How much tax you pay – tax allowances and tax rates

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You’ve probably heard of your tax allowance, basic rate tax and higher rate tax. But do you know how much tax you’re supposed to pay? Find out how tax allowances and thresholds work.

Personal tax allowance

Your personal tax allowance is the amount of money you can earn, or income you can receive without paying tax. In the tax year 2019 – 20 it’s £12,500. This means if you earn or receive less than £12,500 between April 6th 2019 and April 5th 2020, you won’t have to pay any tax.

SAVVY TIP: Your income could include rental income, wages or earnings from freelance work, interest from savings and/or dividends from shares or investment funds you own.

Taxable and non-taxable income

Not all the money you receive is taxable. So that means you could receive more than £12,500 a year and still not pay tax.

Here’s a list of income that you could have to pay tax on:

  • Your wages if you’re employed, or profits from being self employed
  • Interest from savings accounts, over a certain amount
  • Dividends from shares, over a certain amount (a dividend is a share of the profit that a company makes)
  • Pension payments, including your state pension
  • Certain state benefits, including Jobseeker’s Allowance and Carer’s Allowance.

Starting rate for savings

Just to add another allowance or rate into the mix, if you’re on a low income, you can also earn interest tax-free through the starting rate for savings. It’s an allowance that means you can receive up to £5,000 a year in savings interest without paying tax. However, every £1 you receive from income sources that aren’t savings reduces your starting rate allowance by £1.

The easiest way to explain this is through an example. If you earn £12,500 a year and receive £4,000 a year in interest from your savings (which would mean you have a lot of savings!), you wouldn’t pay any tax. That’s because you would qualify for the full savings starting rate of £5,000.

If you were to earn £14,500 a year and receive £2,999 a year in savings interest, so your annual income would be £17,499, you would still be able to get interest on your savings tax free. But if you were to earn £15,000 a year and get £2,999 a year in savings interest, you wouldn’t qualify for the savings starter rate.

Basic rate tax

If you’re a basic rate taxpayer, you pay income tax at a rate of 20%. But you only pay that on your income or earnings above £12,500, not on the whole lot.

You pay this rate if you live in England, Wales and Northern Ireland. Scotland sets its own income tax thresholds and rates. Its personal allowance is the same as England, Wales and Northern Ireland, at £12,500, but it has a lower rate of income tax of 19% on money you earn between £12,501 and £14,549. This rate is called the starter rate.

In Scotland, you pay tax at the basic rate (20%) on earnings or income above £14,550 and below £24,944.

Higher rate tax

You pay a higher rate of tax than 20% on money you earn or receive over a certain threshold. The threshold depends on whereabouts in the UK you live. In Scotland, There’s an intermediate rate of tax of 21% on earnings between £24,945 and £43,430.

In England, Wales and Northern Ireland:

You pay tax at 40% on money you earn or receive over £50,000. You only pay tax at 40% on that part of your income. If you’re a ‘higher rate taxpayer’, you actually pay tax at two different rates (four in Scotland!). I mention this because I’ve had questions from some people who think you pay tax at the highest rate on everything you earn. That’s not the case (but let’s not give politicians any ideas!).

In Scotland, the threshold for the higher rate of tax is lower than £50,000 (it’s £43,431) and the rate of tax is higher at 41%.

If you earn more than £100,000

Once you earn more than £100,000, you start to lose the personal allowance. You lose it at a rate of £2 for every £1 you earn above the £100,000 threshold. If you earn £110,000 a year you get a personal allowance of £7,500 a year.

If you earn £120,000 a year, you get a personal allowance of £2,500 a year. And once you earn over £125,000 a year, you don’t get the personal allowance at all.

Photo by Skitterphoto from Pexels

Additional rate tax

If you earn more than £150,000 a year, you pay tax at 45% in England, Wales and Northern Ireland and 46% in Scotland.

Related articles: 

What to do if your tax code is wrong; checking your notice of coding

Tax relief on workplace pensions

Scottish income tax rates 2019-20

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