Income tax rates explained

In the UK, we have a marginal tax rate system. This means income tax is charged on income above a certain level. It does not mean if you earn £200,000 you pay 50% on the whole £200,000. You only pay 50% on the income earned above £150,000 after the personal allowance is included.

Income tax rates

2014-15 2015-16
Per cent of income / £ a year
Basic rate 20% 20%
Higher rate 40% 40%
Additional rate 45% 45%
Starting rate for savings income (*) 10% 0%
Dividend ordinary rate 10% 10%
Dividend upper rate 32.5% 32.5%
Dividend additional rate 37.5% 37.5%
Trust rate 45% 45%
Starting rate limit (savings income) £2,880 £5,000
Income tax threshold £10,000 £10,600
Basic rate band £0 – 31,865 £0 – 31,785
Higher rate band £31,866 – 150,000 £31,786 – 150,000
Additional rate band Over £150,000 Over £150,000

Income tax allowances

2014-15 2015-16 Change
£ a year
Personal Allowance
those born after 5 April 1948 10,000 10,600 600
those born between 6 April 1938 and 5 April 1948 10,500 10,600 100
those born before 6 April 1938 10,660 10,660
Income limit for personal allowance (*1) 100,000 100,000
Income limit for personal allowances (born before 6 April 1948) (*2) 27,000 27,700 700
Married couple’s allowance (*3)
maximum amount (*4) 8,165 8,355 190
minimum amount (*5) 3,140 3,220 80
Blind person’s allowance 2,230 2,290 60
Transferable Tax Allowance for married couples and civil partners (*6) 1,060

 

Examples of Income Tax

  • In 2014/15 the income tax threshold is £10,000

If you earn £11,000 in a year. The first £10,000 is tax free. Therefore, you pay income tax on the last £1,000. Therefore, the income tax payable on £1,000 @20% is £200. effectively you pay an average income tax of 1.8%.

If you earn £30,000.You will pay the basic rate on the marginal tax above the threshold £30,000-£10,000.

Your income tax will be 20% of £20,000 = £4,000 or an average tax rate of 13%.

If you earn £50,000. Your income tax will be:

  • 0 – 10,000 @ 0% = £0
  • 10,000 – 41,865 @ 20% = £6,375
  • 41,864 – 50,000 @ 40% = £3,254

Total income tax = £9,629 or 19% average tax rate.

more on income tax rates

National insurance N.I. Contributions

In addition to income tax rates, there are national insurance contributions (N.I.) levied on income earned.

Related

4 thoughts on “Income tax rates explained

  1. Yeah, the final example is wrong.

    £50,000 – £6,475 (tax allowance) = £43,525 (taxible income)

    £43,525 – £37,400 (higher rate band) = 6,125 @ 40% = £2,450 (higher rate tax liability)

    £37,400 @ 20% = £7,480 (basic tax liability)

    Total tax is £7,480 + £2,450 = £9,930

  2. Also, your tax allowance is reduce by £1 for every £2 you earn over £100,000.

    So earning £112,950 will reduce your personal tax allowance to £0.

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