- 1. What are the UK tax brackets?
- - When do I have to start paying tax?
- - My personal tax allowance
- - What about National Insurance?
- - Dividend tax explained
- - Capital Gains Tax explained
- - Corporation Tax explained
- - Personal savings allowance explained
- - What income tax bracket am I in?
- - How to pay your tax
- - Still stuck?
- - Relax about your tax
What are the tax brackets in the UK?June 3, 2021
If the thought of navigating the UK's tax brackets, rules and regulations leaves you in a cold sweat, don't worry. You're not alone!
Since most people are employed the taxpaying is left to their employer, meaning they never have to worry about how their taxes are filed.
However, when you start a business and become an employer the taxpaying becomes your responsibility, and you'll need to delve a little deeper to understand just what the tax brackets are in the UK and how they work.
By learning about the UK's income tax brackets, National Insurance, your taxable income and personal allowances you can demystify the whole experience, giving you the confidence to make important business decisions and focus on running and growing your enterprise.
What are the UK tax brackets?
A tax bracket tells you how much tax you have to pay depending on your income. Everyone in the UK pays tax on their income, whether it's generated by a business or an individual. If you're employed, this comes out of your paycheck via PAYE and you've probably never even noticed it. If you're self-employed, then you have to file a tax return. So far, so simple.
But exactly what do you have to pay tax on? How much do you need to earn before you pay income tax and when do the rates change?
In England, Wales and Northern Ireland you can follow this simple table to calculate which tax bracket your income falls under.
|Tax Band||Taxable Income||Tax Rate|
|Personal Allowance||Up to £12,570||0%|
|Additional Rate||More than £150,000||45%|
In Scotland things are a little different, but it's easy enough to find your tax band.
|Tax Band||Taxable Income||Tax Rate|
|Personal Allowance||Up to £12,570||0%|
|Top Rate||More than £150,000||46%|
Benjamin Franklin said it best when he declared "nothing is certain except death and taxes," so this is something that any business owner, big or small, has to get their head around. However, it doesn't have to be an awful chore, and this article will help you feel more relaxed the next time you have to file your taxes.
When do I have to start paying tax?
If your income comes to more than your personal tax allowance then you must pay income tax. This includes earnings and income from:
- Interest on savings
- Employment benefits
- Rental income
- Trust funds
If you're making money from a side hustle then you need to declare it to HMRC and work out any tax you owe. The same goes if you're paying yourself a salary from your own business or start-up. It's your responsibility to find out what you owe, and luckily there are plenty of accounting apps and solutions (like us!) that can make the whole process easier for you.
My personal tax allowance
Now, for the good news — some of your income is tax free. Every UK taxpayer gets a personal allowance of £12,570 for the 2021-22 tax year which you don't have to pay any tax on. Once you go over that threshold, you'll start paying income tax according to your tax band.
This personal allowance amount (and the other tax bands) are subject to change each tax year so it's wise to check in with any changes on the UK government website.
Your personal allowance also changes once you start earning above £100,000. It decreases by £1 for every £2 you earn over £100,000. If your income hits £125,140 or more, then your personal allowance is £0.
If you're self-employed, then there are a few more things to take note of...
Personal tax allowance for the self-employed
If you have a side-hustle, or do freelance work alongside another job, the important thing to remember is you only get one personal allowance. HMRC will usually assign this to your main employment. You can check your tax codes to see which job HMRC views as your main employment. It'll likely have the code 1250L.
If you're self-employed then there are also tax-free allowances that you may be entitled to. These include:
- Your trading allowance, which is the first £1,000 of income from your business.
- The first £1,000 of income from property you rent, although this isn't covered under the Rent a Room Scheme.
Do I have to declare my income if I'm self-employed?
If your gross trading income (money that you make on the job) is less than £1,000, then no. Once your business starts making more, then you'll need to register with HMRC and file a Self Assessment Tax Return. Thankfully, you no longer need to rely on complicated paper forms and endless phone calls.
You can now file a Self Assessment online, without losing access to industry experts and knowledgeable support. If you need a hand filing your return, then Ember's clever system has got you covered with its automated tax submissions.
You should also remember that you only need to pay income tax on your profits (not your total income) when you're self-employed.
What about National Insurance?
A quick glance at any payslip will tell you that more comes out of your pay packet than just income tax. Another important deduction from your (and your employees') pay is National Insurance. Just like with income tax, the amount of National Insurance you pay depends on the amount you earn:
|Earnings Per Week||Annual Salary||National Insurance Rate|
|Less than £184||Less than £9,568||No National Insurance to pay|
|£184-£967||£9,568-£50,270||12% on everything earned between £184 and £967 a week|
|More than £967||More than £50,270||12% on everything earned between £184 and £967 a week. 2% on everything over that|
National Insurance for the self-employed
If you're self employed, then the contributions for National Insurance are a little different. Just like with income tax, you're responsible for working out how much you should pay. These are the two types of National Insurance that you'll pay through Self Assessment:
- Class 2: If your profits are at least £6,515 or more each year, then you'll pay £3.05 a week.
- Class 4: If your profits are £9,569 or more each year, then you'll pay 9% on profits between £9,569 and £50,270. Once you go over £50,270 threshold, you'll pay 2% on these profits.
