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

2014-152015-16
Per cent of income / £ a year
Basic rate20%20%
Higher rate40%40%
Additional rate45%45%
Starting rate for savings income (*)10%0%
Dividend ordinary rate10%10%
Dividend upper rate32.5%32.5%
Dividend additional rate37.5%37.5%
Trust rate45%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 bandOver £150,000Over £150,000

Income tax allowances

2014-152015-16Change
£ a year
Personal Allowance
those born after 5 April 194810,00010,600600
those born between 6 April 1938 and 5 April 194810,50010,600100
those born before 6 April 193810,66010,660
Income limit for personal allowance (*1)100,000100,000
Income limit for personal allowances (born before 6 April 1948) (*2)27,00027,700700
Married couple’s allowance (*3)
maximum amount (*4)8,1658,355190
minimum amount (*5)3,1403,22080
Blind person’s allowance2,2302,29060
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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