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:
- £50,000 – £6,475 (tax allowance) = £43,525 (taxable 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 (19.8%)
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
- Tax rates at Gov.uk
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.