How much can you earn before paying tax?

AS the financial year comes to a close, millions of Brits are filing their 2020-2021 tax returns.

The biggest taking is likely to be income tax, a cut of your earnings once they reach a certain threshold – but what is it?

There are different income tax rates which increase with the more money you earn.

There's also the personal allowance, which means the first chunk of the money you make is entirely tax-free.

Here's how it works.

What's the personal allowance?

The personal allowance is the amount you can earn each year tax-free.

It can change from one year to the next and is set by the government.

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In the current tax year – which runs from April 6 2021 to April 5 2022 – the figure is £12,570.

On earnings between £12,570 and £50,270, you pay the basic income tax rate of 20%.

Wages of £50,271 and above are taxed at the higher rate of 40%.

And the additional rate of income tax, which applies to earnings above £150,000, is 45%.

Chancellor Rishi Sunak announced in his March 2021 Budget that these income tax thresholds will be frozen until 2026.

Though this isn't a tax rise, it is a small stealth pay cut as rising levels of inflation are likely to carry people into higher tax bands.

Just keep in mind that your personal allowance might be different if you're entitled to certain allowances or earn a lot of money.

The marriage allowance is a tax break where one partner in a married couple can transfer some of their unused personal allowance to another.

And people with sight issues can get the blind person's allowance, which increases this tax-free amount.

Anyone who earns over £100,000 does not get any tax-free personal allowance – they will pay income tax on everything they earn.

If you earn £12,570 or less, you currently pay no income tax.

How do I check my tax-free personal allowance?

Your tax-free personal allowance amount is usually reflected in your tax code, which can be found on your payslip.

The letter L in your tax code signals that you're entitled to the standard tax-free personal allowance.

The letter M means you've transferred some of your personal allowance to your partner using the marriage allowance.

Meanwhile the letter N signals the opposite – you've received some of your partner's tax-free personal allowance.

Checking your tax code is correct could save you a small fortune.

We also have a guide on how you can find the best fixed rate ISA, which means you can build up tax-free savings.

And you could be entitled to a £125 tax refund if you worked from home over the past 18 months because of the pandemic.

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