Everything About Income Tax and Personal Allowances in the UK

Tax is a difficult subject to grasp, especially if you're not well-versed on all things tax-related. To enlighten you a bit about income tax rates or personal allowances, we've come with the most layman discussion possible.

If you are seeking a specific explanation of income tax rates and personal allowances in the UK, you can always contact a regulated tax expert.

Ready? Read on.

Income Tax rates

Once your personal earnings exceed your personal allowance, the excess becomes taxable. To compute your taxable income, subtract your personal allowance and your allowable deductions from your gross income.

Your gross income is the sum of your income from all sources, such as your rental income or your income from your investments. On the other hand, your allowable deductions are your contributions, for example, to a pension scheme.

Income tax rates are calculated depending on your taxable income.

Tax bands since 2017 are slightly different in Scotland compared to the rest of the European countries.

The income tax rates and bands in England, Wales and Northern Ireland for 2020 to 2012 are the same:

Taxable income

Tax rate

Notes

£0 - £37,500

20%    

Basic rate tax

£37,501 - £150,000

40%

Higher rate tax

£150,001 or more

45%

Additional rate tax

Taxable Income (Scotland)

Tax Rate (Scotland)

Notes

£0 - £14,585

19%

Starter rate tax

£14,586 - £25,158

20%

Basic rate tax

£25,159 - £43,430

21%

Intermediate rate tax

£43,431 - £150,000

41%

Higher rate tax

£150,001 or more

46%

Additional rate tax

*For Scotland, the income tax rates and bands are slightly different:

This table only applies to non-saving and non-dividend incomes. Savings will be taxed accordingly with the tax bands applied to England, Wales, and Northern Ireland.

Saving incomes are gained from a bank and building society interest, coupons from fixed interest securities, from non-dividend investments from National Savings and Investments products.

Personal Allowances in the UK

In the UK, if you qualify for a personal allowance, you'll get one every tax year.

Personal allowance, in a sense, is the amount of income you earn in that tax year before you start paying an actual tax. The government sets a standard of personal allowance each tax year.

For 2020 to 2021, the personal allowance stands at £12,500.

Your personal allowance will stay constant or increase (depending on your government's decree) as long as your personal income does not exceed over £100,000.

You'll still receive a personal allowance even if you exceed the £100,000 limit, but it'll be subject to deductions. For every £2 excess, your personal allowance will reduce by £1.

A personal allowance in the UK is an income tax levied on a person's annual income. Personal allowances, as well as allowances of a blind person, are deducted from the income to save tax.

The personal allowance is distributed all throughout a year to those taxed under PAYE (Pay As You Earn). If an individual is self-employed, their personal allowance is taken into account with their self-assessment tax return.

Other types of allowance

There are other allowances as well:

1. Married Couple's Allowance: You and your spouse qualify for a married couple's allowance or MCA if you both were born before 6 April 1935, married, and are in a registered civil partnership.
2. Marriage allowance: This is a transferable type of allowance given to married couples and civil partners who are not in receipt of MCA.
3. Blind person's allowance: If you're blind or have legally blind during the tax year, you'll receive a blind person's allowance. The blind person's allowance for the 2020/21 tax year is £2,500.
4. Dividend allowance: This has been abolished but replaced with a tax-free dividend. You will be able to receive £2,000 worth of dividends tax-free.
5. Personal savings allowance: This allowance prevents basic rate taxpayers from paying tax on their first £1,000 of savings income.