01308 488066
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Frequently Asked Questions

What is tax?

Tax is a ‘financial charge’ or deduction from something you get or own. It is not a penalty or fine for doing something wrong. Normally governments collect taxes so that there is a pot of money to spend on things which benefit society as a whole, such as law enforcement roads and pathways and administration.

The UK Government also uses tax to fund various public services, including healthcare and welfare benefits.

The UK has many taxes; some are known as ‘direct’ taxes because they are usually obvious amounts such as income tax which you can see being taken from your pay or have to pay direct to HM Revenue & Customs (‘HMRC’). Other direct taxes include Corporation Tax, Capital Gains Tax and Inheritance Tax.

There are also ‘indirect’ taxes. The most well-known example of an indirect tax is Value Added Tax (‘VAT’). This is less obvious than a direct tax as it is included in the price of things that you buy.

National Insurance is not strictly a tax. It was originally a contributions-based system of insurance for support from the government in times of need such as ill-health, disability or retirement, paid by workers and employers. The link between individual contributions and benefits has gradually weakened, but the number of years for which you make National Insurance contributions still affects some welfare benefits, including your entitlement to the state pension.

Who collects tax?

Her Majesty's Revenue & Customs (‘HMRC’) is the UK tax authority. It is responsible for collecting and managing most UK taxes. It also interacts with other government organisations, for example, it collects most student loan repayments. These are not a tax, they are repayments towards money that students have borrowed in the past; but as they are calculated as a deduction from income, the tax system is a convenient way to collect them.

HMRC also pays some welfare benefits, like tax credits and child benefit.

Local councils are responsible for collecting council tax and rates.

Where can I find more information?

If you are over 60 or near retirement and on a low income. you can contact us on 01308 488066 or via our 'contact us' form on this website. A tax adviser will check your personal situation and guide you in the right direction, based on your specific circumstances.

If you are under 60 or self-employed, you can contact our sister charity TaxAid on 0345 120 3779.

You can also find out more information about what HMRC does and its responsibilities on the GOV.UK website. This includes  HMRC’s ‘Your Charter’ which sets out what HMRC expects from you, but also what you can expect from it.

Taxation at Retirement

During your working life the tax you have to pay is generally dealt with automatically by your employer. They receive instructions from HMRC (Her Majesty's Revenue and Customs) via a tax code and deduct a certain amount of tax, and National Insurance Contributions (NICs) from your pay before you receive it. The amount you receive is called ‘net pay’ and your dues to the State are satisfied without any action on your part. At the end of each tax year your employer gives you a certificate called a P60 showing how much tax and NICs they have deducted over the year.

If you are self-employed or receive any taxable income which has not had tax taken off already, such as rent, you probably have a little more contact with the tax authorities, letting them know about your income for the year by completing a Self Assessment tax return and then paying the tax due either directly or through the next year’s tax code.

Now, however, as you retire your financial and taxation circumstances may be about to change as extensively as your lifestyle. You, as a financial entity, will become a little more complicated. You may have several sources of income including multiple pensions, state pension/ benefits and employment probably all starting at different times in the year. Not forgetting that the taxable state pension is paid gross so your tax codes will need adjusting. You may even find yourself in Self Assessment for the first time in your life. Needless to say the tax system will find you more difficult to handle and you will not have the support of a payroll team; quite a change for the majority of you who have been employed. Even for some of the self-employed, managing tax in retirement may have an impact if you can no longer afford to pay an accountant to do your books and sort out your tax liability. Because you usually only retire once, you have no experience of this life event.

It is important to keep track of your financial and tax situation in the year of retirement as this is the time HMRC’s systems can struggle most. Never assume that HMRC is aware of any changes. You can inform HMRC

  • in writing (keeping a copy), of incomes starting or ceasing or changes of address
  • by phone,  note the officers name along with the date and time of call. If there is a query later on you will have proof that you informed them
  • via your personal tax account. You can inform HMRC of some changes via this route and the list is increasing as it develops. You can register for your account via www.gov.uk/personal tax account

How is the tax collected?

