Reader’s Question – How much can I earn before I start paying tax?

 Reader's Question

How much am I allowed to earn before my tax goes up? I am a woman 62yrs working 7hrs a week

My response

Judging by the number of hours you work I think your question really is how much can you earn before you start paying Income Tax and National Insurance.

Income tax

I'm assuming that you do not earn enough at the moment to pay income tax, unless of course you have a very high hourly rate.

Well the short answer is you can earn £7,475 gross in 2011/12 tax year before you start paying income tax. This is because everyone has a ‘Personal Allowance’ which is an amount of income an individual can earn without having to pay any income tax (although for those earning over £100,000 a year their Personal Allowance is steadily withdrawn).

The level of an individual’s allowance depends predominantly on their age. So for the under 65’s (i.e. you) this Personal Allowance is £7,475 for the current tax year. The over 65’s can earn a bit more before they start paying income tax. For more details see my article Reader’s Question: Personal Income tax allowances.

Technically there are a number of other allowances and reliefs which some people are eligible to claim which can be utilised to reduce their gross pay and ultimately their tax bill.

National Insurance

As alluded to earlier there is a level of income below which you do not even pay National Insurance Contributions (NICs). This is known as the ‘primary threshold’ and for 2011/12 tax year this is set at £139 a week (or £7,225 a year).  However, as long as you earn more than £102 a week (or £5,304 a year) you can still build up your entitlement to a State Pension and certain other benefits. This is known as the 'lower earnings limit'.

But, and there is a big but, you do not pay NICs once you reach your state retirement age. (which is currently 65 for men and steadily increasing from age 60 for women depending on when they were born). And as you are 61 you have already hit your state retirement age! So you no longer need to pay NICs. For more information read my article - Money tip #23 – If you continue to work after the state retirement age make sure you stop paying National Insurance

Summary

So to sum up, on the basis that you have already hit your state retirement age then you should no longer pay NICs (but you might have to inform HMRC first). And you will only start paying income tax (at a rate of 20%) on any earning above £7,475 in the 2011/12 tax year.

I hope that helps

Best Wishes

Damo

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