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2014 to 2015 tax brackets and allowances

You’ll keep less of what you earn after 2011 tax rises.

Most people know their height, their shoe size – to be frank, most men spent a furtive teenage moment measuring their intimate details with a ruler.

An awful lot of us though have no idea where the different tax brackets start and end, nor where our income sits within them.

I find that pretty ironic given how much time we spend at work, wishing we earned more money, not to mention all the debates about public services, taxes, and spending.

Like nearly every student with a soul, I was a leftwing tax-and-spender before I got my first full-time job. Then I started work, saw how much money was taken out of my meager reward for ramming my head repeatedly into the coalface for 40 hours a week, and, economically at least, my head turned to the right. (It also spurred me into getting a more enjoyable job!)

As my dad used to say, quoting somebody else:

If you’re not a socialist at 20 you haven’t got a heart.

If you’re not a capitalist at 30 you haven’t got a head.

With the UK confronting a towering national debt and the righteous mob on Question Time rejecting all specific proposals to tackle State bloat, you might think it’s a wonder that income taxes didn’t rise over the past few years.

And you’d be right to wonder, because although it attracted little comment at the time, in 2010 income taxes did rise.

From 6th April 2011 they rose again. Once more, nobody seemed to notice. That’s because income taxes rose the modern way, by the stealthy adjustment of tax brackets to drag people into the higher rate, ignoring the reality of inflation.

In addition, in March 2011 the government announced it would begin uprating allowances with the CPI inflation rate, rather than the higher RPI rate – another way to wring a few pennies from us without any nasty headlines.

It’s only in 2014 that higher-rate payers1 have had some very minor relief. As of April 2014 the higher rate threshold (where the 40p rate kicks in) has inched up from £41,450 to £41,865. It will rise by a further 1% to £42,285 in 2015.

Before you break out the cut-price champagne from Aldi, let’s look at the numbers to see how you can calculate your own income tax position.

2014-2015 income tax allowances

Every tax year runs from 6 April to 5 April the following year. All of us have a basic level of income that we’re allowed to earn during each year before the government starts taking its share via tax.

What this sum is for you depends on your age and your total income in the tax year, including income from all sources such as pensions, investments, and so on.

Here are the basic allowances2 for 2014 to 2015, plus last year’s for context:

Personal Allowance 2013-14 2014-15
Basic £9,440 £10,000
For those born between 6/4/1938 and 5/4/1948 £10,500 £10,500
For those born before 6/4/1938 £10,660 £10,660
Income limit for personal allowance £100,000 £100,000
Income limit for allowances if born before 6/4/1938 £26,100 £27,000

Source: Autumn Statement 2013

The hiking of the basic personal allowance to £10,000 has been the only good news on income tax over the past few years. A higher allowance potentially reduces tax bills (though other changes have outweighed the benefit for higher earners), and I think it’s psychologically heartening – and fiscally meaningful, if you’re a lower-earner – that the first £10,000 you earn is tax-free.

For those gallivanting within pensionable age, the news is less rosy. The personal allowance has been frozen at £10,660. The plan is to eventually have one personal allowance for all ages.

For more details of the more Byzantine age-related allowances, see the income tax allowances page from Citizens Advice Bureau.

If you’re on a much-coveted six-figure salary, the news is mixed. Since 2010, anyone with an income over £100,000 has seen their personal allowance reduced by £1 for every £2 of income above the £100,000 limit. This applies irrespective of age, and effectively increases the marginal rate of tax between £100,000 and £121,000 to 60%.3

On the other hand, the 50% additional tax rate for those earning over £150,000 has been cut to 45%, as detailed below.

2014/2015 tax brackets

The rate of tax you pay depends on your total income from all sources – salary, gross cash interest, dividends, pensions, property letting income, and so on.