For amounts under £3,000 HMRC will send you a P800 tax calculation and normally collect the unpaid tax by reducing your PAYE tax code 'in year' and for the next tax year. For larger amounts or if is not possible to collect via a tax code they will send you a Simple Assessment called a PA302 showing what you owe and how to pay.

If you have received A PA302 payment in full is due by the 31st January after the end of the tax year. For example, tax due for a 2017/18 PA302 will be due by 31st January 2019. Interest and surcharges being added for late payments.

For years up to 2016/17, if you didn't respond, they would have issued a tax return for the year(s) concerned and you would then have fallen within the system of self- assessment (SA).   The full payment being due by 31st January after the end of the tax year, with penalties for late filing and interest and surcharges being added for late payments.

HMRC have removed the self assessment burden for people who are only in it because their state pension is higher their Personal allowance (£11,850 for 2018/19, £11,500 for 2017/18) and it is the only way the tax can be collected. HMRC will issue a simple assessment PA302 which you just need to check and pay by the usual deadlines. If you are concerned about what is happening contact either HMRC or Tax Help for Older People.

 

How do I find out if I’ve paid too much tax?

To work out accurately if you have paid too much tax, and whether or not you are due a repayment, you will have to work out your tax liability and compare this to how much you have paid.

What information do I need?

To start with, you will need to gather all the information about your income and tax position. This may include the following documents for the tax year:

  • P60 and / or P45 from an employer or pension provider
  • P11D from an employer
  • Details of taxable state benefits received
  • Bank statements or certificates of tax deducted
  • Building society statements or certificates of tax deducted
  • Dividend certificates
  • Details of rental income and expenses.

How do I work out my tax liability?

We set out an example tax calculation and explained the steps involved in calculating your tax liability on our page, ‘How do I work out my tax?’

To work out your tax liability, you first need to calculate your taxable income. You must include the gross amounts in your calculation, that is, the amounts before tax is taken off.

You may be able to deduct certain expenses or claim allowances against your gross taxable income.

You need to calculate your tax liability using the correct rates of tax, and you can then deduct the tax you have already paid, for example, under PAYE, to work out your tax overpayment or underpayment.

For further assistance you can contact us on 01308 488066 or via the secure email link on this website. A tax adviser will check your personal situation, help you resolve it or guide you in the right direction.

Where can I get help if things go wrong?

If you find you cannot resolve your issue by contacting HMRC through the normal channels it may be necessary to complain or appeal.

In this section we look at how to resolve disputes with HMRC and how to complain to HMRC about their treatment of you. We also provide you with guidance on what to do if you are unable to pay you tax bill, or if you have received a tax credits overpayment and have to repay it.

Which route you take depends on the issue you have. For example; if you have an underpayment of tax and are in dispute with HMRC over an HMRC Error (Extra Statutory Concession A19, [ESC A19]) then the complaint route is applicable. However if the investigation finds that it is actually an employer/pension provider error but HMRC are still pursuing you for the lost tax the appeal route is applicable.

  • How do I complain to HMRC? – you will find this guide helpful if you are not happy with the way HMRC is dealing with you.
  • Tax appeals - This guide will help you if you have a right of appeal against an HMRC decision on a direct tax issue.
  • What if I cannot pay my tax bill? – we explain what to do if you owe HMRC money, but you are not able to pay.

What are tax refund companies and why should I be careful of them?

Tax refund companies, or tax refund organisations, are businesses that specialise in offering services to help you submit a tax repayment claim. They charge for these services. Tax refund organisations often operate online.

Websites for tax refund organisations often use headlines to catch your attention, for example, suggesting that you might be due a large amount of money from HMRC and that they can make claiming a refund easy for you. Some organisations also indicate that they are ‘HMRC approved agents’.

Often, it is straightforward to make a claim for a tax repayment, and you can make the claim yourself at little or no cost.
Most tax refund organisations charge a minimum fee and this can reduce or eliminate the benefit of making a claim for a tax repayment, depending on the amount of tax involved.

Why should I be careful of tax refund organisations?

You should be careful of using a refund organisation to make a claim for a tax repayment for various reasons:

Cost:

The costs charged by refund organisations vary, but often the charge is the higher of:

  1. a minimum charge, and
  2. a percentage of the tax repayment obtained.

