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.
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. This rose to £11,500 in 2017-18 from £11,000 in 2016-17.
However, if your income exceeds this figure, you can expect to pay tax on the remainder.
How much income tax you pay depends on where the income has come from and your tax bracket.
- 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?.
How your income tax is calculated
Income from employment, pensions and rental property
This is classed as non-savings income.
Non-savings income is currently taxed in three different tax brackets 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.
Find out more: tax-free income and allowances - this guide lists all of the tax reliefs you could be entitled to
2017-18 tax rates
- People with taxable income up to £33,5000 are basic-rate taxpayers and pay tax at 20%.
- Including your personal allowance of £11,500, this means the threshold for basic-rate taxpayers is £45,000.
- Those with taxable income over the limit (that earn over £45,000) pay 40% tax on income above this threshold.
- Taxable income over £150,000 is taxed at 45%.
Self-employed people pay tax on their profits, rather than their gross income. Gross income is your total received revenue before any deductions or allowances.
Find out more: income tax for the self-employed - more about what self-employed income tax means and what tax returns you might need to fill in
Income from savings
Your tax-free allowances for your savings depends on your:
- personal allowance - if it hasn't been used on your wages or pension, you can use it on your savings instead
- personal savings allowance
- starting rate for savings
Personal savings allowance
From April 2016, a personal savings allowance applies.
- For basic-rate taxpayers, the interest on savings is tax-free up to £1,000 for 2017-18
- For higher-rate taxpayers, the interest on savings is tax-free up to £500 for 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.
Find out more about whether you need to complete a self-assessment tax-return.
Starting rate for savings
You might also qualify to get up to £5,000 savings tax-free, if the total from your other sources of income such as wages and pension is less than your personal tax allowance (which is £11,500 for 2017-18).
Find out more: income tax on savings and investments: our guides explain in-depth about tax on your savings
The first £5,000 you receive in dividends from investments is tax-free (known as your dividend allowance).
To find out at what rate of dividend tax you pay, you'll need to add your dividend income to your other taxable income. If your dividend income pushes you above the higher or additional rate thresholds, you have to pay more tax at the following rates.
- Basic-rate taxpayers pay 7.5% on dividends
- Higher-rate taxpayers 32.5%
- Additional-rate taxpayers 38.1%
From 2018/19, the dividend allowance will reduce to £2,000.
Find out more: Dividend tax explained – more information about how this tax is applied
Capital gains tax
Capital gains tax (CGT) is a tax on the increase in value of possessions - such as a second home, antiques or shares - during the time you have owned them. CGT is due when you dispose of the possession, either through selling it or giving it away.
In 2017-18, you can make capital gains of £11,300 before paying capital gains tax.
After this, capital gains tax is charged at 10% if you're a basic-rate taxpayer and 20% if you're a higher-rate taxpayer.
But if you make a taxable gain from residential property sales above the £11,300 threshold, you pay a higher rates of 18% if you're a basic-rate taxpayer and 28% if you're a higher-rate taxpayer.
Find out more: our guide capital gains tax rates and allowances explains CGT in more detail
Inheritance tax at 40% applies to estates in excess of £325,000. The government has announced that this threshold will remain at its current level until 2019.
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).
On 6 April 2017, a main-residence nil-rate band came into force, which gives extra allowance to those passing the family home to their children.
This allows you to pass on an additional £100,000 above £325,000, 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 £1m by 2020.
Inheritance tax might also be payable on gifts made in your lifetime, especially if you die within seven years of making the gift.
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: August 2017
- Updated by: Gareth Shaw