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 2009-10

• Personal tax allowance – £6,475
• Basic Rate – 20% – £0-£37,400
• Higher Rate – 40% – Over £37,400 – £150,000
• 50% Top Rate – 50% Over £150,000

Examples of Income Tax.

If you earn £7,000 in a year. The first £6,475 is tax free. Therefore, you pay tax on the last £525. Therefore, the income tax payable on £7,000 is £105. effectively you pay an average income tax of 1.5%.

If you earn £30,000. Your income tax will be 20% of £23,525 = £4,705 or an average tax rate of 15%.

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

• 0 – 6,475 @ 0% = £0
• 6,475 – 37,400 @ 20% = £6,185
• 37,400 – 50,000 @ 40% = £5,040

Total income tax = £11,225 or 22.5% average tax rate.

more on income tax rates