This means that the charge may outweigh your repayment if it is only small.

Potentially false claims about their status:

Tax refund organisations are not HMRC approved agents. They may be registered with HMRC for Money Laundering purposes and be registered with HMRC as an agent for the purposes of acting on your behalf. But this does not mean that the organisation has received any formal approval from HMRC.

Data protection – possible concerns:

You may be asked to sign a form 64-8 authority. This gives HMRC the authority to correspond with the tax refund organisation about your tax affairs. You may find that you have to keep using the services of the tax refund organisation year after year, if you do not take steps to remove the authority after you have used the organisation’s services.

Receiving your refund:

Tax refund organisations normally request authority to receive the repayment on your behalf. They will then deduct their fee and pass the balance to you, perhaps by direct transfer to your own bank account. This creates risks, for example that you might not receive your repayment at all, and that you are sharing your own bank details with the organisation, potentially exposing you to personal fraud.

Tax refund organisations may not be unscrupulous or do anything wrong. In addition, you might prefer to employ a qualified tax adviser and pay a fee to them for helping you claim a refund, particularly if you do not understand or have time to do the paperwork yourself, for example.

But as noted above, many refunds are straightforward to claim and we would recommend that you at least try to understand your taxes for yourself even if you do decide to get an agent’s help.

How is tax collected from me?

Tax can generally be paid in two ways – either taken from you before you get the rest of the money via Pay As You Earn (PAYE), or you pay it direct to HMRC via a Self Assessment Tax Return. Sometimes it is a combination of the two – you might have some tax taken from the money before you get it and then have to pay the difference (or claim a refund) depending on your own tax situation.

HMRC introduced a third method in April 2017 called Simple Assessment. This is used where the PAYE system cannot collect the correct tax over the year. Pensioners whose only income is the state pension but tax is due because it is larger than their personal allowance will pay their tax this way, as will those who owe over £3,000.  HMRC will issue a tax calculation (PA302) after the end of the tax year with details on how to pay. Failure to pay will be treated in the same way as the Self Assessment system. There are a few teething problems so, if you are concerned contact Tax Help for advice.

If the person paying your income to you deducts tax from your income before paying you the income due to you, it is often known as having tax ‘deducted at source’.

This means you only receive the ‘net’ amount of income after tax, rather than the ‘gross’ amount. When you are working out how much tax you are due to pay, you have to include the gross amount of your income, including any tax that has been deducted from the income before you received it.

In this section we look at different types of taxable income and the ways in which your tax is collected. We only deal with UK-source of income (Except for a very small part on foreign pensions).

How is tax collected from my wages and salary?

HMRC ask employers to deduct tax from your wages or salary under the Pay As You Earn (‘PAYE’) system.

Under the PAYE system HMRC use a system of codes to tell employers how much tax to deduct. The aim is to collect the correct amount of tax each time you are paid and to spread your tax allowances evenly throughout the tax year. You do still need to check your own taxes, however, as the PAYE deduction will not always be right.

HMRC send a notice of coding (form P2) to you, which shows the allowances that HMRC think you are due and how HMRC are reducing your allowances to collect tax on other types of income that you may have.

How is tax collected from my pensions?

Private and occupational pensions

HMRC ask pension payers to deduct tax from your pension income under the Pay As You Earn (‘PAYE’) system. Under the PAYE system HMRC use a system of codes to tell your pension payer how much tax to deduct. The aim is to collect the correct amount of tax each time you are paid your pension and to spread your tax allowances throughout the tax year. You do still need to check your own taxes, however, as the PAYE deduction may not always be right.

HMRC send a notice of coding (form P2) to you, which shows the allowances that HMRC think you are due and how HMRC are reducing your allowances to collect tax on other types of income that you may have.

Foreign pensions

You might have worked abroad and saved up in an overseas pension scheme or be receiving a foreign state pension. From 6th April 2017 in the UK, foreign pensions will be taxed on the full amount paid to you. In previous years only 90% of the sums paid to you was taxable.  You have to complete a self assessment tax return if you receive a foreign pension.