Add it all up to get your total income, and then subtract your personal allowance from the table above to see which tax bracket you fit into:

Income Rate 2013-14 2014-15
Starting rate for savings: 10%. £0-£2,790 £0- £2,880
Basic rate: 20% £0- £32,010 £0- £31,865
Higher rate: 40% £32,011-£150,000 £31,866-£150,000
Additional 45% rate (from 6/4/2013) Over £150,000 Over £150,000

Source: HMRC

For example, if you will earn £40,000 in 2014/15 from all sources and you’re under 65, then your taxable income is £40,000 minus your basic allowance of £10,000, so £30,000.

That will put all your income within the 20% tax bracket, as it’s less than £31,865 in the table above; you’ll pay no tax on the first £10,000 you earn, and 20% on the remaining £30,000.

If you earn £50,000, then by the same method4 your taxable income is £40,000. The first £31,865 will be taxed at 20%, and the other £8,135 at 40%.

Note that in nearly all cases you will also pay hefty National Insurance contributions.

Two further complications:

The special savings tax rate of 10% is for savings income only. It is most relevant to those living off their savings and/or their spouses (in which case make sure you have investigated HMRC’s little-known form R85 to get your interest paid without tax taken off) and those with very low taxable earnings and savings income. See this HMRC page for more.

From April 2015 the 10% savings tax rate will be abolished and replaced with a new 0% rate. Also, the special savings rate band will be widened that year to £0-£5,000. The official government factsheet has more details.

Dividend income from shares is taxed differently again: there’s theoretically a 10% ordinary rate; a 32.5% dividend for higher rate taxpayers; and an additional rate of 37.5% for any lucky readers earning over £150,000 a year. (Important note: The effective rate you pay in practice is lower – see my article explaining tax on dividends for more information).

A fiscal drag

Provided you know roughly what income you’ll get from your day job plus other sources like share dividends, you should now have a pretty good idea of what tax you’ll pay in 2014-15.

Are you feeling het up about it? I hope so!

Most middle-income earners are paying much more tax than they might have expected a few years ago, and many don’t even realise it.

Check out the table above and you’ll find the 40% tax bracket in 2014/15 starts at £31,866. Just a few years ago it began at £37,401. Inflation has been running above target for years, but the higher-rate tax threshold has been lowered, not raised.

As a result, the IFS estimates two million more people will have been dragged into the higher-rate tax bracket under the Coalition government.

Do you recall the big debates about massively increasing the tax burden on the moderately well-off? Me neither. We’ve heard a lot about how the very rich have been taxed (or not) and how the poor have been hit by welfare cuts, but the far bigger take from the 40p rate has been a stealth tax par excellence.

In addition, higher rate National Insurance was doubled in 2011 to 2% for higher-rate tax payers. (This comes on top of the 12% contributions deducted from earnings below that level).

This means that effectively the standard higher tax rate on earnings is 42%.

Of course, the personal allowance has been raised over the past few years, too. Not enough to offset the fiddling around with the 40% tax threshold for most higher earners, though.

Now, you may say it’s better that lower paid workers have taken less of the strain of sorting out Britain’s public finances than the better-off, and I’d agree.

But don’t let anyone tell you that the Coalition has only hit the poor and given the middle classes an easy ride.

It’s just not true.

Resistance is tax-efficient

If you’re a higher-earner wondering why you feel poorer compared to a few years ago (and unless you’re benefitting from an ultra-cheap mortgage, most do), then higher taxes, above-target inflation, and the withdrawal of certain perks such as child benefit for higher income households explains much of it.

Perhaps you think this is a fair price to pay for the banker-brokered recession, the Brown government’s over-promising, and the measures needed to keep interest rates low to bail out the millions who over-stretched in the housing bubble.

I’m not sure I do, though – and I’m certainly not going to leave a tip.

As far as I’m concerned, a total tax take approaching 40% of GDP is plenty for the government to be getting on with. Cut stupid spending beyond that and focus on real need instead.

However, I’m also a law-abiding citizen. In practice, resistance means taking sensible steps to avoid paying more tax than you have to.

To start with, use as much of your ISA allowance and/or a pension to shelter your savings in the years ahead, and take steps to manage capital gains tax.

