Tax rates, allowances and amounts How much tax you pay
Tax on income varies depending on its source.
You don't normally have to pay any tax on a first slice of the income you receive in the tax year. This is known as your personal allowance and rose to £10,000 in 2014/15, from £9,440 in 2013/14. Older people may be entitled to slightly higher age-related allowance.
However, those whose income exceeds this figure can expect pay tax on the remainder. Depending on their circumstances, they may have other taxes to pay as well.
Here, we explore how much tax you can expect to pay on any income gained from employment, pensions, property, savings, dividends, capitals gains and inheritance.
Income from employment, pensions and property
Non-savings income is currently taxed at three alternative rates depending on how much taxable income you have. Taxable income is calculated by deducting your personal allowance (and any deductible reliefs you are entitled to) from your total income.
For 2013-14 people with taxable income up to £32,010 are basic-rate taxpayers and pay tax at 20% (with £9,440 personal allowance, this gives a threshold of £41,450) For 2014-15 the limit is £31,865 (with £10,000 personal allowance, this gives a threshold of £41,865). Those with taxable income over the limit pay tax at 40% on income above the threshold. Taxable income over £150,000 is taxed at 45%.
Starting rate abolished
Until April 2008 there was an additional starting rate tax band, and income falling into this band was taxed at only 10%. However, this band was abolished for non-savings income from April 2008.
Savings income (such as interest from bank or building society accounts) is still (until April 2015) taxed at three rates.
Depending on what tax band it falls into when added to your non-savings income, it is taxed at 10%, 20% 40% or 45%.
However, you would have to have non-savings income of less than your personal allowance plus £2,880 for any of your savings income (in 2014-15) to qualify for a tax rate of 10%.
In April 2015, the 10% savings rate ends. Instead, a £5,000 tax-free savings band will be applied. This means that anyone with combined savings and non-savings income below £15,500 (£10,500 personal allowance, plus £5,000) will pay no tax on interest they receive.
Dividend income (from shares) is treated differently. Basic-rate taxpayers pay 10% tax, higher-rate taxpayers pay 32.5% and additional rate taxpayers pay 42.5%. UK dividends carry a 10% tax credit, so, effectively, basic-rate taxpayers pay no further tax, higher-rate taxpayers pay further tax at 25% and additional rate taxpayers pay further tax at just over 36%.
Non-savings income is normally allocated against your tax bands before savings, dividends and capital gains, so to find out at what rate interest on your savings is taxed, you must add this to your other taxable income.
Capital gains tax
In 2014-2015 you can make capital gains of £11,000 before paying capital gains tax (CGT). In 2013-14 the threshold was £10,900.
Capital gains tax is charged at 18% if you are a basic rate taxpayer and 28% if you are a higher rate taxpayer.
Selling a business
If you sell off part or all of a business, Entrepreneurs' relief may reduce the rate that CGT is charged at to an effective rate of 10% on the first £10 million of gains you make over your lifetime.
Entrepreneurs’ relief applies if you run a trading business or furnished holiday letting.
In 2013-14 and 2014-15, inheritance tax applies to estates in excess of £325,000. Tax is payable on anything above this threshold (apart from where there are tax exemptions, such as transfers to your spouse or registered civil partner). The government has announced that the nil-rate band will remain at its current level until 2019.
If tax becomes payable on gifts during your lifetime (usually to trusts) the tax rate paid is half the rate charged on death, so it is currently 20%.
For more details, see Inheritance tax explained.