The state pension

The state pension is taxable income, but you receive it gross. This means no tax is deducted at source from the state pension.

If your total taxable income, including your state pension, is greater than your allowances and reliefs, you will have to pay tax on the income that exceeds your allowances.

HMRC may collect any tax due on your state pension through the PAYE system, if you have a source of taxable earned income, such as a private pension or employment income.

If it is not possible for HMRC to collect any tax due on your state pension through the PAYE system, you will normally be put into the Simple Assessment system and you will receive a tax calculation after the end of the tax year, showing what tax is due and how you can pay. If you are unsure contact HMRC on 0300 200 3300 you may still need to complete a self assessment tax return.

How is tax collected from my self-employment income?

If you are self-employed, you must complete a self assessment tax return each year. This is because it is not possible for HMRC to collect any tax on your self-employment income through deduction at source.

You only pay income tax on any taxable profits you make, that is, the excess of your self-employment income when compared with deductible business expenses.

How is tax collected from my bank and building society interest?

From 6 April 2016 banks and building societies will pay your interest gross (without tax being taken). Bank and building society interest is still classed as taxable income but the 0% savings rate and the personal savings allowance mean that most people don't have to worry about tax.

If your taxable income in total is less than your personal allowance or if your savings income is within your personal allowance £11,850, 2018/19 plus £5,000, 2018/19 you will not need to pay tax. If your income is above £16,850, 2018/19  you are still covered by the personal savings allowance of £1,000, 2018/19 (£500 on incomes between £46,350 and £150,000, for 2018/19). Any interest above these amounts is taxable and even though banks and building societies have started informing HMRC of your interest, it remains your responsibility to check that HMRC have the correct information and that the tax is paid.

People living in Scotland should use the English rates and bands when calculating if tax is due on their interest.

Before April 2016 your bank or building society took off income tax at 20% before they paid you your interest.

If you have an Individual Savings Account (‘ISA’) with a bank or building society, you will receive your interest tax free and you need not include the amount in your income when working out your tax. Interest from ISAs is not taxable income.

Gift Aid alert – People who use their savings income as part of their calculation to decide how much they can gift aid may be paying less tax and may need to recalculate. Failure to do so may mean they gift aid too much and may end up with a debt to HMRC.

How is tax collected from my UK dividends?

Dividends are amounts paid by companies to shareholders of their shares and are a way of passing the profit of a company to its shareholders. Normally dividends are taxable income.

If you have an Individual Savings Account (‘ISA’) that pays dividends, you will not need to include the ISA dividends in your income when working out your tax. Dividends from ISAs are not taxable income.

From 6th April 2018 the dividend allowance is reduced to £2,000 (previously £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. It remains your responsibility to check that HMRC have the correct information and that the tax is paid.

People living in Scotland should use the English rates and bands when calculating if tax is due on their dividends.

Gift Aid alert – People who at present, use the now abolished 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.

How is tax collected from my purchased life annuity?

A purchased life annuity is an annuity purchased with any capital which is not compulsorily directed to the purchase of an annuity. So, a purchased life annuity is an annuity you buy with money you have saved up outside of pension schemes.

If you buy a life annuity the amount you receive is treated as savings income. As a result, the annuity payer will take off tax at the rate of 20% before it is paid to you.

Part of the annuity is treated like a return of your capital. Only the part that relates to income is taxed at 20% as savings income.
The final amount of tax due on your income from a purchased life annuity will depend on your situation. You may be able to claim a repayment of some or all of the tax deducted at source, you may have paid the correct amount of tax, or you may have to pay more tax and complete a self assessment tax return.

How is tax collected from my rental property income?

If you receive rental income from letting out a property, you must tell HMRC. The deadline for notifying HMRC about liability to tax on a new source of rental income is 5 October after the end of the tax year in which you first receive rental income. For example, if you start to receive rental income during the tax year 2017/18 you must notify HMRC by 5 October 2018.

If you have a source of income from which tax can be deducted under the PAYE system, for example, a salary or a pension, you may be able to pay any tax you owe on your rental property income through PAYE. Your tax code will be adjusted to reflect the amount of rental profit you make. You may not be able to do this if your taxable income that is not taxed at source, including your rental profits, comes to more than £2,500.

