In the United Kingdom the tax system is progressive, it means that the people who earn more will have to pay higher taxes. In other words, the higher you earn the more taxes we pay. As a result, you are expected to pay tax on the income that is above the personal allowance. To understand the tax system in United Kingdom it is essential to understand the different UK tax Rates, UK Tax Brackets and Personal allowances.
Taxes have been a nightmare for most of us and this blog is written solely to help everyone understand the basis of the Tax systems and UK tax brackets. In this blog, from the desk of Gagan Singh-CEO of UK’s fastest emerging Accounting Firm-PKPI chartered accountants we will breakdown the concepts of personal allowance, income tax UK, Uk Tax Brackets, Uk Tax Rates, UK Tax Codes, and more to help individuals, businesses and employees understand the basic concepts of income tax.
What is personal tax allowance?
Everyone in the UK gets a tax-free Personal Allowance. This is the amount you can earn in a year without paying tax. Its like a tax-free amount that everyone is entitled to. For the tax year 2022/2023, the personal allowance is £12,570. If you earn less than your standard personal allowance, you are not expected to pay tax on it at all. If you earn more than your standard personal allowance, only income above your personal allowance will be taxed. The personal allowance is an important factor to consider when calculating your taxable income. It also helps you determine which tax bracket you fall into.
Allowances | 2022 to 2023 | 2021 to 2022 | 2020 to 2021 |
Personal Allowance | £12,570 | £12,570 | £12,500 |
Income Limit for Personal Allowance | £100,000 | £100,00 | £100,000 |
How is income tax determined?
Income tax is a compulsory contribution that needs to be made to the government (local or national). This can be in the form of additional costs on a product, service, or taken from business profits or an individual's wage. It is a tax you need to pay on your income. This tax is most commonly the money you earn from having a job.
In the case of being employed by a business, income tax gets deducted from the wage before the salary is deposited to your bank account. In the case of being self-employed, you submit the income tax on your own via HMRC self-assessment form.
Income tax is not restricted to just the money you earn from your job but also from other profits. For example, if you own a house and you have rented it out and make a certain income out of it, you pay income tax on the profits. Income tax is also paid on the interest earned from savings if you go over personal allowance threshold.
What are the tax brackets in UK and which one will I fall into?
If you are a taxpayer in the UK, it's important to know which tax bracket you fall into. UK Tax Brackets help you understand how much tax you’ll have to pay based on your income. They help you plan your finances accordingly.
UK Tax Brackets are tailored every year. These brackets indicate the percentage of tax you’ll pay on each additional pound you earn. There are four tax brackets determining your tax rates. The first one is the personal allowance in which you are not required to pay tax if your income is up to £12,570. The second one is the basic tax rate where you pay 20% tax if your income ranges between £12,571 to £50,270. The third tax bracket has a higher rate where you pay 40% tax if your income ranges between £50,271 to £150,000. The last tax bracket has an additional rate where you pay 45% tax if your income is above £150,000. Refer the table below to understand the tax brackets and rates better.
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% |
How to calculate taxable income?
Calculating taxable income helps you to determine which tax bracket you fall into. Taxable income is the total earned income. This income is from all the sources, including income received from your employer, self-employed income, pension payments, rental income and benefits.
Taxable income can be calculated in three easy steps:
Add all the earned income. This should cover all the sources of income mentioned above.
Deduct the personal allowance (£12,570) from the total amount of income for the year. This figure is the figure that determines your tax range.
Apply relevant deductions from the taxable income. These deductions can be tax reliefs, property and marriage allowances, trading allowances and gift tax.
The final figure after calculations is called the non-savings income. HMRC considers your non-savings income while determining your income tax bracket and rate.
How can we reduce income tax?
After calculating your non-savings income, you must be wondering if there are ways to reduce your income tax bill. Thankfully there are several effective ways one can achieve this. Read the following tips to reduce your income tax.
Make the best use of your personal allowance. Be sure to claim this allowance to its fullest extent by ensuring you do not earn over the threshold.
Taking advantage of tax reliefs. Keeping a constant check on the tax reliefs can also reduce your income tax bill.
Use tax-free savings accounts. Saving money using tax-free saving accounts can help you reduce the overall tax bill by earning tax free interest.
Considering salary sacrificing schemes. A few employers offer salary sacrifice schemes where a part of the salary can be exchanged for non-cash benefits. These benefits can be childcare vouchers or cycle to work schemes which would help reduce the taxable income.
What does this mean for you?
Every individual has different streams of income which results in different tax rates, but a qualified accountant can give you the best strategy. If you are seeking to enhance your tax planning, you are at the right place. PKPI charted accountants can help you navigate your finances on the best terms available. Sign up for a free consultation now!