains from stocks and shares investments up to the annual capital gains allowance of £3,000 spreading withdrawals over several years.
- Invest in the stock market using a tax-free ISA.
- If you save money in a regular savings account make sure the savings allowance covers the annual interest and save any extra money in a tax-free ISA savings account.
HMRC’s website provides information about other allowances, such as the property allowance and marriage allowance:
Income Tax rates and Personal Allowances : Current rates and allowances – GOV.UK
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VAT and when you need to register
VAT in the UK
Are you a small business unsure about the legislative requirements of VAT and when you need to register? To ensure compliance with current UK VAT legislation, all small business owners need to understand the implications of VAT or value-added tax for their business. Business owners should be familiar with input and output tax, the scope of VAT and when a business must register for VAT.
VAT in the UK is a tax on goods and services sold in the United Kingdom. It is a tax paid by the consumer and is currently charged at 20%. Some goods and services are exempt from VAT or are subject to a lower VAT rate. The current threshold for VAT registration is an annual business turnover of £90,000.
Input and output tax
When a VAT registered business makes a taxable supply, it must charge VAT to its customers, which is output tax. The business can reclaim VAT that it has paid on its purchases, such as the VAT on goods purchased from other businesses. This is known as input tax.
The difference between the output tax and input tax is the amount of VAT the business owes to HM Revenue and Customs (HMRC). If the output tax exceeds the input tax, the business must pay the difference to HMRC. If the input tax is greater than the output tax, the business can reclaim the difference from HMRC.
Scope of VAT
UK VAT consists of taxable supplies and exempt supplies. Taxable supplies are subject to VAT at three rates, 20%, 5% and 0%. Exempt supplies are not taxable supplies. Businesses with exempt supplies are unable to register for VAT. They do not charge VAT on their outputs and can’t reclaim VAT on inputs or purchases.
Standard rated VAT supplies
These are supplies that are subject to the standard rate of VAT of 20%.
Reduced rated VAT supplies
These are supplies subject to a lower rate of VAT, which is currently 5%, for example, home energy.
Zero rate VAT supplies
These are supplies with a 0% VAT rate, such as books, children’s clothes and non-luxury food.
Exempt supplies
These are supplies not subject to VAT such as postage stamps, and education.
Outside the scope of VAT
Certain supplies, such as wages, are outside the scope of VAT.
Calculating VAT
The amount of VAT due on a taxable supply is calculated by multiplying the price of the supply by the VAT rate. For example, if a business sells a product for £100 and the standard rate of VAT is 20%, the VAT owing is £20.
Registering for VAT
Businesses with a taxable turnover exceeding £90,000 per year must register for VAT. Businesses with a taxable turnover of less than £90,000 per year may voluntarily register for VAT.
Once a business is VAT registered, it must charge VAT on all its taxable supplies. It must also keep records of its VAT transactions and submit VAT returns to HMRC every quarter.
To learn more about how VAT is calculated and the different VAT schemes that are available to small businesses, click below:
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Employee Cost Calculation
The cost of an additional staff member
Before recruiting a new staff member, it is essential to understand the breakdown of the additional costs and the impact on the business overheads. Preparing an employee cost calculation lets the business ensure it has the necessary financial resources for an extra employee. The three main costs for the calculation are the annual salary, workplace pension, and employer national insurance contributions.
For example, assume you recruit a new employee with an annual salary of £35,000. From April 2025 the total cost of employment to the business will be £40,363, which breaks down as follows:
Salary £35,000 Employer’s national insurance £4,500 Workplace pension £863 TOTAL £40,363 Calculation of employer national insurance contributions
Understanding the calculation of employer national insurance and other payroll figures is important for small business owners. Employers pay national insurance contributions on individual employee earnings over £5,000 annually (or £416 monthly). In the above illustration, employer national insurance contributions of 15% are payable on £30,000 annually or £2,500 monthly (£2,916 less £416), which is £4,500 for the year or £375 a month.
Employer’s national insurance allowance
Most employers are eligible for the annual employer’s national insurance allowance of £10,500 (from April 2025). The national insurance allowance benefits small employers with just a few employees, significantly reducing the national insurance costs to the business. Limited companies with one director who is the only employee aren’t eligible for the NI allowance.