HMRC will ask you to complete a self assessment tax return each year but, you can still pay the tax due via the PAYE system if that is best route for you.

You only pay income tax on any taxable profits you make, that is, the excess of your rental property income when compared with deductible rental expenses.

What is PAYE and how does it work?

Employees and pensioners have tax deducted under Pay As You Earn by means of what are called ‘PAYE codes’. You should check your code number and what tax is being taken off your income and query it with HMRC if you do not understand or think it might be wrong. We have some simple instructions for you to check your coding notice from HMRC for employees here and pensioners here.

PAYE stands for Pay As You Earn. It is the system for collecting tax from your earnings or pensions during the tax year. The tax year begins on 6 April in the year and ends on 5 April in the following year.

PAYE is a three-party process, involving HM Revenue and Customs (HMRC), your employer or pension provider and you. Each has a role in its operation.

In most cases the tax due from you can be taken off your pay or pension under the Pay As You Earn (PAYE) system. How often tax is taken off depends on how often you are paid – usually weekly or monthly for employees and most pensioners, but some pensions might only be paid quarterly or annually.

How PAYE works – the basics

HMRC will:

  •  calculate a tax code for you
  •  send you a PAYE coding notice (a form ‘P2’), if they are required to do so, showing you how they have worked out your tax codes. For cases where HMRC are not obliged to issue a coding notice you can still ask them for one
  • tell your employer or pension provider what your tax code is (but not how it has been worked out).

Your employer or pension provider then uses that tax code to work out how much tax to take off your weekly or monthly pay or pension. They regularly pay over that tax (and National Insurance contributions, if appropriate) to HMRC. You can view your tax code and how it has been calculated on the HMRC website through your Personal Tax Account.

Employers and Pension providers have procedures for running PAYE that allow them to use a tax code when paying you. It is important to check that your employer/pension provider has informed HMRC of your income. When new incomes start you should expect to see an updated coding notice from HMRC. If this doesn’t happen we suggest you contact HMRC and ask for one.

It is important to check that the tax codes HMRC have issued are being operated by your employer or pension provider. It can become more confusing in retirement as pensioners often have multiple sources of income including the taxable state pension that is paid gross. It is worth checking that the tax codes issued to you actually take the correct amount of tax. You can contact HMRC, Tax Help for Older People or if you have a 'personal tax account' you can view your tax codes there. To access your 'personal tax account' go to www.gov.uk/personal- tax-account and follow the prompts. Using Government Gateway is the easiest way to access your account but if you want someone else to manage your affairs via 'Trusted Helper' you need to follow the 'Verify' route.

Payslips

If you are employed you will be given a payslip each time you are paid. It may show the tax code your employer used to work out the tax to deduct from your gross pay.

If you are getting a pension, you generally do not get a payslip with each pension payment. However, you should get some form of notification if there is any change to the pension payment if, for instance, your tax code changes.

If you are unsure what code is being operated by your employer/pension provider call and ask.

The tax year end

So long as you are employed or receiving a pension at 5 April, the end of the tax year and pay tax, your employer or pension provider will give you an ‘end of year certificate’ (form P60 or its equivalent) by 31 May. This will show your pay or pension and the tax deducted and usually the final tax code operated. Your employer or pension provider will give the same information to HMRC.

What are the current tax rates and allowances?

Income tax allowances

Allowances 2015/16 2016/17 2017/18 2018/19 2019/20
Personal Allowances 
Those born after 5 April 1948 10,600 11,000 11,500 11,850 12,500
Those born between 6 April 1938 and 5 April 1948 10,600 11,000 11,500 11,850 12,500
Those born before 6 April 1938 (i) 10,660 11,000 11,500 11,850 12,500
Income limit for personal allowance for those born before 6 April 1938 (ii) 27,700 N/A N/A N/A N/A
Income limit for personal allowance (iii) 100,000 100,000 100,000 100,000 100,000
Married Couple's Allowance: (iv)
Maximum amount 8,355 8,355 8,445 8,695 8,915
Minimum amount 3,220 3,220 3,260 3,360 3,450
Income limit for Married Couple's Allowance for those born before 6 April 1935 27,700 27,700 28,000 28,900 29,600
Blind Person's Allowance 2,290 2,290 2,320 2,390 2,450
Marriage Allowance (v) 1,060 1,100 1,150 1,190 1,250
Trading Allowance 1,000 1,000 1,000
Property Allowance 1,000 1,000 1,000