Higher rate taxpayers might also want to consider making extra contributions into their pension. Done carefully, you can effectively get the 40% tax you pay wiped out via a reclaim on your self-assessment form, though remember you’ll probably pay some tax when you withdraw a pension income later.

Even I, a former pension-o-phobic, now prefer to lock away some of my money for 20 years in a pension rather than chuck it away pay 40% tax on it.

I’ve previously used VCTs to reduce my tax bill, but as my income has increased and I’ve had my fill of these horridly illiquid vehicles, I bit the bullet and opened a Self Invested Personal Pension.

Recent changes have made pensions much more attractive than they were.

Taxing matters for the hardly rich

If you live in Hull or Anglesey, perhaps it seems rather mean-fisted of me to be earning a higher-rate salary and yet trying to shelter every penny I can from tax.

To which I say: Let me take you by the hand and lead you through the streets of London. Or at least take a look at what £250,000 buys you in terms of a home down here in the South East. A mansion it is not.

Higher-rate tax is no longer the preserve of the wealthy by any sensible definition. As a result, nor is tax avoidance (as opposed to illegal tax evasion).

Finally, if you are proper income-wealthy – that is you’re earning over £100,000 a year – then you’ll need specialist advice or a lot of long nights with boring documents. The political imperative to meddle with the tax system for maximum democratic output has made taxes above this level about as predictable as a silver orb flying about a pinball machine.

The bottom line is taxes have been steadily rising, and you’ll have less money than you might have expected. Take cover, or take the pain.

Further reading:

  • Hargreaves Lansdown has a great page on all the various tax bands.
  • Use this calculator to see how much tax you’ll pay in 2014/2015.

Note: This page was updated in May 2014 with new UK tax bracket and allowance information. Comments below may refer to old tax brackets or old information, so please scroll down.

  1. I can’t bring myself to write “high earners”, given when the 40% rate now starts. []
  2. Special allowances apply for elderly married couples and blind people. See this HMRC table for details []
  3. Above £121,000 the marginal rate drops back to 40% because all your personal allowance will have been used up. []
  4. £50,000 – £10,000. []

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{ 42 comments… add one }
  • 1 ermine March 18, 2011, 10:24 am

    I didn’t realise you pay 10% on savings income even if you don’t have a main income. You used to have to fill in a form to get the interest paid gross (I never qualified), but it looks like even those poor devils take the shaft now. When did that start happening?

    > most people earning over £42,475 will be a higher-rate taxpayer

    I like your presentation of the thresholds in the amount you actually have to earn to have to take steps to KO 42% HRT, rather than having to backwork it from the personal allowance plus the tax bracket. It makes it easier to take one’s gross and subtract that to know how much you need to save in a pension. For the wage slaves who get shifted just above the HRT threshold this year there are some other ways to lose the excess, which also help those for whome the loss of child tax credit would be an issue. My employer runs an employee share purchase scheme, where you buy shares up to a value of £125 p.c.m. from pre-tax income. You have to hold the shares for 5 years, but buying them at a 41% discount means you can eat a lot of downside. There is apparently a childcare vouchers scheme which also comes from pretax income. Keen cyclists may avail themselves of the cycle to work bike purchase scheme. Those might help for this eyar, but if you are aiming to shelter a lot of wedge from HRT then using a pension is about the only way to do real heavy lifting there. With a pension you are making an implicit bet there that in 20 years we a) have an economy that is still related to the current one, b) inflation hasn’t ripped the beating heart out of your savings and c) you won’t be rewarded for your thrift by being denied the basic state pension because the Government has decided to means-test it.

  • 2 Andy March 18, 2011, 12:18 pm

    Investor, I’m a big fan and have been reading the blog for a while now but this article has undermined your credibility a bit in my eyes. There’s nothing wrong with arguing that “rich people pay too much tax” but for me it’s disingenuous to pretend that you’re talking about people on “middle incomes”.

    As a reality check, last year’s full time median income for the UK was £25,900. 80% of people earnt less than £39,900.

