Income tax and rates

What is income tax?

Income tax is charged on an individual’s personal income. The amount and rate of income tax that you pay will depend on the amount that you receive and the way in which you receive it.

The most common forms of taxable income for an individual are as follows:

• Earnings from employment.
• Earnings from self-employment.
• Earnings from pensions, including the state pension.
• Rental income.
• Interest from savings.
• Interest and dividends from shares.

What are the income tax rates in England and Wales for the 2024/2025 tax year?

Tax free income tax allowances

Personal Allowance

The tax free personal allowance is currently £12,570. This means that you can earn up to £12,570 from any of the sources mentioned above before you start paying tax.

However, if your total earnings go over £100,000 then this allowance starts to disappear at the rate of £1 for every £2 over £100,000 that you earn. So when your income reaches £125,140, the tax free personal allowance will have completely disappeared.

Married couples and civil partners may also be able to transfer part of their personal allowances to each other. However, this is only available where both individuals earn below £50,270 per year and is only beneficial where one individual is not already using all of their personal allowance.

Dividend Allowance

If you earn dividend income outside of your personal allowance then your first £500 of dividend income is also tax free, regardless of your total taxable income.

The Starting Rate for Savings and the Personal Savings Allowance

If you have interest income from savings then you have a few allowances available for you to consider each tax year: the personal allowance mentioned above; alongside the starting rate for savings; and the personal savings allowance.

The starting rate for savings is a maximum of £5,000 and available to you if your total income from other sources is £17,570 or less. The starting rate for savings reduces at a rate of £1 for every £1 earned in other income above the personal allowance (so above £12,570 for 2024/2025). If your income from other sources is £17,750 or more then the starting rate for savings is not available to you. HMRC have an example of how this works.

Basic rate taxpayers will also be entitled to the Personal Savings Allowance of £1,000, with higher rate earners entitled to £500. Unfortunately, those with total incomes in the additional rate will not qualify for the allowance.

There are also more generous allowances for people born before the 5th of April 1935.

Basic rate tax

For income over £12,571 and up to £50,270 you’ll be charged basic rate tax which is 20%, apart from dividend income which is taxed at 8.75% after you have exceeded your dividend allowance.

As a basic rate tax payer you can earn up to £1,000 on your savings before having to pay tax.

Higher rate tax

Income over £50,270 and up to £125,140 falls into higher rate tax which is taxed at 40%. This is for everything apart from dividend income which is taxed at 33.75%.

As a higher rate tax payer you can earn up to £500 on your savings before having to pay tax.

Additional rate tax

If your income exceeds £125,140 then you will pay 45% on your earnings after that point, with a rate of 39.35% for dividend income.

As an additional rate tax payer all your savings income is subject to tax (apart from funds held in Individual Savings Accounts, ISAs).

What are the income tax rates in Scotland for the 2023/2024 tax year?

For those living in Scotland, you’ll pay Scottish Income Tax which goes to the Scottish Government.

The Scottish tax rates below apply for 2023/2024 if you have a personal allowance of £12,570, however for earnings above £125,140 you do not get a personal allowance.

If my income is from my own limited company, how does the above apply?

As the director and shareholder of your own Limited company, you can pay yourself a salary, dividends, or a mixture of both. In most cases, a small salary topped up by larger dividends will allow you to utilise your personal allowances whilst mitigating your tax liabilities. We’ve written a handy contractors Guide to Dividends if you’d like to read more on this.

You do not have to extract all the profit that your company makes. So, if your lifestyle allows you to limit your earnings to the amount of the basic rate tax allowances, you needn’t pay any higher rate tax. You can leave the funds in the company to allow for periods of time where you may find yourself out of contract, or if you might eventually decide to close the company.

We provide bespoke tax planning to all our clients each year to ensure their remuneration strategy helps them achieve their goals while remaining as tax efficient as possible. For more tax information, why not speak to one of our qualified accountants on 0207 0962659 or click here to request a call back.