(i) In 2015/16 only people born before 6 April 1938 are entitled to the age-related personal allowance. Individuals born on or after 6 April 1938 are entitled to the basic personal allowance.
(ii) The age-related personal allowance reduces where the individual's income in the tax year is above the income limit by £1 for every £2 above the limit until the level of the basic personal allowance is reached.
(iii) The personal allowance reduces where the individual’s income in the tax year is above the income limit by £1 for every £2 above the limit, until the level of the basic personal allowance is reached.
(iv) Married Couple’s Allowance may apply if one of the couple was born before 6 April 1935, relief given at 10%
(v) The allowance is the transferable part of the personal allowance, which applies to transfers between spouses or civil partners who were both born after 6 April 1935. It can be transferred where neither the transferer nor transferee is liable to income tax above the basic rate.

Tax Bands for England, Scotland and Wales

Band Band name Tax Rate
 Scotland     Wales Rest of UK
£12,500* - £14,549 Starter Rate 19%
£12,500 - £50,000 Basic Rate 20% 20%
£14,549* - £24,944 Scottish Basic Rate 20%
£24,944* - £43,430 Intermediate Rate 21%
£43,430 - £150,000 Higher Rate 41%
£50,000 - £150,000 Higher Rate 40% 40%
Above £150,000 Top Rate 46%
Above £150,000 Additional Rate 45% 45%

* This assumes you are entitled to the UK personal allowance. The starter, basic and intermediate rate bands together for Scottish income tax are £30,930 (£12,500 + £30,930 = £43,430)

Savings Allowances

Allowances 2015/16 2016/17 2017/18 2018/19 2019/20
Dividend Allowance 5,000 5,000 2,000 2,000
Personal Savings Allowance
   Basic rate taxpayer 1,000 1,000 1,000 1,000
   Higher rate taxpayer 500 500 500 500
   Additional rate taxpayer nil nil nil nil

Income Tax Rates (Personal and Savings)

2015/16 2016/17 2017/18 2018/19 2019/20
Basic rate of 20% up to income of 31,785 32,000 33,500 34,500 37,500
Higher rate of 40% on income of 31,786-150,000 32,001-150,000 33,501-150,000 34,501-150,000 37,501-150,000
Additional rate of 45% on income of 150,000+ 150,000+ 150,000+ 150,000+ 150,000+
Start up rate of 0% on savings up to (within limits) 5,000 5,000 5,000 5,000 5,000
Dividends basic rate taxpayer 10% 7.5% 7.5% 7.5% 7.5%
Higher rate taxpayer 32.5% 32.5% 32.5% 32.5% 32.5%
Additional rate taxpayer 37.5% 38.1% 38.1% 38.1% 38.1%

Capital gains tax

2015/16 2016/17 2017/18 2018/19 2019/20
Standard rate * 18% 10% 10% * 10% * 10% *
Rate for higher and additional rate taxpayers * 28% 20% 20% * 20% * 20% *
Annual exemption 11,100 11,100 11,300 11,700 12,000
Entrepreneurs' Relief rate 10% 10% 10% 10% 10%
Entrepreneurs' Relief lifetime limit 10M 10M 10M 10M 10M
Inventors' Relief rate 10% 10% 10% 10% 10%
Inventors' Relief lifetime limit 10M 10M 10M 10M 10M

* 8% surcharge for gains on residential property and carried gains. This makes the rates 18% and 28% respectively.

Inheritance tax

Nil Rate Band (NRB) 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21
Chargeable lifetime transfers (after exemptions) 325,000 325,000 325,000 325,000 325,000 325,000
IHT nil rate
Lifetime rate 20% 20% 20% 20% 20% 20%
Death rate 40% 40% 40% 40% 40% 40%
Residential nil rate band (RNRB) N/A N/A 100,000 125,000 150,000 175,000

 

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.

