Tax rates and allowances
How much tax you pay
By Ian Robinson
Article 4 of 10
How much tax you pay
Discover how much tax you can expect to pay on various forms of income, such as wages, savings and property.
Tax on income varies depending on its source.
You don't normally have to pay any tax on the first slice of the income you receive in the tax year. This is known as your personal allowance and rose to £11,500 in 2017-18 from £11,000 in 2016-17.
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.
- Get a head start on your 2016-17 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?.
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 £33,5000 are basic-rate taxpayers and pay tax at 20% (with £11,500 personal allowance, this gives a threshold of £45,000)
- 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%.
Find out more: Tax-free income and allowances – this guide lists of all the tax reliefs you could be entitled to
Savings income and personal savings allowance
Until 6 April 2016, 20% tax was deducted from savings interest at source. If you were a higher-rate taxpayer, you had a further 20% tax to pay on this, and additional-rate taxpayers paid a further 25%.
From April 2016, a new system incorporating personal savings allowance applies. Interest on savings is tax-free to a threshold of £1,000 for 20% taxpayers and £500 for those who pay higher-rate tax. This allowance applies in 2017-18
Tax will no longer be deducted by your bank or building society, and all interest will be paid gross.
If the interest you receive from all sources exceeds the £1,000 limit (£500 for 40% taxpayers), any tax due will be collected through a self-assessment tax return or via an adjustment in your PAYE tax code.
The starting rate limit
If your income is made up of salary, pension income and savings, you could qualify for an additional £5,000 savings 'starting rate limit', which allows you to earn savings income tax free.
To calculate if tax is due on your savings income, set any non-savings income against your personal allowance (for 2017-18, this is typically £11,500).
If your non-savings income exceeds your personal allowance, deduct the excess from the £5,000 savings income band to see how much of this you have left.
Set your savings income against the remainder of the band and a further tax-free £1,000/£500 of personal savings allowance. If all your savings income falls within this, you have no tax to pay on it.
If your savings income exceeds what's left, only the amount within the band is tax-free, with any excess interest being taxable.
Dividend income and dividends allowance
From 6 April 2016, a new dividend allowance has been available, making the first £5,000 you receive in dividends from investments tax-free.
Above this, basic-rate taxpayers will pay 7.5% tax on dividends, higher-rate taxpayers 32.5% and additional-rate taxpayers 38.1%.
This will apply in 2017-18, but in 2018-19, the dividend allowance will reduce to £2,000.
In 2015, dividend income carried a 10% tax credit, so basic-rate taxpayers effectively paid no tax, higher-rate taxpayers paid tax at an effective rate of 25% and additional-rate taxpayers paid 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.
Find out more: Dividend tax explained – more information about how this tax is applied
Capital gains tax
In 2017-18, you can make capital gains of £11,300 before paying capital gains tax (CGT).
Capital gains tax is charged at 10% if you are a basic-rate taxpayer and 20% if you are a higher-rate taxpayer. Higher rates apply (18% and 28% respectively) on taxable gains made from residential property sales.
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.
Find out more: Capital gains tax explained – a detailed summary examining how this tax is applied
In 2017-18, 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.
The new main-residence nil-rate band, which gives extra allowance to those passing the family home to their children, came into force on 6 April 2017.
This allows you to pass on an additional £100,000, rising by £25,000 each year until it reaches £175,000 in 2020-21. This means married couples and civil partners could pass on as much as £1 million by 2020.
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%.
Find out more: Inheritance tax explained – more information on how this tax is applied
Get an expert answer to your tax query
Our Which? Money Helpline experts can give you independent one-to-one guidance on all kinds of tax queries. If you're not a Which? member and you'd like to get unlimited access to the helpline, you can try Which? Money for two months for £1.
- Last updated: April 2017
- Updated by: Gareth Shaw