How income tax is calculated
As a first step, you should work out how much of your income and earnings - excluding any savings interest or dividends - is taxable. This is known as 'non-savings income'.
You should then work out your taxable income from savings, as well as your dividend income.
Add together these amounts to find your total taxable income.
The illustration below shows how all your incomes and allowances work together to give you the final amount of money you’ll pay tax on.
In the 2018-2019 tax year, the first £34,500 above your personal allowance (so, up to total earnings of £46,350) will be taxed at 20%, which is the UK basic tax rate.
Anything left above this amount will be taxed at 40%, unless your income exceeds £150,000, in which case it will be taxed at 45%. Dividends are taxed based on the same thresholds, but at a different rate.
You'll pay tax on your non-savings income first, followed by your savings income, and then your dividend income.
In 2019-20, the personal allowance will increase to £12,500, and basic-rate tax will be paid on earnings above that up to £50,000.
- Get a head start on your 2017-18 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?.
Calculate your non-savings income
To work out your non-savings income, follow the steps below.
1. Work out your taxable income
The first step is to work out the portion of your non-savings income you need to pay tax on.
Add together your non-savings income from various sources, including , self-employment, freelance work, pensions, rental income and taxable state benefits. Ignore any tax-free income, such as interest from cash Isas.
Don't include income from savings and investments at this stage, as they are taken into account later.
Add all of this income together to find your total non-savings income.
2. Deduct tax reliefs
Tax reliefs can be claimed to reduce your overall bill. These can include:
- Pension contributions made through your employer's pension scheme, (but not any contributions made to personal or stakeholder schemes, as relief for these contributions is given later in the income tax calculation)
- Qualifying loan interest payments.
- Qualifying gifts to charities.
3. Deduct allowances.
A tax-free allowance refers to the amount of money you're able to earn before paying tax.
For 2018-19, you’ll pay no tax on the first £11,850 you earn – as this is your tax-free personal allowance. In 2019-20, this will increase to £12,500.
You may also be able to claim the following allowances:
- Blind person’s allowance – this is £2,390 for 2018-19.
- Marriage allowance – this is up to £238 for 2018-19.
The video below highlights five allowances that are commonly forgotten. Consider this when working out your non-savings income.
4. Calculate how much tax you'll pay
The figure you're left with is the non-savings part of your income that you’ll pay tax on.
Taxable income in Scotland
There are different rates if you live in Scotland. The personal allowance is the same at £11,850, but there is a Scottish starter tax rate of 19% for those who earn up to £2,000 above the personal allowance (which would include salaries up to £13,850).
Basic tax of 20% applies to those earning between £2,000-£12,151 above the personal allowance, with an intermediate tax rate of 21% for earners at £12,151-£31,580 above the personal allowance.
A 41% higher tax rate is for those earning £31,581-£150,000 more than the allowance. The Scottish top tax rate of 46% will apply on income above £150,000.
Find out more in our Income taxes in Scotland guide.
The 2019-20 rates of Scottish income tax will be announced in December at the Scottish Budget.
Tax on your savings income
When you earn interest on your savings, this interest will be treated as income and be liable for tax.
This could include interest earned from bank and building society accounts, savings and credit union accounts, unit trusts, investment trusts and open-ended investment companies, and peer-to-peer lending.
There are a few steps to finding out how much tax you’ll pay on your savings.
1. Find out how much you earned in interest
Note down how much you earn from your savings for the year – you can find this out from a statement from your bank or building society.
2. Work out if the starter savings rate applies
The savings starter rate is £5,000 of tax-free savings income in addition to your personal allowance. Those who earn below the 2018-19 personal allowance of £11,850 can use up the full £5,000 savings starter rate.
For each pound you earn over the personal allowance, the same amount is taken off the savings starter rate – so, if you earn £12,850, you’d only have a £4,000 savings starter rate. If you earn more than £16,850, you won’t have any savings starter rate at all.
In 2019-20, this will change, as the personal allowance will increase to £12,500. Anyone who earns less than this amount can use the full savings starter rate. Due to the deductions that come from earning more than this, those with salaries over £17,500 won't have any savings starter rate.
3. Deduct your personal allowance
Your personal savings allowance is separate – and in addition - to the savings starter rate. In 2018-19, basic rate taxpayers can earn up to £1,000 from savings tax-free; higher rate tax payers can earn up to £500; and additional rate tax payers do not receive a savings allowance. These rates were the same in 2017-18, and will be unchanged in 2019-20.
4. Pay tax on remaining interest
Once you've deducted the personal savings allowance (and the starter savings rate, if applicable) from your total savings interest, you'll be left with your total taxable savings income. This will be added to your total income, and you'll pay income tax according to your band.
Find out more: Tax on savings - more on how the personal savings allowance works.
Tax on your dividend income
The first £2,000 you receive in dividend from investments is tax-free in the 2018-19 tax year - known as your dividend allowance. This has been significantly reduced from the £5,000 dividend allowance in 2017-18.
Any earnings above this threshold differently according to your normal tax rate. Basic-rate taxpayers will pay 7.5% tax on dividends, higher rate taxpayers 32.5%, and additional rate taxpayers 38.1%.
The dividend tax rates and thresholds will be frozen in 2019/20.