 

What income is taxable?

You do not have to pay tax on all of your income. In tax terms, some income is called ‘taxable’ – you have to pay tax on it, and some is ‘non taxable’, ‘not taxable’, ‘exempt’ or ‘tax free’ – you do not have to pay tax on it.

If you have income that is not taxable, you do not normally need to tell HM Revenue & Customs (‘HMRC’) about it.

It is not always easy to know if a certain type of income is taxable or not. We list the most common types of taxable income and tax free income to help you.

As the tax rules are complex, it has not been possible to include all types of income on this page.

Taxable Income

The following list includes income that is normally taxable.

Earned income

Wages and salaries, including holiday pay, bonuses and tips

Profits from self-employment

Pensions from occupational pensions, private pensions, personal pension plans or retirement annuity policies

Foreign pensions - 100% (90% up to 2016/17) and lump sums paid under overseas pension schemes in certain circumstances

One off payments from pension funds

Benefits in kind, which might also be called ‘perks’ of your job. This includes things like company cars and private medical insurance. The tax treatment of benefits in kind sometimes depends on whether you earn £8,500 a year or more.

Redundancy/leaving payments over £30,000

State benefits

The UK Government provides support to people in certain times of need, by way of the state benefits system. Some benefits are taxable, but others are not

The State Pension IS taxable as are Job seekers allowance and Carers allowance.

For a list of state benefits and their tax treatment. Please refer to the state benefits checklist Link to LITRG website http://www.litrg.org.uk/low-income-workers/state-benefits in the ‘tax credits and benefits’ section of the Low Income Tax Reform Group (LITRG) website.

Savings and investment income

Bank or building society interest - Also read 'what tax allowances apply to me?'

Dividends from shares or from collective investments such as investment trusts - Also read 'what tax allowances apply to me?'

National Savings and Investments (‘NS&I’) products can cause confusion because some are taxable and some are tax free. Common taxable NS&I products are: Income Bonds, the Investment Account, Guaranteed Income Bonds and Guaranteed Growth Bonds – the interest is taxable, but tax may not be deducted at source.

Interest from savings deposits with credit unions

Purchased annuities - income element

Taxable gains on life assurance policies or investment bonds

UK companies - interest

UK Government stocks, or gilts, interest, for example, Treasury Stock and War Loan Stock

UK unit trusts or Open-Ended Investment Companies, both interest and dividends

Other income

Property letting – most income from renting out a property, including from second properties. You can claim certain expenses against the rents. If you rent out a room in your home, you should read our separate page on ‘rent a room’ relief. Link to 5a

Trust or settlement income

Income paid to the estate of a deceased person

Jurors' financial loss allowance, when the juror is self-employed

Motor mileage allowance profits paid to volunteer drivers.

Pre owned assets – a tax charge which can arise on something you have given away but still retain some interest in, or benefit from

What income is tax free?

The following list includes income that is normally tax free.

Benefits

The UK Government provides support to people in certain times of need, by way of the state benefits system. Some benefits are taxable, but others are not. Importantly, tax credits and pension credits are not taxable income and neither is Universal Credit.

For a list of state benefits and their tax treatment. Please refer to the state benefits checklist Link to LITRG website http://www.litrg.org.uk/low-income-workers/state-benefits in the ‘tax credits and benefits’ section of the Low Income Tax Reform Group (LITRG) website.

Non-savings income

Foreign social security benefits – a large number are exempt

Friendly Societies – any gains on qualifying insurance policies

Gallantry awards – annuities and additional pensions paid to holders of the Victoria Cross, George Cross and most other gallantry medals

Insurance benefits paid to a person who is sick, disabled or unemployed, to meet her/his financial commitments. These include benefits paid under mortgage protection insurance, permanent health insurance, payment protection, or credit, insurance and long-term care insurance

Life Assurance policies – certain bonuses and profits

Local authority home improvement grants

Lottery, football pools and other betting winnings, for example, from horse racing

Lump sums from UK approved pension schemes up to 25% of the capital value – note that part of 'trivial commutation' lump sums above the 25% limit are taxable

Maintenance payments following divorce or separation

Disability pensions of members of the armed forces are tax free. Any pension awarded to an employee on retirement because of an injury at work is free of tax.