To check your eligibility for the allowance:
Employment Allowance: Check if you’re eligible – GOV.UK
Calculation for workplace pension
The calculation for workplace pension contribution is based on the legal minimum contribution of 3% on eligible employee earnings. Companies can contribute a higher percentage to their employees’ pensions if they wish. Not all employees are eligible for enrolment in a workplace pension. Eligible employees are those aged 22 years and above earning over £10,000 a year. There are instances where non-eligible employees can request to join a workplace pension scheme.
New employers | The Pensions Regulator
Employers contribute to workplace pensions based on employee earnings that fall between the current thresholds of £6,240 and £50,270. In the above example, the employer makes their 3% contribution on £28,760 (£35,000 minus £6,240). When employees earn above the upper threshold of £50,270, employers still contribute 3%, but only on £44,030 (£50,270 minus £6,240). Employers do not contribute on earnings that exceed the upper threshold.
The pensions regulator has a useful calculator that works out employer workplace pension contributions:
Employer Contributions | The Pensions Regulator
Other earnings
Any other earnings employees receive such as commission must be added to their base salary for the calculations. Commission and bonuses are subject to employer national insurance and pension contributions.
HMRC calculators
HMRC has a handy calculator to work out both employee and employer national insurance contributions:
HM Revenue & Customs: Class1NICs-1 (hmrc.gov.uk)
Employee and employer NI contributions for company directors are paid at a slightly different rate to employees. The link below will take you to the HMRC calculator for the director’s NI:
HM Revenue & Customs: DirectorsClass1NICs1 (hmrc.gov.uk)
UK Employee Cost Calculator
We have a handy calculator to help you with the employee cost calculation, so you can be confident your business has the resources to cover the extra cost of a new employee.
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Choosing a Business Structure
Are you embarking on a new business venture as a self-employed individual or with a partner? Choosing a business structure is an important decision, as the different business types have varying administrative requirements and legal protections. We’ve compiled a comparison of the main differences between being self-employed and trading through a limited company, to help you choose the most suitable option for your business. The three main business structures are:
- Self-employed or sole trader
- Limited company
- Partnership
Self-employed
If you plan to operate your business as a sole trader or self-employed individual, you must register with HMRC as self-employed. Anyone with trading income over £1,000 annually from self-employment must register with HMRC and submit annual self-assessment tax returns. You will need to keep records of your business income and expenses, as you will pay income tax and national insurance contributions on your net profit via your self-assessment tax return.
Self-employed individuals pay income tax on their annual net profits (sales less expenses) and pay Class 4 national insurance contributions. As a self-employed individual, you are personally liable for the liabilities and debts of the business, although you can take out insurance to mitigate against this. HMRC has a handy calculator for estimating your PAYE and NI liability:
Budget for your Self Assessment tax bill if you’re self-employed – GOV.UK (www.gov.uk)
Limited company
Limited companies must be registered with Companies House and HMRC for corporation tax. There is additional administration to running a business as a limited company. Limited companies must submit an annual return and financial statements to Companies House plus submit a corporation tax return, together with any tax owing to HMRC. The annual financial statements and tax return must be filed 9 months after the end of the financial year.
Directors of limited companies have greater flexibility in how they withdraw earnings. They can pay themselves a salary through payroll and draw dividends from the business, paying dividend tax via their self assessment tax return. They can leave funds in the company to build reserves.
Limited companies with net profits of £50,000 or less are subject to 19% corporation tax. Companies with net profits between £50,000 and £250,000 will pay tax between 19% and 25%, depending on their profit. Finally, companies with net profits exceeding £250,000 pay 25% corporation tax. It is advisable to enlist the services of an accountant to prepare your financial accounts and calculate your tax liability.
Partnership
A partnership may be an appropriate business structure where two or more of you are working in the business. All partners share responsibility for the business, including all bills and any losses. Each partner receives a share of the profits and pays income tax on their share of the profits through a self assessment tax return. Furthermore, the partnership needs to designate a nominated partner who is responsible for submitting the partnership’s tax return and maintaining the business records. All partnerships must be registered with HMRC.
