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Personal tax essentials
Personal allowance
Each individual is entitled to his or her own personal allowance (PA) of £12,570 for 2021/22. The PA reduces an individual’s taxable income. For those with income in excess of £100,000, the allowance is restricted.
After reducing income by the PA a series of rate bands are assigned first to your non-savings (this may include income from wages, self-employment, property income and pensions), then to your savings income, and finally to any dividend income.
Income tax rates for 2021/22
Non-savings income for English and Northern Irish taxpayers is taxable as follows:
This is not available if the taxable non-savings income exceeds the starting rate band.
Dividend income
The Dividend Tax Allowance (DTA) is £2,000. The DTA does not change the amount of income that is brought into the income tax computation. Instead, it charges £2,000 of the dividend income at 0% tax – the dividend nil rate. Like the PSA, the DTA does not reduce total income for tax purposes, and dividends within the allowance still count towards the appropriate basic or higher rate bands. Dividends in excess of the DTA are taxed at 7.5% (BR); 32.5% (HR); and 38.1% (AR).
Case Study
Rita has gross income of £56,000 (made up of £26,000 earnings, £5,000 of interest and UK dividends of £25,000). Her tax liability is £6,743.50.
Band £
Rate %
0 - 37,700
37,701 - 150,000
Over 150,000
Welsh taxpayers
Basic rate (BR) 20
Higher rate (HR) 40
Additional rate (AR) 45
Income
Deduct: PA
Taxable
Tax at:
0% on PSA / DTA
20% on
7.5% on
32.5% on
Total tax
26,000
–12,570
13,430
0
13,430
2,686.00
5,000
5,000
500
4,500
900.00
25,000
25,000
2,000
17,270
5,730
3,157.50
Earnings (£)
Interest (£)
Dividends (£)
The National Assembly for Wales has the right to vary the rates of income tax payable by Welsh taxpayers. The Welsh rate of income tax has been set at 10% and is added to the UK rates, which are each reduced by 10%. This means that for 2021/22, the tax payable by Welsh taxpayers continues to be the same as English and Northern Irish taxpayers.
Scottish taxpayers
However, the following rates and bands apply for Scottish taxpayers (on non-savings and non-dividend income):
Total tax liability £6,743.50
Band £
Band Name
Rate %
0 - 2,097
2,098 - 12,726
12,727 - 31,092
31,093 - 150,000
Over 150,000
Starter 19
Basic 20
The ‘hidden’ 45% and 60% tax rates
The top rate of income tax, for those with taxable income in excess of £150,000, is 45% (38.1% for dividends). The PA is scaled back if ‘adjusted net income’ exceeds £100,000, being reduced by £1 for every £2 of income in excess of that limit. This means that an individual with total taxable income of £125,140 or more will not be entitled to any PA. This gives an effective tax rate on this slice of income of 60% – higher if you are a Scottish taxpayer paying the Scottish Top rate of tax of 46%. It may be possible to reduce your taxable income and retain your allowances if approached with due consideration, e.g. by making pension contributions or Gift Aid donations. Contact us now for advice on minimising the impact of the top tax rates.
Intermediate
21
Higher 41
Top 46
Rates that apply across the UK
Savings income
The Personal Savings Allowance (PSA) applies to income such as bank and building society interest. The allowance applies for up to £1,000 of a basic rate taxpayer’s savings income, and up to £500 of a higher rate taxpayer’s savings income each year. The allowance is not available to additional rate taxpayers.
In addition to the PSA, some taxpayers benefit from the starting rate for savings, which taxes £5,000 of savings income at 0%.
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