Premium Bond prizes

Purchased annuities – capital element of amount received

Renting out a room in your own home – you should read our separate page on ‘rent a room’ relief link to 5a as part of the income may not be taxable

Repayment supplement (interest) in connection with overpaid tax

Wounds and disability pensions

Some savings and investments income sources

National Savings and Investments (‘NS&I’) – interest on Savings Certificates and Children’s Bonus Bonds

Individual Savings Accounts (‘ISA’) income

Insurance policies or investment bonds – withdrawal tax free up to 5% of the amount originally invested

How can I work out my tax?

You can work out your tax by following these four stages:

1.Work out whether your income is taxable or not.

Some income is taxable and some is tax-free. See our page ‘What income is taxable’ for more information.

2. Work out the allowances you can deduct from your taxable income or your final tax bill.

There are several different tax allowances to which you might be entitled.

Every man, woman and child in the UK has a ‘personal allowance’. For 2018/19 the personal allowance for everyone (on incomes below £100,000) is £11,850.

There is also a blind person’s allowance for those who qualify. Despite its name, you do not have to be completely without sight to claim it, so if you have very poor eyesight, check if you could be entitled.

Higher age-related personal allowances might be available in previous years depending on when you were born. It is worth checking that you claimed them if you were born before 6 April 1938.

If you are part of a married couple or a civil partnership and either you or your spouse or partner was born before 6 April 1935, a married couple’s allowance might be available. Finally the marriage allowance, available to married couples and civil partners who are basic rate taxpayers where one of them has unused allowances.

You can find out more information on these allowances on our page ‘what tax allowances am I entitled to?’

3. Work out at what rate your income is taxed.

If you qualify,  some  savings income might be taxed at 0%. The rules for savings income changed on 6 April 2016.

A £2,000 Dividend allowance is available in 2018/19 (2016/17 & 2017/18 it was £5,000) and only amounts above this allowance will be taxable at your marginal rate. If you are a basic rate taxpayer 7.5%, higher rate 32.5% and additional rate at 38.1%.

Next, there is the basic rate band, where most types of income are taxed at 20%. Most people are within the basic rate band.

But for people with higher levels of income, 40% and 45% tax rates can also apply.

In Scotland there are 5 tax bands from April 2018.

See our section ‘what tax rates apply to me?’ for more detail.

4. Finally, consider whether you can deduct anything from your final tax bill.

The most common deduction is tax you have already paid, either in the UK or overseas.
But take care: some deductions might not be allowed and some tax is not refundable, for example, the tax credit on UK dividends.

Example calculation
To work out your tax, you have to do the following calculation:

  • First, take your allowances from your income to work out your taxable income.
  • Second, HM Revenue & Customs charge tax on your taxable income using the rates of tax that apply to you. The tax rates are set each year.

For most individuals with simple tax affairs the way the tax calculation works is as set out below. The tax year runs from 6 April one year to 5 April the next. Negative or minus numbers are shown in brackets.

£
Income – most income is taxable although some may be tax free xxxx
Take off your tax allowances xxxx
You are left with the amount of your taxable income xxxx
Calculate your tax liability using the tax rates that apply to you xxxx
Take off the amounts you get due to any special allowances xxxx
Take off any tax already deducted from the income you receive before you get it xxxx
Tax now due or (repayable) xxxx or
(xxxx)

So if you have a job earning £300 a week, you are single, your 2018/19 tax calculation would probably work out like this, using the table above:

£
Income – wages: £300 a week x 52 weeks 15,950
Take off your personal allowance (11,850)
You are left with the amount of your taxable income:
£15,950 – £11,850
4,100
Calculate your tax liability:
£4,100 x 20%
820
Take off the amounts you get due to any special allowances (None)
Take off any tax already deducted from the income you receive before you get it:
This depends on the PAYE code used for your wages but here we assume you were on the correct code for the whole tax year
(820)
Tax now due or (repayable) £ 0