Alternatively, a partnership can be a limited partnership registered with Companies House. Limited partnerships must have at least one general partner and one limited partner, with all partners paying tax on their share of the profits. As with limited companies, limited partnerships are liable for the bills and debts of the partnership, protecting the partners’ personal assets. To learn more about partnerships, the link below takes you to the gov.uk website providing more information:
Set up a business partnership: Setting up – GOV.UK (www.gov.uk)
Comparison of self-employed and a limited company
Self-Employed Limited Company Less administration and easier to set up and close business More administrative requirements and various annual returns to HMRC and Companies House. When the company closes it must be liquidated. Register with HMRC for self assessment tax (SA) and submit an annual tax return online. Register the company with Companies House. Articles and memorandum of association are required on registration. An annual confirmation statement and annual financial accounts must be submitted to Companies House. Register with HMRC for corporation tax and submit an annual tax return (CT600). The individual is liable for the debts and liabilities of the business. Both business and personal assets are seen as one. Can take out insurance to protect personal assets. The company is liable for the debts and liabilities of the business. All earnings (income less expenses) for a tax year are subject to income tax and national insurance in that year. Earnings can be taken via payroll and as dividends. Net profits can be left in the company as reserves and withdrawn at a later date and tax year. Pay tax as PAYE and class 4 national insurance contributions. Pay tax as an employee through payroll with deductions for PAYE and NI. Dividends withdrawn from the company are taxed via a self assessment return. The company pays employer NI and corporation tax is due on net profits. Must keep records of income and expenditure. Must prepare annual financial accounts that are submitted to Companies House. Records are private and not publicly available. Accounts and company information is publicly available on the Companies House website. -
UK Marginal Corporation Tax
How does marginal corporation tax for business work?
Limited companies in the UK pay corporation tax on their net profits. UK marginal corporation tax consists of three different tax bands and rates. The tax rate is determined by the amount of a business’s net taxable profit. Companies with net profits of £50,000 and below pay 19% corporation tax. Those with net profits between £50,000 and £250,000 pay a corporation tax rate between 19% and 25% and companies with profits above £250,000 pay 25% tax. The marginal rate of tax is 26.5% and is paid on net profits between £50,000 and £250,000.
How does marginal rate relief work?
Marginal rate relief applies to profits between £50,000 and £250,000 and is calculated using a formula provided by HMRC. The formula is:
Standard fraction x (Upper limit – augmented profits) x amount of taxable profits ÷ augmented profits
As an illustration, assume a net profit of £60,000. The standard fraction is 3 ÷ 200. Applying this to the formula gives:
3 ÷ 200 x (250,000 – 60,000) x (60,000 ÷ 60,000) = £2,850 marginal relief
There are two options for calculating the corporation tax. You can multiply the net profit of £60,000 by 25%, which equals £15,000. Then deduct the marginal relief of £2,850, resulting in a tax liability of £12,150, or an effective tax rate of 20.25%.
Alternatively, you multiply £50,000 of the profit by 19%, which is £9,500. Multiplying the remaining profit of £10,000 by the marginal tax rate of 26.5%, results in marginal relief of £2,650. Adding both amounts gives a total tax of £12,150.
An easier way to calculate corporation tax is by using HMRC’s calculator which is available using the link below:
Other examples:
Profits of £75,000
£50,000 x 19% = £9,500
£25,000 x 26.5% = £6,625
Total of £16,125
OR
£75,000 x 25% = £18,750
less marginal relief of:
3 ÷ 200 x (£250,000 – £75,000) = £2,625
£18,750 – £2,625 = £16,125 effective tax rate of 21.5%
Profits of £100,000
£50,000 x 19% = £9,500
£50,000 x 26.5% = £13,250
Total tax of £22,750
OR
£100,000 x 25% = £25,000
less marginal relief of:
3 ÷ 200 x (£250,000 – £100,000) = £2,250
£25,000 – £2,250 = £22,750 effective tax rate of 22.75%
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Financial Planning with the Time Value of Money
Financial Planning
Small business owners often focus on day-to-day operations, but understanding a fundamental financial concept – the time value of money – can transform your approach to cash flow management and financial planning.
What is the Time Value of Money?
