Female small business owner at till

Contents

  1. 1. What are the UK tax brackets?
  2. 2. When do I have to start paying tax?
  3. 3. When do I have to declare my income if I'm self-employed?
  4. 4. Income Tax
  5. 5. National Insurance contributions (NICs)
  6. 6. Dividend Tax
  7. 7. Capital Gains Tax
  8. 8. Corporation Tax
  9. 9. Relax about your tax

What are the UK tax brackets?

June 28, 2021
This article was updated 6th September 2022.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!When you start a business 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 Allowance 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 earned through employment or self-employment.
If you're employed, this comes out of your paycheck via Pay As You Earn (PAYE). 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?

When do I have to start paying tax?

As soon as you're earning more than your Personal Tax Allowance (£12,570), you'll need to start paying Income Tax.

Regardless of whether you're a sole trader or limited company director, it's your responsibility to work out how much Income Tax you owe and to pay the correct amount to HMRC when filing your Self Assessment.It's worth noting that your Personal Allowance isn't set in stone. While the £12,570 Personal Allowance threshold is set for the 2022/23 tax year, this can change in future tax years.Your Personal Allowance also changes once you start earning above £100,000. Once your earnings exceed this threshold, your Personal Allowance decreases by £1 for every £2 you earn over £100,000. This means that if you're earning £125,140 or more, your allocated Personal Allowance is £0.It's also worth checking to see if there are any tax-free allowances you may be entitled to, such as:
    Your trading allowance, which covers the first £1,000 you make in a tax yearThe first £1,000 of income from property you rent, although this isn't covered under the Rent a Room Scheme

When do I have to declare my income if I'm self-employed?

If your gross trading income (money you make on the job) is less than £1,000, you won't have to declare your self-employment income just yet. Once you start earning above this threshold, however, you'll need to register your business with HMRC and file a Self Assessment tax return.

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, we've got you covered with our Self Assessment service.

You should also remember that you only need to pay Income Tax on your profits (not your total income) when you're self-employed.

Income Tax

In England, Wales and Northern Ireland, you'll find the Income Tax brackets for the 2022/23 tax year:
Tax BandTaxable IncomeTax Rate
Personal AllowanceUp to £12,5700%
Basic Rate£12,571-£50,27020%
Higher Rate£50,271-£150,00040%
Additional RateMore than £150,00045%
In Scotland things are a little different, but it's easy enough to find your tax band.
Tax BandTaxable IncomeTax Rate
Personal AllowanceUp to £12,5700%
Starter Rate£12,571-£14,66719%
Basic Rate£14,668-£25,29620%
Intermediate Rate£25,297-£43,66221%
Higher Rate£43,663-£150,00041%
Top RateMore than £150,00046%

National Insurance contributions (NICs)

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 as with Income Tax, the amount of National Insurance you pay depends on the amount you earn and whether you're an employer or employee:

Paid by EmployeesPaid by employers
Annual IncomeRateAnnual IncomeRate
Below £12,570 (as of 6th July 2022)0%Below £9,1000%
£12,571-£50,27013.5%£9,101-£50,27015.05%
Above £50,2713.25%Above £50,27115.05%

National Insurance for sole traders

If you're a sole trader, your National Insurance contributions (NICs) will look a little different. Unlike employers and employees who'll need to pay Class 1 and Class 1A NICs, you'll need to pay both Class 2 and Class 4 NICs on your sole trader profits.The National Insurance rates and thresholds for the 2022/23 tax year are as follows:
Class 2 NICs2022/23
Small profits threshold£6,515
Weekly rate£3.05
Class 4 NICs2022/23Rate
Lower profits limit£9,56810.25%
Upper profits limit£50,2703.25%
For more information on voluntary National Insurance contributions, how to pay the National Insurance contributions you owe and when you need to start paying, head over to our guide on paying National Insurance as a sole trader.

Dividend Tax

For the present tax year, the current Dividend Tax Allowance is £2,000. If your dividend amount is below this amount, you won't need to pay tax on it.The amount of tax you pay on your dividends will depend on what Income Tax Band you're in. If you're earning below your allocated Personal Allowance amount — £12,570 — you won't need to pay tax on your dividends. Those in the Basic Rate Tax Band will pay a 8.75% rate on dividends over the £2,000 allowance. For those in the Higher Rate, it's 33.75%. For those paying the Additional Rate, it's 39.35%.If you're a limited company director, one savvy way to cut down your tax bill is to adjust the salary and dividend amounts you take home. Combining both your Dividend Tax Allowance and Personal Allowance means you can take up to £14,270 home for the present tax year, completely tax free!

Capital Gains Tax

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 the 2022/23 tax year, 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 tax band.

Corporation Tax

If your company is based abroad, but has a UK office, then Corporation Tax is only applied to profits made on its UK activities.To pay your Corporation Tax, you'll need to register or write to HMRC. It's also wise to keep strict accounting records to make the most of the deductions you can use to reduce your Corporation Tax bill, which is easy to do with our snap and capture technology.

I'm a sole trader. Do I need to pay Corporation Tax?

If you're a sole trader or partnership, you can relax — you don't need to pay Corporation Tax.

Relax about your tax

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.
Daniel Hogan
Daniel HoganCOO & Co-Founder

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