The majority of us pay income tax at two levels, and the amount you pay depends on how much you earn.
There are two main rates of income tax set by the government: 20% and 40%. Those who pay the 20% rate are paying the basic rate of tax, while those who pay 40% are paying the higher rate of tax.
Each person has a personal allowance which is a set amount you can earn before you pay any tax. There are also allowances for specific criteria, such as for those who are married and anyone who receives dividends. If you are eligible, you won’t pay tax on the amount within the allowance.
Here, we explain what you need to know about the different income tax brackets and the allowances you may be eligible for.
What are the different income tax rates and tax bands?
There are three different income tax brackets in England, Wales and Northern Ireland which are basic, higher and additional. From April 2023, the following income tax rates will apply:
- 20% on earnings from £12,570 to £50,270 (basic)
- 40% on earnings from £50,271 to £125,140 (higher-rate)
- 45% on earnings over £125,140 (additional rate)
Scotland uses a slightly different system and has five different income tax brackets. From April 2023 the following rates will apply:
- 19% on earnings from £12,571 to £14,732 (starter rate)
- 20% on earnings from £14,733 to £25,688 (basic rate)
- 21% on earnings from £25,689 to £43,662 (intermediate rate)
- 41% on earnings from £43,663 to £124,140 (higher rate)
- 46% on earnings over £125,140 (top rate)
When does the additional rate of income tax kick in?
Any money you earn over £125,140 is taxed at the additional rate which is currently 45%.
Am I eligible for an income tax allowance?
The majority of people are eligible for the £12,570 personal allowance. This is set each year at the budget and applies to an entire tax year. People earning over £100,000 a year will get a reduced personal allowance, and only those earning more than £125,000 a year will not get any personal allowance.
There are a number of other allowances too, including the following:
If you’re married you may be able to transfer £1,260 of your personal tax allowance to your husband, wife or civil partner to lower their tax bill, by up to £252 a year, if they earn more than you.
To be eligible the lower earner usually needs to have an income of less than the personal allowance, which is currently £12,570, and the higher earner needs to earn less than £50,270. If you think you may be eligible, there is a free marriage tax calculator on the Gov.co.uk website.
It’s also possible to backdate your claim to include any tax year since 5 April 2019 for any years you were eligible.
Personal savings allowance
The size of your personal savings allowance depends on your income.
Basic-rate taxpayers can earn £1,000 interest a year before paying tax, higher-rate taxpayers can earn £500 interest a year, and there is no allowance for additional-rate taxpayers.
Lower earners, those with an income or pension below £12,570 a year, may also be eligible for the starting rate for savings. Those in this bracket can earn interest of up to £5,000 tax-free on top of their personal allowance.
If you own shares in a company, you may receive a dividend payment and a certain amount of this will be tax-free.
The current dividend allowance is £1,000, so you will pay tax only on any dividend income of more than this amount. If you receive dividends from shares you hold within a stocks and shares ISA, you also won’t pay tax on these.
While you don’t specifically get an allowance for benefits you can receive without paying tax, some will not be factored into your taxable income.
These include child benefit, disability living allowance, income support, maternity allowance, and pension credit. For a full list, see the Gov.co.uk website.
Is there any way to avoid paying higher-rate tax?
It’s impossible to avoid paying tax, but there are some ways to lower your tax bill.
These include making sure your tax code is correct, and that you’re being taxed at the right level and taking advantage of tax credits if you are eligible.
If you fill in a self-assessment tax return always make sure you do it on time to avoid paying more. And if you do find out you’ve overpaid on your tax bill, always make sure you reclaim the overpaid taxes from HM Revenue and Customs (HMRC).
Taking advantage of tax benefits at work, if your employer offers them, may also help lower your overall bill. The benefits on offer will depend on your company, but these could include a travel season ticket loan or help with childcare costs.
» MORE: How to claim tax relief