    Even in London which is disproportionately rich, 60% of people earn less than £38,600.

    The vast majority of people don’t pay higher rate tax.

    Like I say, freely argue why you think rich people are over-taxed but let’s not pretend that rich people aren’t rich.

  • 3 The Investor March 18, 2011, 1:32 pm

    Hi Andy,

    Thanks for thoughts, I’m all for thought provoking debate. 🙂

    To be fair I did reference possible dissenting views with my Hull/Anglesea comment.

    I think it’s more useful to define richness not as ephemeral income from salary that you have to earn everyday, but in terms of assets (which may well be used to buy income).

    The fact is on £40k a year a first time buyer can barely afford a one bed flat in a council estate in London on a standard 3.5x mortgage. If that is the trappings of great wealth to you, then we’re going to have to disagree.

  • 4 DIY Income Investor March 18, 2011, 1:38 pm

    Good overview of the tax allowance changes Monevator – as you say, the trick is to try to keep it out of the taxman’s reach with ISAs and a SiPP.

    One wheeze is to open a SiPP for a non-working spouse or child and pay the maximum £2880 in – you get 20% on top free from the taxman (a 25% instant return).

  • 5 The Accumulator March 19, 2011, 9:10 am

    Just stumbled across this interesting definition of being wealthy: You are wealthy when more money won’t change where you live, what you eat, what you wear, what you drive or who you sleep with

    If it wasn’t for the car, I’d be there. Maybe I can do without the GTR.

    As an aside, the combination of VAT rises, inflation, NI rises and widening income tax bands (not to mention low interest rates for the saving minority), pay freezes, benefit cuts and lack of employment opportunity can’t be leaving many parts of the population unscathed, regardless of your definition of wealth.

  • 6 OldPro March 19, 2011, 10:46 am

    I bought a London property in the early 1980s for apprx £35,000 as I recall…. if I had kept hold of it the mortgage would be peanuts to pay… does that make me stupid… wealthy… or lucky? (In practice I moved along the ladder of course…)

  • 7 Salis Grano March 19, 2011, 5:14 pm

    >I think it’s more useful to define richness not as ephemeral income >from salary that you have to earn everyday, but in terms of assets
    >(which may well be used to buy income).

    Yes, it’s not necessarily all down to income. The IFS make a similar point in relation to poverty:

    http://www.ifs.org.uk/publications/5506

  • 8 EdSwippet March 20, 2011, 2:59 pm

    There’s an entry missing from your tax bracket tables. Due to the phaseout of personal allowance there is an effective 60% income tax band at £100,000 – £112,950 for 2010-11, £100,000 to £114,950 in 2011-12. In these ranges a SIPP makes real sense (as perhaps does taking one or two days a week unpaid to play golf rather than work).

    On definitions of “rich”, I find it useful to differentiate between owning-your-own-island rich and letting-your-kids-order-anything-off-the-menu rich. Unfortunately, politicians of all stripes are unable to see any difference between the two.

  • 9 The Investor March 20, 2011, 5:43 pm

    @Ed – Thanks for your comments. I do mention that in the third paragraph after the table, as well as in the penultimate paragraph.

    I thought tax brackets and allowances were long and confusing enough so didn’t want to bog down the table with this data to cater for a tiny minority, but I’ve had 3-4 emails about this — clearly Monevator has more six-figure income readers than I’d appreciated. 😉

    Re: Rich, yes, that is another strand to the discussion. The categories of rich isn’t very finely granulated in English language, perhaps because we don’t like to talk about money much IRL. Over in America they ‘make bank’ and so forth!

  • 10 The Investor March 21, 2011, 10:17 am

    Some interesting numbers today backing all this up from Stephanie Flanders/the IFS:

    Nearly everyone’s feeling squeezed these days, and for good reason. New research published today in association with the BBC shows that after tax, the real income of the median household in the UK, right in the middle of the income distribution, will be 1.6 per cent lower in 2011 than it was in 2008. That’s a loss of around £365. Usually, they could have expected their income to have risen by nearly £1140 over that period.

    http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2011/03/the_shrinking_pound_in_your_po.html

    OldPro — Perhaps the clue is in your name? 😉

  • 11 Mendy August 18, 2011, 7:38 pm

    I’m employed in Ohio and I get paid weekly…I’m trying to figure out how much income I can gross each week without being put in a higher tax bracket, so I know how much OT to sign up for. Do you know where can I find this information?

