Which of the following best describes personal allowance in taxation?

Personal allowance in taxation refers to a specific amount of income that an individual is permitted to earn each year without being subject to income tax. This facility is designed to ensure that individuals have a basic level of income that can be used for essential living costs, beyond which taxation begins to apply. In many tax systems, the personal allowance effectively reduces the amount of taxable income, allowing taxpayers to retain a certain degree of their earnings without the burden of tax.

This concept serves as a fundamental element in personal income tax calculations, creating a financial buffer for earners. It directly benefits individuals by ensuring that lower levels of income are not taxed, thus promoting a degree of financial support for those who may be earning less.

The other options do not accurately define personal allowance. Payment of taxes on capital gains pertains specifically to profits made from investments rather than personal income. A maximum tax bracket applicable refers to the highest percentage rate at which an individual’s income is taxed but does not relate to any tax-free income portion. An increase in taxable income suggests that an individual is earning more and may consequently pay more tax, which runs counter to the concept of a personal allowance that provides a tax-free threshold.