How Much is Income Tax?

Income tax is a significant part of the UK tax system, levied on the earnings of individuals and businesses. Understanding how much you need to pay, and making the most of available allowances and reliefs, can help minimise your tax liability. This article delves into the income tax rates for the past four years, provides a guide on maximising various allowances, explains how to pass on some of your allowances to a married partner, and discusses how to reduce tax via salary sacrifice with examples.

Income Tax Rates for the Past Four Years

The income tax rates in the UK vary depending on your income and where you live (as Scotland has different rates). Here are the rates for the past four years:

Tax Year 2024/25

• Personal Allowance: £12,570 (0% tax rate)

• Basic Rate: 20% on income from £12,571 to £50,270

• Higher Rate: 40% on income from £50,271 to £125,140

• Additional Rate: 45% on income over £125,140

Tax Year 2023/24

• Personal Allowance: £12,570 (0% tax rate)

• Basic Rate: 20% on income from £12,571 to £50,270

• Higher Rate: 40% on income from £50,271 to £125,140

• Additional Rate: 45% on income over £125,140

Tax Year 2022/23

• Personal Allowance: £12,570 (0% tax rate)

• Basic Rate: 20% on income from £12,571 to £50,270

• Higher Rate: 40% on income from £50,271 to £125,140

• Additional Rate: 45% on income over £125,140

Tax Year 2021/22

• Personal Allowance: £12,570 (0% tax rate)

• Basic Rate: 20% on income from £12,571 to £50,270

• Higher Rate: 40% on income from £50,271 to £150,000

• Additional Rate: 45% on income over £150,000

Maximising Your Allowances

Understanding and utilising available allowances can significantly reduce your tax bill. Here are some key allowances and how to maximise them:

Personal Allowance

• Use it all: Ensure that your total income (from all sources) doesn’t waste any of your personal allowance. For instance, if you’re earning below the allowance, you might consider taking on extra work or drawing income from other sources.

Savings Personal Allowance

• Basic Rate Taxpayers: £1,000 of interest tax-free.

• Higher Rate Taxpayers: £500 of interest tax-free.

• Additional Rate Taxpayers: £0 tax-free.

To maximise this, spread your savings across accounts to utilise the allowance fully and ensure you're earning interest efficiently.

Savings Interest Allowance

This allowance, known as the Starting Rate for Savings, allows up to £5,000 of interest to be tax-free if your other income is below £17,570. If your other income reduces your starting rate for savings, plan your savings to maximise this allowance.

Dividend Income Allowance

• £2,000 tax-free: Regardless of your tax band. Maximise this by investing in dividend-paying stocks or funds. Keep in mind the total income to ensure you don't cross into a higher tax bracket unnecessarily.

Trading Allowance

• £1,000 tax-free: For casual earnings from self-employment. Keep track of all minor self-employment income and claim the trading allowance instead of actual expenses if this benefits you more.

Property Income Allowance

• £1,000 tax-free: For rental income. This is particularly useful for those renting out a single property. Track rental income and compare the benefit of claiming the property allowance versus actual expenses.

Passing Allowances to Your Husband/Wife

Marriage Allowance

If you or your partner earns less than the personal allowance and the other is a basic rate taxpayer, you can transfer 10% of the personal allowance (£1,260) to your partner, saving up to £252 in tax.

Eligibility:

• One partner’s income must be less than the personal allowance.

• The other must be a basic rate taxpayer.

How to Apply:

• Apply online through the HMRC website or by phone.

Reducing Tax via Salary Sacrifice

What is Salary Sacrifice?

Salary sacrifice, sometimes known as salary exchange, is an arrangement where an employee agrees to reduce their salary in exchange for non-cash benefits, such as increased pension contributions or childcare vouchers.

Benefits of Salary Sacrifice

• Tax Efficiency: Contributions made through salary sacrifice are taken from your gross salary (before tax is deducted), reducing your taxable income and therefore your tax bill.

• National Insurance Savings: Both employees and employers pay less National Insurance contributions on the reduced salary.

Example of Salary Sacrifice

Suppose you earn £40,000 per year and agree to sacrifice £3,000 of your salary for additional pension contributions. Your taxable salary would then be £37,000.

• Before Salary Sacrifice:

  • Taxable Income: £40,000 - £12,570 (Personal Allowance) = £27,430

  • Income Tax: £27,430 x 20% = £5,486

  • National Insurance: £40,000 - £9,568 (Lower Earnings Limit) = £30,432 x 12% = £3,651.84

• After Salary Sacrifice:

  • Taxable Income: £37,000 - £12,570 (Personal Allowance) = £24,430

  • Income Tax: £24,430 x 20% = £4,886

  • National Insurance: £37,000 - £9,568 = £27,432 x 12% = £3,291.84

By using salary sacrifice, you save £600 in income tax and £360 in National Insurance, resulting in a total saving of £960 per year.

Conclusion

Understanding income tax rates and allowances is crucial for effective tax planning. By maximising personal allowances, savings personal allowances, savings interest allowances, dividend income allowances, trading allowances, property income allowances, and utilising salary sacrifice, you can significantly reduce your tax liability. Additionally, taking advantage of the marriage allowance can result in further savings.

For tailored advice, consider consulting with a tax advisor or financial planner who can help navigate your specific circumstances and ensure you're making the most of your allowances and reliefs.