25 January 2022
How much Income Tax is due in each tax year depends on:
the income above the Personal Allowance;
how much of the income falls within each tax band.
Some income is tax-free so there is no need to pay tax on it. For example, the standard tax-free Personal Allowance is £12,570. It may be bigger when you claim marriage allowance or blind person’s allowance or smaller if your income is over £100,000.
The table shows the tax rates for each band if a standard Personal Allowance of £12,570 applies.
Band | Taxable income | Tax rates |
Personal Allowance | Up to £12,570 | 0% |
Basic rate | £12,571 to £50,270 | 20% |
Higher rate | £50,271 to £150,000 | 40% |
Additional rate | over £150,000 | 45% |
There is no Personal Allowance on taxable income over £125,140. If all the requirements are met, you may also have tax-free allowances for:
your first £1,000 of income from self-employment (‘trading allowance’)
your first £1,000 of income from rented property
There are also additional tax-free allowances for:
savings interest
dividends if you own shares in a company
Taxation of dividends
There is no tax on dividend income that falls within the Personal Allowance and you may also get a dividend allowance. So, the tax is only due on any dividends above the dividend allowance. In the tax year 6 April 2021 to 5 April 2022 the dividend allowance is £2,000.
How much tax is due on dividends above the dividend allowance also depends on the income tax band.
Tax band | Current tax rate on dividends over the allowance | Tax rate on dividends over the allowance from April 2022 |
Basic rate | 7.5% | 8.75% |
Higher rate | 32.5% | 33.75% |
Additional rate | 38.1% | 39.35% |
To work out a tax band, it is necessary to add total dividend income to other income. It might happen that tax will be payable at more than one rate.
Example
You get £4,000 in dividends and earn £39,570 in wages in the 2021 to 2022 tax year. So, the total income is £43,570.
Then it is necessary to take of a Personal Allowance of £12,570. This leaves a taxable income of £31,000.
This is in the basic rate tax band, so you would pay:
no tax on £12,570 of wages, because of the Personal Allowance
20% tax on £27,000 of wages
no tax on £2,000 of dividends, because of the dividend allowance
7.5% tax on £2,000 of dividends
For further information on any of the points above, please, contact
Yuliya Shved at: yuliya@lexefiscal.com or
Dr Clifford J Frank at: clifford.frank@lexefiscal.com