Income Level Tax Brackets
What are the current income tax rates?
In the UK, income is taxed progressively – meaning that the more you earn, the higher tax rate that is applied to you. Taxpayers in the UK must file an annual income tax return. If you are employed, your employer does this for you, and if you are self-employed, you will need to submit a self-assessment tax return. This return determines the tax band that you fall into and how much tax you’ll need to pay on your income.
Income tax is collected by the government to fund public services such as the NHS and education, alongside improving infrastructure such as roads and housing.
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What is my personal tax allowance?
Taxpayers in the UK are given a personal allowance. This is the amount you can earn before you start paying income tax. Once you earn over this allowance, you will be taxed at the applicable income tax rate on the amount earned over the threshold.
For the 2021/2022 tax year, the standard tax-free personal allowance is £12,570. If you earn over £100,000 annually, your personal allowance will reduce by £1 for every £2 you earn. So, if you earn over £125,000 annually you’ll pay income tax on everything and will not be eligible for a tax-free personal allowance.
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Is there a marriage tax allowance?
If you are married or in a civil partnership, and you and your partner were born on or after 6 April 1935, then you may be eligible for a marriage tax allowance. Couples are able to transfer a proportion of their personal allowance between them.
How much is the marriage tax allowance?
For the 2022/23 tax year, the marriage tax allowance is £1,260.
10% of the married couple’s allowance is taken off your annual income tax bill. If you were married before 5 December 2005, this is automatically calculated using the husband’s salary. If you were married on or after 5 December 2005, it is calculated using the highest earner’s salary.
What income tax band am I in?
Here are the income tax rates and bands for the 2021-23 tax year:
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*Personal allowance drops by £1 for every £2 earned over £100,000.
If you earn £12,570 or less (the lowest tax threshold), you won’t pay any income tax in the UK.
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How do I calculate my taxable income?
- Add together all of your earned income from all sources, including self-employment, freelance work, pensions, rental income and state benefits. Deduct your personal allowance. Do not factor in any savings or investments.
- Apply any deductions from tax relief that you are eligible for.
- You now have your non-savings income that you will pay tax on.
Tax on Savings Accounts
The tax you pay on your savings depends on how much interest you earn and what tax bracket you are in. low-income earners can benefit from a 0% starting rate on savings of up to £5,000. This is then reduced for every £1 you earn over your personal income tax allowance of £12,570 per year (2022/23). For example, if you earn £13,500 you would only get a 0% starting rate on your first £4,070 of savings.
Basic taxpayers can earn up to £1,000 annually tax-free.
Higher rate (40%) taxpayers can earn up to £500 annually tax-free.
If you are looking for tax-free savings, ISAs are a good option.
Other allowances
Paying less income tax with income tax reliefs
Charity donations:
– Donations to a charity from individuals are tax free. You can get tax relief if you donated through Gift Aid or straight from your wages or pension, through Payroll Giving.
Maintenance Payments:
You can receive a Maintenance Payments Relief to reduce your income tax liability when you make maintenance payments to an ex-spouse or civil partner, if:
- Either of you were born before 6 April 1935;
- You’re paying maintenance under a court order, after the marriage/relationship ended;
- The payments are for the maintenance of your ex-spouse or former civil partner, if they are not remarried or in a new civil partnership, or, for your children who are under the age of 21.
Maintenance Payment Reliefs are worth 10% of the maintenance you pay to your ex-spouse of civil partner. This is up to a limit of £364 a year (10% of £3,640).
Is there a limit on tax relief I can get?
When does tax relief become tax charge?
Capital gains tax
If you sell or give away more than £6,000, you could be subject to Capital Gains Tax. However, this doesn’t apply for main homes, cars or lottery winnings, among other exceptions.
There is an annual exempt amount that allows you to receive some capital gains tax-free, and you only pay CGT on gains above this amount.
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Your rate will depend on your other taxable income.
If you give or sell your assets to your spouse or civil partner, you won’t pay CGT unless:
- You separated and did not live together during that tax year
- The assets you gave them were sold on via their business
Dividend tax
Dividends are given to you when a company makes a profit, and some of it is given back to you. This could either be as a one-off or on a regular basis. You also have a tax-free dividends allowance, which is unchanged at £2,000 for the 2022/23 tax year. Any dividends received above this amount are taxed at the below rates (other than ISAs which are tax-free):
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If you earn over £2,000 annually in dividend income (outside of a stocks and shares ISA) you will need to inform HMRC.
Tax relief on pension contributions
Pensions give savers a nice tax break – when you put money into a pension, the state tops this up with a tax relief.
Basic-rate taxpayers receive a 20% tax relief on their pension contributions.
Higher paid taxpayers can receive up to 40% tax relief.
Top-rate taxpayers can receive up to 45% tax relief.
You can generally put as much as you earn each tax year into your pension, up to an annual contribution limit of £40,000. This limit includes the money you put into your pension, the basic-rate tax relief that the state adds, and any contributions made by your employer. For taxpayers earning over £240,000 annually, the £40,000 allowance is reduced.
Anything over £40,000 (or more if you earn over £240,000) annually, or £1,073,100 in a lifetime, will face a tax charge.
National Insurance
In addition to income tax, most UK workers will need to make national insurance contributions which are deducted from their pay. These payments are made from the age of 16 until you reach state pension age.
How is National Insurance changing in 2022/23?
From 6 April 2022, Class 1 and Class 4 contributions have increased by 1.25% for anyone earning above the primary threshold of £9,880.
The primary threshold is also increasing to £12,570 from July 2022.
Key Takeaways:
- You only pay tax on income which is over your personal allowance limit
- You may be eligible to claim tax relief and/or tax allowances
- The UK uses a progressive taxation system which applies a higher tax rate to those who earn more
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