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.
However, those whose income exceeds this figure can expect pay tax on the remainder.
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.
Go further: 30 ways to save on tax - learn how you can reduce your tax bill
Income from employment, pensions and property
This is classed as non-savings income (from employment, self-employment, pensions and rental income).
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.
- People with taxable income up to £31,865 are basic-rate taxpayers and pay tax at 20% (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%
Go further: Tax-free income and allowances - this guide lists of all the tax reliefs you could be entitled to
Savings income (such as interest from bank or building society accounts) is still (until April 2015) taxed at four rates, depending on what tax band it falls into when added to your non-savings income;
- If you have non-savings income of less than your personal allowance plus £2,880, your savings income will quality for a tax rate of 10%.
- Otherwise, savings income falling into the basic rate band will be taxed at 20%
- Income falling into the higher-rate band will be taxed at 40%
- Income falling into the additional rate will be taxed at 45%
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.
Go further: Tax on savings and investments - a comprehensive guide to how savings income is taxed
Dividend income (from shares) is treated differently;
- Basic-rate taxpayers pay 10% tax
- Higher-rate taxpayers pay 32.5%
- Additional rate taxpayers pay 42.5%
However, 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.
Go further: Dividend tax explained - more information about how this tax is applied
Capital gains tax
In 2014-2015, you can make capital gains of £11,000 before paying capital gains tax (CGT).
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.
Go further: Capital gains tax explained - a detailed summary examining how this tax is applied
In 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%.
Go further: Inheritance tax explained - more information on how this tax is applied
Not all taxpayers will have a personal allowance of £10,000. Older people may be entitled to slightly higher age-related allowance, for example. Your personal allowance could be reduced if you owe money to HMRC. Depending on your circumstances, you may other taxes to pay as well.
Go further: What taxes you pay - a summary of the other taxes you might be liable to pay