  • 12 The Investor August 19, 2011, 9:08 pm

    @Mendy – These tax brackets are for the UK. For US tax brackets, try my friend Mike’s site:

    http://www.obliviousinvestor.com/2011-tax-brackets/

  • 13 Gregor October 25, 2011, 11:52 pm

    Stumbled across this interesting blog about the tax brackets and had a good read through the article, which enlightened me on several different issues facing a diversity of people. But there’s just one question I haven’t been able to find the answer to anywhere on the internet. I’m 19 and in full time education, I have a part-time job as a Lifeguard, and my shifts are inconsistant, so my pay varies each month, rather heavily at that. My tax code is 747L and I know this means that anything I earn over my personal allowance of £7,470 will be taxed.
    However, this month I was taxed £103.80 and was left with a net pay of £925.39, yet I haven’t yet gone over the £7,470 personal allowance. Should I be claiming for tax back?
    Regards

  • 14 Elissa Miller March 20, 2012, 9:31 pm

    The ‘tax allowance’ is a joke. Every job I have had if I earned less than £7,000 (although actually it was less when I started working) I didn’t pay tax – of course. However, every job I have had, and everyone I know, where I earned over £7,000 I have paid 25% of every penny I earned between tax and national insurance – regardless of when I was on £10,000 or £21,000. I’ve applied for it back and always been told ‘no, that’s right’ by HMRC, employers, citizens advice etc so it is misleading to tell people they have an allowance which doesn’t, in any real sense, exist.

    Which makes the whole 40% tax bracket thing seems a big superfluous esp as one of the commenter noted that 80% of people don’t meet it anyway. Its hard to feel sorry for people whose take home after deductions is still a good £10k more than my combined household income thanks to the Governments hack and slash approach to the economy.

  • 15 The Investor March 21, 2012, 9:19 am

    @Elissa — The tax allowance is very real! 🙂 You’ve either misunderstood how tax works, or you’ve been misled by employers.

    In case you misunderstand it, here’s another go at an explanation. You are taxed on your taxable income. These is your total income MINUS any allowances and reliefs, including the personal allowance we’re discussing here.

    Let’s say you earn £10,000, as you say. The tax-free allowance currently is £7,475. You are therefore taxed on the rest of your salary (£10K minus £7,475) which is £505. You’d pay another £332.64 in National Insurance (which *is* a whole other confusing subject!), for a total annual tax bill of £837.64.

    There are plenty of calculators out there where you can see what your PAYE wages should be. Try this one: http://listentotaxman.com/index.php

    I would return to the Citizens Advice Bureau if they’ve told you what you state and show them their own web page:

    http://www.adviceguide.org.uk/england/tax_e/tax_income_tax_-_how_much_should_you_pay_e/income_tax_allowances_and_amounts.htm

    Under the ‘Personal Allowance Amounts’, you’ll find: “These allowances are deducted from total taxable income before the amount of tax payable is calculated.”, just as I also state above.

  • 16 Neverland February 22, 2013, 1:19 pm

    The inequity is at the heart of the British tax system:

    Income is taxed; wealth largely isn’t

    Make a £50k bonus; most likely pay £20k in income tax and some more in NI

    Get handed £50k from your family; tax nil (unless the giver dies in seven years)

    Want to get ahead? Marry someone from a rich family…

    The way tax/benefit system is set-up is full of perverse incentives and eye-watering marginal tax rates at the top and bottom of the income scale

    If you are liable to pay higher or additional rate income tax investment decisions are more driven by income tax treatment that asset returns

    According to my good freind Gadgetmind about 1 in 8 tax payers are now in the 40% tax band

  • 17 Ric February 22, 2013, 1:38 pm

    I’m very much looking forward to your proposed SIP article. It has been a while since I last read up on pensions (circa the times of Equitable life) and I suspect a lot has changed since then. Reading about it on Monevator would be an easy route back into pension enlightenment.
    Thanks for the blog!

