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What tax rates apply to me?

Under the UK tax system, generally your earnings or non-savings income is treated as being taxed first, then your savings income and then your dividends.

You can find the current and recent years’ tax rates and bands’ in the next section 'Rates and bands in table format'

What tax rates apply to my earnings or non-savings income?

Earnings or non-savings income includes wages, pensions, taxable state benefits, profits from self-employment and rental income. This is not a complete list. Separately, we provide more information on what income is taxable.

You have to pay income tax on your taxable earned income that exceeds your tax allowances. You are also allowed to deduct any allowable expenses that you have incurred.

You pay income tax at the basic rate of 20% on your taxable earned income that falls within the basic rate band. The basic rate band for 2018/19 is £34,500 (£31,580 in Scotland).

If you have taxable earned income that exceeds the basic rate limit, you will have to pay more tax. This is firstly charged at the higher rate of 40% on the income above the basic rate limit. This means that in 2018/19 you will pay tax at the rate of 40% on taxable earned income above the limit of £34,500 (£31,580 in Scotland).

If your taxable earned income exceeds the higher rate band limit, you will have to pay tax at the additional rate of 45% on the income above the limit. The higher rate band limit is £150,000 for 2018/19.

What tax rates apply to my savings income?

As your taxable savings income is taxed after your earned income, the tax rates that apply to your savings income depend on how much earned or other non-savings income, such as rents, you have.

If your taxable savings income falls within the basic rate band, you will normally pay income tax at the rate of 20%. The basic rate band for 2018/19 is £34,500. There is also a '0% starting rate' of £5,000  for savings income only, which may apply to your savings income in certain situations. There is also a 'personal savings allowance' of £1,000, 2018/19 for saving income only.

If you have any taxable savings income above the basic rate limit, you will have to pay more tax on it. This is firstly charged at the higher rate of 40% on the income above that limit. This means that in 2018/19 you will pay tax at the rate of 40% on taxable savings income above the limit of £34,500 2018/19, the 'personal savings allowance' is reduced to £500 for higher rate taxpayers.

If your taxable savings income exceeds the higher rate limit, you will have to pay tax at the additional rate of 45% on the income above that limit. The higher rate band limit is £150,000 for 2018/19. There is a 'personal savings allowanc'e  of £500, 2018/19 for savings income only.

How does the starting rate for savings work?

The starting rate for savings is a special 0% rate of income tax for savings income that falls within certain limits. It will only apply to you if your earned income is  low. The starting rate for savings band is £5,000 for 2018/19.

If your taxable earned or non-savings income is above your personal allowance plus £5,000, the starting rate for savings will not apply to your taxable savings income.

If any of your taxable savings income falls within £5,000 after your personal allowance, you will not be liable to pay tax on that taxable savings income.

How does the personal savings allowance work?

On 6 April 2016 the personal savings allowance was introduced, £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate tax payers aren’t eligible.

The allowance works together  with the starting rate for savings and both are dependent on your total taxable income.

The easiest way to establish if you qualify is to add up your non- savings income, if it is below or within your personal allowance plus £5,000 then the starting rate for savings will apply.

If this doesn’t cover all of your savings income then apply the personal savings allowance. To determine which rate to use add up all of your taxable income including savings income. If it's £46,350  or less then use £1,000, if between £46,351 and £150,000, use £500. Note, Scottish taxpayers use the English rates and bands for savings income.

Any savings income over these amounts will be taxable at the appropriate rate and it is your responsibility to inform HMRC. Where possible the amount owed will be collected via your tax code but if this isn’t possible a self-assessment tax return will be required.

Gift Aid alert – People who at present, use the tax they pay on savings as part of their calculation to decide how much they can gift aid need to recalculate. Failure to do so may mean they gift aid too much and may end up with a debt to HMRC.

What are the upper and lower limits of income to get the starting rate for savings?

The guide below just provides the general rule. This may not provide you with the correct information if you have additional tax allowances or expenses that you can claim.

If you have taxable earned or non-savings income of between £11,850 and £16,850 the savings rate will apply to at least part of your savings income.

What are the upper and lower limits of income to get the starting rate for savings if you also get blind person's allowance?

