The UK has a progressive Income Tax system whereby the more you earn, the more you pay. Outside of the personal tax-free allowance, there are three Income Tax bands for UK workers: the basic rate, the higher rate, and the additional rate.
Income Tax was first implemented in the UK in the 18th century by William Pitt the Younger to pay for defence spending during the Napoleonic Wars. During the post-war years of the 1950s and 1960s, Income Tax rates in the UK reached their highest ever levels, with a top rate of 90%. When Margaret Thatcher came to power the top rate was quickly reduced from 83% to 60% and the basic rate from 33% to 30%. She then went on to cut the basic rates in successive budgets and by the time John Major left office in 1997, the basic rate of Income Tax was 23%.
But what are the current UK Income Tax rates and the Income Tax bands? And are they liable to change again soon?
We are going to take a look at Income Tax bands in the UK, what they are, when they change, and how to work out your annual Income Tax contributions.
Everyone who earns income in the UK has a tax-free personal allowance of £12,570 per year. After that, the basic rate of 20% Income Tax is levied on earnings between £12,571 to £50,270, the higher rate of 40% is for earnings between £50,271 to £150,000, and the additional rate of 45% is for any earnings over £150,000.
The Income Tax thresholds regularly change and any changes are announced in either the Chancellor's Autumn Budget or their Spring Statement. Tax rates are also subject to change and the basic rate of 20% is set to fall to 19% in 2024.
|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 £150,000||40%|
|Additional rate||over £150,000||45%|
What is Income Tax?
Income Tax is a tax you pay on your earnings. For most people, it is automatically deducted from their pay packet by their employer along with their pension contributions and their National Insurance contributions.
What is the tax-free Personal Allowance?
The tax-free Personal Allowance is the amount you earn that you do not have to pay Income Tax on. You don't start paying Income Tax until you earn more than the tax-free allowance.
The standard rate is £12,570, which means that only the money you earn over that amount is taxed. The current rate of tax-free allowance is set to be frozen until 2026.
The tax-free Personal Allowance can be higher if you are married and one of you is a low earner or if you are blind. The Personal Allowance is lower if you earn over £100,000 per year.
Income over £100,000
If you earn over £100,000 per year, your tax-free Personal Allowance goes down by £1 for every £2 you earn over £100,000. This means your tax-free allowance is zero if your income is £125,140 or above.
So if you earn above £125,140, you pay the basic 20% tax rate on earnings between £0.01 and £52,270.
How do you work out how much tax you pay?
If you earn under £12,571 per year, you pay no Income Tax. Anything above that threshold is taxable income and the total amount can be worked out in the following ways.
Anything you earn between £12,571 to £50,270 per year, is taxed within the 20% basic rate tax bracket.
Say you earn £40,000 per year, to work out your Income Tax contributions you do:
- £40,000 - £12,570 (the tax-free threshold) = £27,430.
- 20% of £27,430 = £5,486 (total annual Income Tax contribution).
- £40,000 - £5,486 = £34,514 (total annual salary minus Income Tax deductions).
Anything you earn between £50,271 and £100,000 per year, is taxed within the 40% higher rate tax bracket.
Say your salary is £100,000 per year, to work out your Income Tax contributions you do:
- £100,000 - £50,270 (the higher rate tax threshold) = £49,730 (the amount on which you will pay the higher rate of 40%).
- 40% of £49,730 = £19,892.
- £50,270 - £12,570 (the tax-free threshold) = £37,700 (the amount on which you will pay the basic rate of 20%).
- 20% of £37,700 = £7,540.
- £19,892 + £7,540 = £27,432 (total annual Income Tax contribution).
- £100,000 - £27,432 = £72,568 (total annual salary minus Income Tax deductions).
Anything you earn above £150,000 per year, is taxed within the 45% additional rate tax bracket.
Say your salary is £200,000 per year, to work out your Income Tax contributions you do:
- £200,000 - £150,000 (the additional rate threshold) = £50,000 (the amount on which you will pay the additional rate of 45%).
- 45% of £50,000 = £22,500
- £150,000 - £50,271 (the higher rate threshold) = £99,729 (the amount on which you will pay the higher rate of 40%).
- 40% of £99,729 = £39,891.60
- There is no tax-free threshold for earners of over £125,140.
- 20% of £50,271 = £10,054.20
- £10,054.20 + £39,891.60 + £22,500 = £72,445.80 (total Income Tax contribution).
- £200,000 - £72,445.80 = £127,554.20 (total annual salary minus Income Tax deductions).
Do Income Tax bands change?
Income Tax bands change regularly. Changes are often due to inflation, but they can also change based on other factors such as unemployment rates or the lasting impact of a recession. Usually, the Income Tax bands rise rather than fall, as inflation means that money becomes more valuable not less.
The tax-free Personal Allowance also frequently rises and is often used as a means to suggest the ruling party is helping those on the lowest incomes in our society. The recent announcement by UK Chancellor Rishi Sunak that the tax-free Personal Allowance was to remain frozen until 2026 came as a shock to many. Dissenters across the political spectrum argued that this would mean people would end up paying more tax and low-income earners would be especially hard hit.
How do you pay Income Tax?
Most people pay Income Tax through the PAYE (Pay As You Earn) system. This is the system used by employers throughout the UK to deduct taxes on workers' earnings before they receive their pay packet. So if you are employed on a contract and receive a regular monthly wage, your Income Tax is most likely paid through PAYE.
If you are self-employed, you must file a Self Assessment tax return by the end of every tax year, which is April 5th. Therefore, if you are self-employed it is crucial that you keep track of your invoices and receipts so that you can pay the correct amount of Income Tax at the end of each year. To pay Income Tax as a self-employed worker you must first register as self-employed and then complete your tax returns.
What is a progressive tax?
The UK's Income Tax system is progressive, which means that as you earn more, you pay more. A progressive tax is one in which the rate of taxation increases as the taxable amount also increases.
A progressive tax is the opposite of a regressive tax, which is a tax that disproportionately impacts poorer people. For example, VAT is a regressive tax as everyone pays the same amount of VAT irrespective of their earnings. This means that poorer people spend a more sizable proportion of their earnings on a product than richer people.
If you earn over £12,570 in the UK you pay tax on your income. There are three Income Tax rates in the UK beyond the tax-free Personal Allowance. Income Tax bands demarcate the thresholds at which you begin to pay a higher or lower rate of Income Tax. The tax rates and bands change regularly and the UK currently has one of the lowest rates in our country's history.