The UK income tax and allowances for individuals consists of a marginal tax system. In England, Wales, and Northern Ireland, there are three marginal tax bands and tax rates. UK individuals also have several personal tax allowances, allowing them to earn certain types of income tax-free.
| Allowance | Tax free amount |
|---|---|
| Personal allowance | £12,570 |
| Dividend allowance | £1,000 |
| Capital gains allowance | £6,000 |
| Personal savings allowance – basic rate tax payers | £1,000 |
| Personal savings allowance – higher rate tax payers | £500 |
Personal allowance
Individuals in the UK enjoy an annual personal allowance of £12,570, meaning the first £12,570 of income is tax-free.
Reducing personal allowance
UK individuals earning £100,000 or above have a reducing personal allowance, losing £1 of their allowance for every £2 earned above £100,000. The personal allowance is forfeited entirely once annual income reaches £125,140.
Tax bands and rates
England, Wales, and Northern Ireland have three tax bands and rates of income tax. Income between £12,570 and £50,270, which falls in the basic rate tax band, is taxed at 20%. The higher rate tax band of 40% tax, applies to income over £50,270 and up to £125,140. And lastly, the additional rate tax band of 45% applies to income over £125,140. Note that Scotland has different tax bands and tax rates than the rest of the UK.
In a marginal tax system, higher tax rates only apply to that portion of income falling within the next tax band. For example, someone making £53,000 a year pays 20% tax on their earnings between £12,570 and £50,270. Their remaining pay of £2,730 (£53,000 less £50,270) is taxed at 40% as it falls in the higher rate band.
| Tax band | Taxable income | Tax rate |
|---|---|---|
| Personal allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
Personal savings allowance
The annual personal savings allowance allows basic rate taxpayers or individuals to earn £1,000 of tax-free interest on savings. For higher rate taxpayers the allowance is reduced to £500.
Capital gains allowance
The capital gains allowance is currently £6,000 per annum after reducing from £12,300 in April 2023. The government is reducing it to £3,000 per year from April 2024.
When you sell certain assets, profits up to £6,000 per annum are tax-free. Basic rate taxpayers pay 18% tax on profits over £6,000 from the sale of investment properties. Whilst higher rate taxpayers pay an additional 10%, paying 28% on property profits. Profit over £6,000 from the sale of other assets, such as shares, incurs a 10% tax for basic rate taxpayers. Higher rate tax payers pay 20% tax on the sale of other assets.
Dividend allowance
The current dividend allowance is £1,000 per year, allowing you to earn £1,000 of income from shares annually tax-free. From April 2024, the dividend allowance is decreasing to £500 per year.
Dividends falling within the basic tax rate band are taxed at 8.75%, whilst those falling within the higher rate band are taxed at 33.75%. Finally, the tax rate on dividends in the additional tax band is 39.35%.
You can avoid tax on dividends and shares by investing in the stock market using a stocks and shares ISA.
Scottish tax bands and rates
| Tax bands | Income | Tax rate |
|---|---|---|
| Personal allowance | UP to £12,570 | 0% |
| Starter rate | £12,571 to £14,732 | 19% |
| Scottish basic rate | £14,733 to £25,688 | 20% |
| Intermediate rate | £25,689 to £43,662 | 21% |
| Higher rate | £43,663 to £125,140 | 42% |
| Top rate | Over £125,140 | 47% |
