This paper proposes a method for setting the threshold for ultra-wide-band (UWB) threshold-based ranging in indoor scenarios. The optimum threshold is derived based on the full analysis of the ranging error, which is equivalent to the probability of correct detection of first arriving signal in time-based ranging techniques. It is shown that the probability of correct detection is a function of first arriving signal, which has variations with two independent distributions. On the one hand, the first arriving signal varies in different positions with the same range due to multipath interference and on the other, it is a function of distance due to free space path-loss. These two distributions are considered in the derivation of the ranging error, based on which the optimum threshold is obtained. A practical method to derive this threshold is introduced based on the standard channel model. Extensive Monte Carlo simulations, ray-tracing simulations and ranging measurements confirm the analysis and the superior performance of the proposed threshold scheme.