What income tax rate do you pay?
As the name suggests, income tax is a tax on your income. However, not everyone pays income tax and not all income is taxable. And, different rates of tax apply depending on the amount of money that you earn.
Our guide looks at the different tax rates in the UK and answers the question ‘what percentage of tax do I pay?’
When you pay 0% tax
Almost everyone in the UK who is resident for tax purposes is allowed to earn a certain amount each year without paying any tax. This is called your’ personal allowance’.
In the current tax year (2011/12), the basic Personal Allowance – or tax-free amount – is £7,475.
This means that you will pay 0% tax on the first £7,475 of your earnings.
If you’re aged 65 or over, registered blind or married (assuming one of you was born before 6 April 1935) then you may also be able to claim additional allowances. This will increase the amount of income that you can earn before you start paying tax.
When you pay 20% tax
You only pay income tax on taxable income that’s above your tax-free allowances. So, if your total earnings are less than your personal allowance, you’ll pay no tax. If you earn more than your personal allowance (for most people this will be £7,475) then you will pay some tax on your earnings above this amount.
The ‘basic rate’ of tax in the UK is 20%.
You pay 20% tax on the first £35,000 of your taxable income.
When you pay 40% tax
If you earn more than your personal allowance plus the limit for the ‘basic rate’ of tax then you will begin to pay ‘higher rate’ tax on any earnings over this amount.
For example, if you earn £50,000 in tax year 2011/12 and you have the basic personal allowance, your tax rates will be:
- £0 – £7,475 – 0% (your personal allowance)
- £7,475 – £42,475 – 20% (‘basic rate’ – on the first £35,000 of your taxable income)
- £42,475 – £50,000 – 40% (‘higher rate’ – on your taxable income over £35,000)
When you pay 50% tax
If you are a high earner, then part of your income may be taxed at the ‘additional rate’ of 50%. 50% tax is charged on any taxable earnings over £150,000.
Bear in mind that other rates of tax apply to different types of income. For example, savings interest and dividends are taxed at different rates.
A worked example
You are 35 years old, have £25,000 of taxable earnings a year and you are eligible for the full personal allowance. The percentage of tax you pay is:
- £0 – £7,475 – Nil
- £7,475 – £25,000 – 20% (equivalent to 20% of £17,525 = £3,505)