Tax Allowance

Many tax systems give each individual a tax-free amount of income. In the United Kingdom, for example, this is called the personal allowance. Income above the allowance is taxed in bands at rising rates.

For example, if the personal allowance were 12,000 and someone earned 30,000, only 18,000 would be subject to income tax. Some systems reduce or withdraw the allowance for people with very high incomes.

The term is also used for other tax-free amounts, such as allowances for savings interest, dividends or capital gains, and for business deductions. Capital allowances, for instance, are the tax equivalent of depreciation in the United Kingdom and some other countries, letting businesses deduct the cost of equipment and buildings from taxable profits.

Allowances serve a similar purpose to the standard deduction in the United States: they keep low incomes out of tax and simplify the system. The amounts are usually set each year by the government, so current figures should be checked with the tax authority.