Page last updated at 13:02 GMT, Thursday, 10 April 2008 14:02 UK

What is my personal allowance?

Married couples can transfer assets to minimise their tax bill
Married couples can transfer assets to minimise their tax bill
Although the government is keen to start taxing you as soon possible and keep taxing you for as long as possible, there is a benevolent side to its revenue raising operations.

This generosity manifests itself in terms of the rates of tax that are applied and more notably through the personal allowances to which everyone is entitled.

The personal allowance means that each and everyone of us, including children, can earn a certain amount of income, either through our work or from our savings and investments without paying any tax at all.

Personal allowances are amended each year in the Budget, although increases, even just in line with inflation, cannot be taken for granted.

In the current tax year 2008/2009 the basic personal allowance is 5,435 but significantly higher allowances are available to those over 65.

Where tax kicks in

Everyone can therefore have earned or unearned income up to that amount without paying any tax.

Once you breach the 5,435 threshold then tax becomes payable, but at two different rates.

The starting rate for income tax is now set at 20%. This rate will be applied to the first 36,000 of taxable income.

Rates of income tax*
10% starting rate: 0 - 2,230
22% basic rate: 2,231 - 34,600
40% higher rate: over 34,600
*Taxable income. Tax year 2007/2008

At the simplest of level, someone could therefore earn 41,435 (personal allowance of 5,435 + basic rate threshold 36,000 = 41,435) and would pay 20% tax on the top 36,000.

Any income earned above this level will be taxed at the higher rate of 40%. The same staged approach applies, using the same threshold levels but different tax rates, on any dividend income.

And the previous 10% starting rate of income tax stays in place for savings income earned by people on very modest incomes.

This staggered taxation approach is important for the tax planning of married couples where one spouse is paying the highest 40% rate and the other is taxed at either a lower rate or has no earnings at all.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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