Income Tax Rates Explained
The amount of income tax you pay depends on how much you earn, which determines the tax band that you will fall in. Every working person with an income below £100,000 per annum has a personal allowance. This presently stands at £12,500, and means that the first £12,500 per annum that you earn, is tax free, and everything you earn after that, is taxed at the rate determined by your tax band. The tax bands for England, Wales, and Northern Ireland are as follows:
- Basic Rate £0 – £37,500 per annum, which is taxed at 20%
- Higher Rate £37,501 – £150,000, which is taxed at 40%
- Additional Rate £150,000 +, which is taxed at 45%
Please note that the sum above is for the taxable earnings, after the personal allowance has been deducted.
So, if you earn £30,000 per annum you would deduct your personal allowance of £12,500, and would be left with £17,500 taxable income (£30,000 – £12,500 = £17,500). At 20% (basic rate) your tax bill for the year would amount to £3,500.
If you were to earn £55,000 per annum, the calculations get a little more complicated.
From this sum, we’ll deduct your personal allowance of £12,500, and we’ll be left with £42,500. Out of this sum, on the first £37,500 you’ll pay 20% tax (£7,500 tax), and on the remaining £5,000, you’l be paying higher rate tax, at 40% (£2,000 tax). Total tax paid: £9,500
Once your wages hit £100,000 per annum, your personal allowance begins to fall with £1 for every £2 earned, and doing the sums become even further complicated, so to work those figures out, it is far easier to use our tax calculator HERE.
If you are self-employed or earn further income from investments, renting out property, tips, etc, you are required by HMRC to file a tax return. If you fail to do so you will put yourself at risk of being fined, which can amount to considerable sums. You can find out whether you should complete a self-assessment return HERE. Even if you’re not amongst the groups that are listed, but the HRMC have requested that you complete a self-assessment, you will need to. If not, again, you could face punitive fines.
More and more people are choosing the self-employed route. The first thing you most do, if choosing to be self-employed, is register with HMRC by the 5th October of the tax year that you become self-employed.
You can do this on-line HERE, or by calling the HMRC Self-employed hotline on 0300 200 3504. If you are self-employed, it is your responsibility to pay your own tax and NI contributions, and it’s essential that you file a self-assessment tax return at the end of the financial year. The financial year runs from April 6th – April 5th.
Being self-employed means that you can deduct your expenses from the amount earned each year, from your gross earnings. For example, if you earned £50,000 in the financial year, but you spent £12,000 on expenses, your taxable income would be £38,000 (minus your personal allowance). Expenses must only be money spent that is necessary for you to carry out your work in a professional manner. These can include office rental, office equipment, travel expenses, marketing materials and costs, legal costs, clothing and website costs. You cannot deduct any expenses which were spent for personal use. Many self-employed people employ an accountant to do their tax returns. The advantage of this is that a good accountant can considerably reduce your tax bill, often saving more than they are costing you. Another advantage is that the HMRC are less likely to challenge a return that has been completed and certified by an accountant, so can save you time as well as money. Once allowable expenses are deducted, the figure that remains is the taxable income, and is taxed at the same rates as if you were on PAYE.
National Insurance Contributions for employees on PAYE NI contributions very depending on how much you earn, and are deleted at source by the employer. The latest figures from HMRC for 2019 – 2020 are as below. Between Primary Threshold (£162 pw) and Upper Earnings Limit (£892 pw) – 12% Above Upper Earnings limit – 2% If you are above the upper earnings limit you would pay 12% on the first £892 pw, then a further 2% on all earnings above £892 pw.
National Insurance Contributions for the self-employed
There are two rates of National Insurance if you’re self-employed. Class 2 – £2.95 pw for the first £8,632 earned Class 4 – 9% of profits (net earnings) between £8,632 and £50,000 + 2% on profits above £50,000 You usually make these payments through your self-assessment declaration. If you are not a fan of paying tax, and let’s face it, who is, history tells us that you’re not alone. “There is no worse tyranny than to force a man to pay for what he does not want merely because you think it would be good for him.” ― Robert A. Heinlein, The Moon is a Harsh Mistress “Death, taxes and childbirth! There’s never any convenient time for any of them.” ― Margaret Mitchell, Gone with the Wind “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” ― Winston S. Churchill “The invention of the teenager was a mistake. Once you identify a period of life in which people get to stay out late but don’t have to pay taxes – naturally, no one wants to live any other way.” ― Judith Martin “Income tax returns are the most imaginative fiction being written today.” ― Herman Wouk “The wages of sin are death, but by the time taxes are taken out, it’s just sort of a tired feeling.” ― Paula Poundstone