The guide below provides the general rule. This may not provide you with the correct information if you have additional tax allowances or expenses that you can claim.

If you are also receiving blind person's allowance the upper limits will be increased by this amount and you will get the savings rate if your taxable non-savings income is between £11,850 and £19,240.

What tax rates apply to my dividends?

The dividend allowance has been reduced to £2,000 for 2018/19 (previously it was £5,000). Any dividend payments  above £2,000 are taxable at either 0%, 7.5%, 32.5% or 38.1% depending on your total taxable income. For example, a person receiving £3,000 in dividends won't pay tax if their total taxable income is under their personal allowance. However, they will pay tax on £1,000 at 7.5% if their total taxable income is between £11,851 and £46,350, at 32.5% on an income between £46,351 and £150,000 and 38.1% on income of £150,001 and over. Note, Scottish taxpayers use the English rates and bands for dividends.

Gift Aid alert – People who at present, use the dividend tax credit as part of their calculation to decide how much they can gift aid need to recalculate. Failure to do so may mean they gift aid too much and may end up with a debt to HMRC.

More information

What if my only taxable income is savings income?

If you have no taxable earned income and all your income is taxable savings income, you will get your personal allowance against part of your income. The next part of your income that falls within the starting rate for savings band, £5,000, will not be taxed. Then you get the personal saving allowance 0f £1,000  where the income won't be taxed. The balance of your income that exceeds the starting rate band and personal savings allowance will be taxed at the basic rate of 20%.

What if my non-savings or earned income is above the upper limit for the starting rate for savings?

If your taxable non–savings or earned income is more than the upper limits for the starting rate for savings the 0% savings rate will not be available. However, you will be eligible for the personal savings allowance of £1,000 (£500 for incomes over £46,350 but below £150,000) savings income over this will be taxed in full at 20% (40% over £46,350, 45% over £150,000).

What if my earned income is less than my tax allowances?

If your taxable non-savings or earned income is below your tax allowances, you will be able to set some of your tax allowances against your savings income.

Any savings income that exceeds your tax allowances but is within the 0%  starting rate for savings or personal savings allowance will not be taxable. The balance of your savings income that exceeds the starting rate band  and the personal savings allowance will be taxed at the basic rate of 20%.

From April 2016 banks and building societies will not deduct tax at source. In 2017 banks and building societies started to inform HMRC about savings interest, but it remains  your responsibility to ensure that HMRC hold the correct information and that the tax is paid on any income above the savings and dividend allowances.

What if my non-savings or earned income falls between the lower and upper limits for the starting rate for savings?

If you have used up your tax allowances against your non-savings or earned income, but your remaining non-savings income is less than the upper limit of the starting rate band, you can use the balance of the starting rate band against your taxable savings income, if necessary you can then use your personal savings allowance. This means some or all of your taxable savings income won't be taxed any amount not covered by the 0% starting rate or the personal savings allowance is then taxed the basic rate of 20%.

The following examples for 2018/19 explain the interactions between the SR and the PSA.

Example 1 - Alex is 71 and has non savings income of £11,000. In addition he receives £600 in savings income. His non savings income is below £16,850 and the savings income is within the 0% savings rate of £5,000. He doesn’t need to pay tax on his savings and doesn’t have to do anything.

Example 2 - If Alex’s non savings income is £16,450, it is still below the £16,850 threshold and £400 of  his savings income is covered by the 0% savings rate. The remaining £200 is covered by the Personal Savings Allowance. He doesn’t need to pay tax on his savings and doesn’t have to do anything.

Example 3 - If Alex’s non savings income plus savings interest is between £16,851 and £46,350, he will not be eligible for the 0% Starting Rate but his savings income will be covered by the Personal Savings Allowance of £1,000. He doesn’t need to pay tax on his savings and doesn’t have to do anything.

Example 4 - If Alex’s non savings income is between £46,351 and £150,000 he will not be eligible for the 0% starting rate and only £500 of his savings income will be covered by the Personal Savings Allowance. The remaining £100 is taxable at 40% and he will need to contact HMRC to arrange payment.

 

Posted in: How do I work out my tax?