The time value of money (TVM) is based on a simple principle: a pound today is worth more than a pound tomorrow. This is due to three main factors:
- Opportunity cost (what you could earn by investing that pound)
- Inflation (which erodes purchasing power over time)
- Risk (the uncertainty of receiving future payments)
Why It Matters for Your Small Business
1. Cash Flow Management
Understanding TVM helps you make better decisions about when to collect payments and pay expenses. For example:
- Offering early payment discounts might make financial sense if the benefit exceeds what you’d earn by investing that money elsewhere
- Delaying large payments when possible (without incurring penalties) can be advantageous if you can put that money to work in your business
2. Equipment Purchases and Financing
When deciding whether to buy equipment outright or finance it:
- Financing may be preferable if your business can generate returns higher than the interest rate of finance
- Leasing might make sense when technology changes rapidly, preserving capital for higher-return investments
3. Pricing Strategies
TVM should influence your pricing models:
- Subscription models with upfront annual payments can provide immediate capital for growth
- Payment plans may require higher total prices to account for the time value of foregone immediate payment
How TVM is applied in Planning and Forecasting
Practical Tools and Calculations
Several core TVM calculations can help in your business planning:
- Future Value (FV) – What your money will be worth in the future
- Present Value (PV) – What future money is worth today
- Net Present Value (NPV) – The current value of all future cash flows
- Internal Rate of Return (IRR) – The rate at which NPV equals zero
Practical Tips for Implementation
- Use Financial Tools: Many accounting software packages include TVM calculators. Microsoft Excel also has built-in functions like NPV, IRR, and PV. Your accountant will be able to assist with TVM calculations and offer practical advice.
- Consider Inflation: When forecasting, account for inflation’s impact on future expenses and revenues.
- Review Financing Regularly: As interest rates change, reassess your debt structure and consider refinancing when advantageous.
- Apply to Inventory Management: Calculate the true cost of holding inventory by factoring in the opportunity cost of tied-up capital.
Final Thoughts
In a small business, cash is king – but understanding when you receive or spend that cash matters tremendously. By incorporating time value of money principles into your financial planning, you’ll make more informed decisions that enhance your business’s long-term sustainability and growth.
Remember: financial success isn’t just about how much money you make, but when you make it and how effectively you put it to work.
Future Value Calculator for Cash & Investments
Loan Repayment and Amortisation Calculator
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Employer NI Contribution changes from April 2025
With the Employer NI contribution changes from April 2025 fast approaching, it is vital to understand how these changes will impact your staff costs. Employer national insurance contributions are increasing by 1.2% from 13.8% to 15%, whilst the threshold above which employer contributions are paid is decreasing from £9,100 to £5,000. The national insurance allowance, is however, increasing from £5,000 to £10,500 which may benefit small employers with just a few staff members.
Financial Impact of the National Insurance Changes
The financial impact of the national insurance changes for an employee earning £35,000 a year, is an additional employment cost of £925. This breaks down as follows:
Reduction in Threshold
The threshold above which employers pay national insurance contributions (NIC) on an employee’s salary is decreasing from £9,100 to £5,000. The reduction in threshold means NIC is payable on an extra £4,100 a year. At 15%, this is an extra £615.
Increase in the Percentage Rate
The increase in the percentage from 13.8% to 15%, results in an extra £310in NIC. Together, these two changes increase the contributions by £925 a year.
Increase in the National Insurance Allowance
The increase in the National Insurance Allowance from £5,000 to £10,500 should benefit small employers with a few staff members earning the minimum wage. For large employers the increase will be insignificant when compared with the total increase in NIC resulting from the combined impact of the 1.2% increase and threshold reduction.
Illustrations
The charts below illustrate the impact of the employer NI contribution changes from April 2025, for small and medium size businesses.
In this example, there are 4 staff members each earning £24,000 a year. While the NIC changes increase the total NIC due, the increase to the NI allowance reduces the overall NI liability by £2,324 from £3,224 to £900.
Tax year 24/25 Tax year 25/26 NIC per employee £2,056 £2,850 Total NI £8,224 £11,400 Less NI Allowance £5,000 £10,500 Total NIC due £3,224 £900 In the following example, the employee salary is £35,000 (this is around the UK average) and the figures are based on a headcount of 25 employees. The additional cost to the employer in this example is £17,650 or £706 per staff member.
Tax year 24/25 Tax year 25/26 NIC per employee £3,574 £4,500 Total NI £89,350 £112,500 Less NI Allowance £5,000 £10,500 Total NIC due £84,350 £102,000 It is important to note that not all employers are eligible to receive the national insurance allowance. You can check your eligibility on HMRC’s website: Employment Allowance: What you’ll get – GOV.UK
With our national insurance calculator you can see the impact of the changes to your business staff costs
