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 £10,600 in 2015/16, from £10,000 in 2014/15.
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.
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 £31,785 are basic-rate taxpayers and pay tax at 20% (with £10,600 personal allowance, this gives a threshold of £42,385)
- 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
If you are a taxpayer, 20% tax will be deducted from your savings interest before you get it. If you are a higher-rate taxpayer, you'll still have a further 20% tax to pay and additional rate taxpayers a further 25%.
Non-taxpayers (whose income is lower than their personal allowance) can receive tax-free (gross) interest on savings, rather than having tax deducted automatically and then claiming this back. To do this, you need to complete form R85 (available from your bank or building society).
The 10% savings income tax band
Until April 2015, if you have very little or no other income apart from interest on your savings, some or all of your savings income may be taxed at only 10%, rather than the normal 20% basic rate. You can claim back any excess tax that's been deducted at source by using form R40.
Tax on your savings income is only payable at the lower 10% rate, if your savings income plus all other income falls into the starting rate tax band. This is £2,880 for the 2014-2015 tax year.
To work out how the band is applied, deduct your income from all other sources (non-savings income) from your tax-free personal allowance (typically £10,600 or £10,660 for 2014-15).
From April 2015, the 10% 'savings rate' band is abolished and replaced with a £5,000 tax-free (0%) savings income band on top of the personal allowance.
This is applied in the same way as the 10% band above, with non-savings income being set against your personal allowance and the savings income band first and savings income taken into account after this.
So first set your tax-free personal allowance against any non-savings income. If there is any tax-free allowance left, deduct this from your savings income. Any remaining savings income figure should then be set against the £5,000 band. If it all falls within this, the whole sum is eligible for a 20% tax refund or you could use form R85 to register to receive the interest without any tax deducted. If the savings income exceeds the band, any further interest is taxed at 20%.
If your non-savings income exceeds your personal allowance, deduct the excess from the £5,000 figure to see how much of the 0% band you have left. Set your savings income against whatever is left of the £5,000 band. If it all falls within the residue, the whole sum is eligible for a 20% tax refund or you could use form R85 to register to receive the interest gross. If the savings income exceeds what's left, only the amount within the reduced band is tax-free, with any further interest being taxed at 20%.
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 2015-2016, you can make capital gains of £11,100 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 2015-16, 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
2015 Summer Budget
In the 2015 Summer Budget, the Chancellor, George Osborne announced major changes in dividend income tax rules from April 2016. He also confirmed changes to IHT rules and set the 2016 threshold for 40% income tax.
Not all taxpayers will have a personal allowance of £10,600. 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
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