If you find taxes difficult to understand, you’re not alone. From Value-Added Tax (VAT) and Excise Duties to Council Tax and Stamp Duty, there are so many different types of taxes, it can be challenging to get your head around them all.
But while some taxes won’t affect you, it’s likely you’ll have to pay Income Tax at some point in your life. This means it’s one of the most important taxes to get to grips with.
Each year the UK government determines what the Income Tax bands and allowances will be for the coming tax year and reveals them in the annual budget announcement in March. But what exactly are Income Tax bands?
In this article, we’ll explain what these are and give the figures for the tax year 2023/224. This will give you an indication of how much Income Tax you might be expected to pay for the current tax year.
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.
Income Tax bands for England, Wales and Northern Ireland
|Tax band||Taxable income||Tax rate|
|Personal Allowance||Up to £12,570||0%|
|Basic Rate||£12,571 and £50,270||20%|
|Higher Rate||£50,271 to £125,140||40%|
|Additional Rate||Over £125,140||45%|
Income Tax bands for Scotland
|Tax band||Taxable income||Tax rate|
|Personal Allowance||Up to £12,570||0%|
|Starter rate||£12,571 to £14,732||19%|
|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%|
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.
These figures are revealed in the House of Commons as part of the annual Budget announcement, so they can change from year to year. However, the Chancellor announced in the April 2023 that the personal allowance would be frozen at £12,570 until April 2028.
HMRC collects income tax on behalf of the government so it can fund public services, like the NHS, education and the welfare system. It also uses the money to invest in public projects, such as housing and roads.
Income Tax isn’t just charged on earnings that come from employment. You’ll also have to pay it if your income comes from other sources, like rent or savings and pensions. However, it isn’t levied on all types of income.
If you receive income from any of the following, you’ll usually be required to pay Income Tax on it:
- Employment benefits
- Interest on savings above your Personal Savings Allowance
- Most pensions including state pensions, personal and company pensions and retirement annuities
- Renting out properties (unless you’re a live-in landlord and receive less than the Rent a Room Scheme limit
- Some grants, including the Small Business Grant Fund, the Coronavirus Job Retention Scheme, the Self-Employment Income Support Scheme and the Retail, Hospitality and Leisure Grant Fund
- Some state benefits
- The Test and Trace Support Payment, Self-Isolation Support Payment and Self-Isolation Support Scheme
Income Tax is paid differently, depending on whether you are employed or self-employed.
If you are employed, you will pay it through Pay As You Earn (PAYE). PAYE is a system that deducts Income Tax and National Insurance contributions before your wages or pension payments are made.
If you are self-employed, you will need to pay it through Self-Assessment. Self-employed taxpayers and those with other sources of income must file a self-assessment tax return each year.
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.
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).
In some cases, you may not be required to pay tax on your income.
For example, you don’t pay Income Tax on things like:
- Dividends from company shares below your Dividends Allowance. Check out our guide on what tax you pay on dividends for the latest rates and how you work out your tax.
- Income from tax-exempt accounts, such as Individual Savings Accounts (ISAs) and National Savings Certificates
- National Lottery or premium bond wins
- Rent from a lodger in your house that’s below the Rent a Room Scheme limit
- Some state benefits
- The first £1,000 of income from property you rent (unless you’re using the Rent a Room Scheme)
You may also be able to claim Income Tax relief if:
- You’re self-employed, as you can pay less tax to take into account the money you’ve spent on the costs of running your business (provided you’re not using your £1,000 tax-free trading allowance)
- You work on sea vessels outside of the UK for a certain number of months per year
- You make charity donations through Gift Aid or Payroll Giving
- You make maintenance payments to an ex-spouse or civil partner
In addition to the above exemptions, you may be entitled to some other allowances that could reduce the amount of income tax you have to pay:
Blind Person’s Allowance
On top of their Personal Allowance, blind people can get an extra allowance of £2,600, for the tax year 2022/23.
If you’re married or in a civil partnership and you and your partner were both born after 6th April 1935, you may also be able to claim Marriage Tax Allowance.
If one partner earns less than £12,570 and the other earns between £12,571 and £50,270 (or £43,662 in Scotland), the lower earner can transfer as much as £1,260 of their Personal Allowance to reduce their partner’s tax bill.
Personal Savings Allowance
Depending on your Income Tax band, you may be able to earn tax-free interest on your savings too. Basic Rate taxpayers can earn up to £1,000 in savings interest per year without paying tax and Higher Rate taxpayers can earn up to £500 in savings interest per year without paying tax. Additional Rate taxpayers. however, don’t qualify for this allowance. These bands are used for the Personal Savings Allowance for Scottish residents too.
The Personal Savings Allowance applies to any interest earned from building society and bank accounts, credit union accounts, savings accounts and government and corporate bonds, as well as interest earned on other currencies if they’re held in UK-based savings accounts. Dividend income from shares or funds isn’t included in the allowance.
If you’re self-employed, you don’t have to pay tax on the first £1,000 you make, as this is your trading allowance.
This is in addition to your Personal Allowance and it applies to casual services like babysitting and gardening, as well as businesses.
It’s worth noting that if you earn less than £1,000 per year, you can only claim the same amount as your gross income and you can’t claim your expenses.
Income Tax is one of the most important taxes to get to grips with, as it’s likely you’ll have to pay it at some point in your life.
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.