These numbers can seem complicated at first, but a careful recording of your finances and a trusted accounting solution will help you to keep everything in shape and save you from panicking when the time comes to file your Self Assessment.
As well as tax brackets and National Insurance, there are a range of other taxes that you'll come across when running your business. Let's take a look at what some of them are and what they could mean for you and your company.
Dividend tax explained
When a company makes a profit, it can distribute some of its earnings to shareholders, either as cash or as stock. If you own shares in a company, then you may get a dividend payment.
If this dividend payment falls within your personal allowance, then you don't have to pay any tax on it. There is also a dividend allowance. The current dividend allowance for this tax year (6 April 2021 to 5 April 2022) is £2,000.
The amount of tax you pay on your dividends will depend on what Income Tax Band you're in. Those in the Basic Rate Tax Band will pay a 7.5% rate on dividends over the £2,000 allowance. For those in the Higher Rate, it's 32.5%. For those paying the Additional Rate, it's 38.1%.
Just remember to add what you've earned from your dividends to any other income to work out the tax you need to pay.
Capital Gains Tax explained
Capital Gains Tax (CGT) is a tax paid when you make a profit by selling something you own. This could be from a business, a second home, shares or valuables to name just a few.
Just like with other forms of tax, there's a personal allowance (the Annual Gains Amount) for Capital Gains Tax. For this tax year (2021-2022) it's £12,300.
It's easy to work out how much you owe. Just follow these steps:
- Calculate your taxable income (remembering to remove your personal allowance).
- Calculate your total taxable gains. To do this, work out the profit you made from the disposal of any assets (possessions, property, shares) in this tax year, and add them together.
- Deduct your tax-free allowance for capital gains tax from your total taxable gains.
- Add this amount to your taxable income.
- You will now pay 10% (18% for residential property) on your gains if this amount is within the basic income tax band, and 20% (28% for residential property) on any gains outside of the basic income tax band.
Corporation Tax explained
If you're running your own business, then you've probably already come across corporation tax. This is the tax that UK companies pay based on the profits that they make.
If your company is based abroad, but has a UK office, then corporation tax is only applied to profits made on its UK activities. The rate for corporation tax is currently 19%.
To pay your corporation tax you have to register or write to HMRC. It's also wise to keep strict accounting records, and bone up on any expenses and deductions you can use to reduce your corporation tax bill.
Don't have the time to do all that extra research? You're not the only one. Luckily, solutions like Ember have clever systems that work behind the scenes to file and optimise your taxes, as well as accounting geniuses to suggest simple ways that you might be entitled to more of your money back.
I'm a sole trader. Does this apply to me?
If you're a sole-trader or partnership, then no. You don't need to worry about Corporation Tax.
Personal savings allowance explained
The personal savings allowance (PSA) lets you earn some interest on your savings without paying any tax. Once again, your income tax band will affect your personal savings allowance.
Here's a quick breakdown:
- Basic rate taxpayers can earn up to £1,000 of interest on their savings each year and not pay tax on it
- Higher rate taxpayers can earn up to £500 of interest on their savings each year and not pay tax on it
- Additional rate taxpayers are not entitled to a personal savings allowance
One more thing on the personal savings allowance – it doesn't cover things like ISAs or premium bonds.
What income tax bracket am I in?
If you're not sure which tax bracket you should be in, let's take a look at some examples to help you make up your mind.
The side hustler
Louise has a day job and has started a side hustle designing websites in her spare time. She's registered as a sole-trader and needs to work out how much tax to pay.
She earns £35,000 from her employer, and made £20,000 profit from her side hustle. This puts her total income at £55,000. She has a personal allowance of £12,570, which makes her taxable income £42,430.
The amount of basic rate income tax she has to pay is £7,540. The amount of income tax at the higher rate came to £1,892.
That means the total amount of income tax she has to pay for the year works out at £9,432.
The company director
Raj is a company director of a limited company. He is paid a salary of £45,000 each year.
Raj also has a personal allowance of £12,570 each tax year. Because his salary falls below £50,270 he is in the basic rate tax band of 20%. Moreover, since his salary comes through the company payroll, his tax is automatically deducted via PAYE and he doesn't need to file a Self Assessment.
However, if Raj receives any dividends from the company, these will need to be taxed separately.
How to pay your tax
Gone are the days when you'd send a cheque in the post and hope for the best. Now, you can pay online, by direct debit, over the phone, or at your bank in person.
If you're looking for a service which offers a mix of clever tech and real world human assistance, then why not try ember.co, to really get the best of both worlds.
If you need more information about how much income tax you have to pay, or which tax brackets your income falls under, then there are plenty of helpful resources and tax calculators out there.
A couple of examples:
- Income tax calculator
- Take home tax calculator
- UK government income tax rates and personal allowances page
Relax about your tax
HMRC once said "Tax doesn't have to be taxing." They're right! Doing your taxes isn't the most exciting job in the world, but it is necessary when you run your own business. Luckily, you can arm yourself with the knowledge to make the process less faster and less stressful.
Once you've familiarised yourself with the tax bands and kicked the jargon to the kerb, you can speed your way through your tax paperwork and get back to making your company soar.
If you prefer not to worry about any of this, then we should talk! Reach out to us via the chat on your screen and we'll get those taxes taken care of for you.
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