Income tax

Published: 01 Sep 2013

Updated: 11 Oct 2023

Written by Ray Coman

Income tax is payable on almost all forms income with exception of tax free income

Income tax rates

A Rate on non-dividend savings income up to £5,000 is 0% where taxable non-savings income does not exceed £5,000
B A dividend allowance effectively taxes the first £2,000 dividends received by individuals at 0%. Dividends above this limit are taxed at 8.75% (2021/22: 7.5%) for basic and standard rate taxpayers, 33.75% (2021/22: 32.5%) for higher rate taxpayers and 39.35% (2021/22: 38.1%) for additional and trust rate taxpayers.
C Basic rate band increased by Gross Gift Aid donations and most personal pension contributions
D Scottish income tax and rate bands apply to earned, pensions and property income of Scottish taxpayers. UK income tax rates and bands apply for other income, including savings and dividend income, of Scottish taxpayers. The Scottish Budget will be announced on 12 December 2018 and the Scottish rates and bands for 2019/20 will then be updated. With effect from 6 April 2019, the Welsh Government also has the right to set the Welsh rate of income tax that applies to earned, pension and property income of Welsh taxpayers in addition to the UK rates less 10%. The Welsh Government has set the Welsh rate on income tax at 10% for 2019/20, leaving the combined UK plus Welsh rates the same as those applying in England and Northern Ireland. 

Savings income is assessed to income tax after non-savings.  Typically non-saving income will include pension, self-employment profits and employment earnings.  To the extent that the starting rate is not used up by non-savings income, the lower rate will apply to savings income.

Rates of income tax on dividends

Dividends are taxed as the top slice of income, after savings and non-savings income. Until 2015-16, dividends carried a non-refundable 10% tax credit.   

Since 2016/17, tax credit has been abolished.  The effective rate for dividends is the same as the actual rate, and there is no longer a requirement to 'gross up' dividend with a fraction of 10/9 in the income tax calculation.  A dividend allowance of £5,000 was also introduced with effect from 6 April 2016.

Personal allowances

A Reduced by £1 for every £2 of income over £100,000
B Non-residents may not be entitled to personal allowance, in certain circumstances
C Available to persons born before 6 April 1935. Relief limited to 10%. Reduced to minimum allowance by £1 for every £2 over income limit. Apply personal allowance reduction first
D £500 for higher rate and £nil for additional rate taxpayers
E If gross income is in excess of £1,000, a deduction of £1,000 is permitted instead of actual expenses

Note: High income child benefit charge - 1% of the benefit per £100 of adjusted net income over £50,000. 100% of the benefit when adjusted net income is over £60,000

For Scottish residents only the following rates apply

A Basic rate band increased by Gross Gift Aid donations and most personal pension contributions
B Scottish income tax and rate bands apply to earned, pensions and property income of Scottish taxpayers. UK income tax rates and bands apply for other income, including savings and dividend income, of Scottish taxpayers. The Scottish Budget will be announced on 12 December 2018 and the Scottish rates and bands for 2019/20 will then be updated. With effect from 6 April 2019, the Welsh Government also has the right to set the Welsh rate of income tax that applies to earned, pension and property income of Welsh taxpayers in addition to the UK rates less 10%. The Welsh Government has set the Welsh rate on income tax at 10% for 2019/20, leaving the combined UK plus Welsh rates the same as those applying in England and Northern Ireland. 

Non-residents

Certain non-residents are entitled to personal allowances, which includes British and other European nationals, resident of various countries in the European Economic Area, various former Commonwealth and other nations.  A full list of non-residents entitled to personal allowances is available on the HMRC website.

Blind person’s allowance

An individual who is registered on the local authority’s blind person’s register is entitled to a Blind Person’s Allowance.

Married couple’s allowance

If the older spouse is born before 6 April 1935, the husband or higher earning spouse is entitled to a married couple’s allowance.  For couples married after 5 December 2005 the tax reduction is allocated to whichever partner has the higher income.  For other couples the reduction is allocated to the husband.

The maximum allowance is reduced by half of the excess of income over the income limit.  The income limit is after total income after deduction of personal allowance.  However, the allowance cannot be reduced below the minimum shown above. 

A taxpayer is entitled to a reduction in tax liability equal to 10% of the amount of married couple’s allowance.  However a tax reducer cannot create a tax refund. 

If it turns out that any allowance is wasted, because the husband (or higher earning partner) does not have sufficient tax liability to extinguish, the surplus may be transferred to other partner.

The allowance is reduced by a twelfth for each part month or full month in which the couple have not been married in the tax year of marriage.  In the year of separation or death, the husband is entitled to a full year of the allowance.

Spouses can transfer personal allowance where neither spouse is a higher rate taxpayer.  The Marriage Allowance cannot be transferred to a person in receipt of the Married Couples Allowance.  A couple would pay less tax where a spouse who is not liable to income tax transfers his or her allowance to a spouse who is a basic rate taxpayer.