  • 18 Greg February 22, 2013, 2:57 pm

    You have forgotten the “went to university” tax* that younger people have to pay. 9% of income over £15k.

    * A special tax that if you manage to earn enough money, you don’t have to pay any more!

    Of course the amount paid off is taken *after tax*.

  • 19 Luke February 22, 2013, 3:17 pm

    @Gregor

    If you want to reclaim tax, there’s some information here: http://www.hmrc.gov.uk/incometax/overpaid-thro-job.htm

  • 20 The Investor February 22, 2013, 4:31 pm

    @Greg — Indeed. But that’s another article in itself.

  • 21 Sookie February 22, 2013, 5:41 pm

    Very helpful thanks. I received a letter from HMRC last week about my new tax code, and didn’t know that it works that way. I thought tax codes varies for different individual until I’ve read this article. Is there a way to claim or relieve my taxes that I’ve been paying? Or even, do I get back my taxed payed after I’ve retired?

  • 22 AlwaysLearnin February 23, 2013, 9:37 am

    Hi Monevator. My first post after being a long term reader, so I’d just like to start by congratulating you on an excellent site full of very useful information, especially for an investment beginner like myself.

    I just thought I’d add that some employers offer a number of ways to potentially reduce pre tax income, such as holiday purchase schemes and salary sacrifice (bike to work, wine purchase, supermarket vouchers etc), plus charity donations from source. This obviously depends on the company and, as ermine implies, might only be small beans in the grand scheme of things, but in my experience some people aren’t even aware of the availability/potential, possibly because it’s generally publicised with ‘yet another email’.

    Keep up the great work.

  • 23 Faustus February 23, 2013, 11:47 am

    @Neverland

    Very much agree about the insidious nature of the tax system, whereby labour (earnings) faces a much higher tax burden than capital.

    It is made worse by National Insurance, which acts as a super-tax on earnings, so that the effective tax rate is not 20% but 32% (29% for self-employed) on most people’s income. In that context a rise from 32% to 42% does not seem quite such a horrific leap.

    At the same time dividends and interest do not attract national insurance, while capital gains are taxed at a much lower rate. And all the recent bleating about inheritance tax from super-wealthy families is especially sickening when there is a tax-free allowance of £325K (effectively £650K for couples) for these handouts – imagine if such thresholds existed on ordinary people’s earnings!?

    The real reason of course is that the tax system is not really based around fairness but about picking the low hanging fruit. Earnings are more visible than wealth and therefore more straightforward for HMRC to police.

  • 24 Faustus February 23, 2013, 11:49 am

    Oops – I meant to write invidious (but the tax system is insidious too!).

  • 25 The Investor February 23, 2013, 12:35 pm

    While I understand the sentiments entirely — hey, I’ve watched what’s felt like everyone in London but me get rich on property for 20 years — I’m not aware of any data showing wealth taxes have good economic outcomes overall.

    You don’t want to damage productivity / growth out of envy, although perhaps if it addresses inequality and hence can be shown to boost happiness overall it might still be worth doing. (I’m not aware of that data either).

    In practical terms, wealth is so potentially fleeting that most wealth taxes devolve into property taxes. (It’s hard to move a house!) Perhaps taxing a house is a good idea, but it would surely be politically suicidal in this country, unless targeted at the richest — where it doesn’t really do much to truly move the economic dial, anyway, and risks hurting the attractiveness of the crucial South East UK economy.

    Difficult!

  • 26 gadgetmind February 23, 2013, 7:14 pm

    > According to my good freind Gadgetmind about 1 in 8 tax payers are now in the 40% tax band

    Yup, and rising to closer to 1 in 6 very soon. And there is no need to quote me as copious primary/secondary sources exist that show that many people on modest salaries are being pushed into this bracket.

    http://www.bbc.co.uk/news/business-17475709
    http://www.telegraph.co.uk/finance/budget/9160607/Budget-2012-1.3m-people-on-modest-salaries-forced-into-higher-rate-of-tax.html

    As for gifts from family, this is money that’s already been taxed, so why should it be taxed again? It could also be gifted as boxes of £50 notes so HMRC stand little chance of getting their greedy snouts into this particular trough anyway!

    As I see it, as long as we all put more into the system than we take out, then the yin and the yang balance. Sadly, we have a lot of net takers who regard their right to take as being inviolable.

  • 27 gadgetmind February 23, 2013, 7:17 pm

    > the effective tax rate is not 20% but 32% (29% for self-employed) on most people’s income.

    With all the available allowances and benefits, is the *net* taxation on *most* people really 32%?

    I’d love to see references to sources that support this assertion.

  • 28 Jonathan May 23, 2013, 8:00 am

    Good technical article (although we could do without the pointless politics about what’s “righteous” from some of the posters).

    However, I’m concerned about part of terminology you’ve used, namely the word “taxable”:

    quote> For example, if you will earn £40,000 in 2013/14 from all sources and you’re under 65, then your taxable income is £40,000 minus your basic allowance of £9,440, so £30,560.

    quote> …

    quote> If you earn £50,000, then by the same method your taxable income is £40,560. The first £32,010 will be taxed at 20%, and the rest at 40%.

    For pensions tax “relief” purposes, the _taxable_ income is the entire gross income, not the bit after the personal allowance has been deducted (otherwise some people on incomes which fall entirely within the personal allowance would be very limited in how much they can pay into a pension, namely the same £3,600 to which non-earners are limited).

    Calling the income about the personal allowance the “taxable” income is a misleading use of terminology. It’s the “taxed” part of income, but for pensions-relief purposes, the entire gross income is the “taxable” income.

    [Technical note: I use quotes around “relief” because pensions contribs aren’t really tax-relieved; instead (as you mention in the article), one is deferring taking income, and therefore deferring taxation of that income — but pensions annuities or drawdown are subject to income taxation on distributions in a way that purchased-life annuities or ISA-consumption is not.]

  • 29 Jim McGregor May 22, 2014, 8:57 pm

    If you’re a salaried employee at any level not working for yourself then you are humped, humped and humped again, from your first wage packet to your last. Even beyond your last, when your pension kicks in. And they’re going to keep at it, taxing here, there and everywhere. The working class is now just that, all of us who work, subsidising everything else, everywhere else, again and again and again.

  • 30 oldthinker May 22, 2014, 10:34 pm

    > The rate of tax you pay depends on your total income from all sources – salary, gross cash interest, dividends, pensions, property letting income, and so on. Add it all up to get your total income, and then subtract your personal allowance from the table above to see which tax bracket you fit into

    As long as you have listed property letting income, it would be worth mentioning that allowable expenses associated with letting (including BTL mortgage interest) should be subtracted in the same way as personal allowance.

  • 31 dearieme May 23, 2014, 11:21 am

    If you want a post-1945 Welfare State then these are the sorts of taxes we’ll have to pay to fund it. If you prefer the pre-1945 welfare state, or would have preferred the sort of welfare state that Beveridge recommended, tough luck!

  • 32 Dave May 23, 2014, 11:42 am

    I think people define whether they are rich relative to their peer groups.
    We tend to have peer groups that have similar levels of income to us(as housing costs tend to segregate people and professions earn similar salaries). I suspect that almost everyone therefore believes they are in the middle(or slightly below as it seems natural to feel sorry for ourselves).

    Objectively taking every human alive and who has ever lived, being in central London with a £44k salary and a 40% marginal tax rate is probably a cushy deal. And to Ms Flanders point, throughout all bar the last couple of hundred years(and for much of the world less than that) most people would not have expected their income to rise at all, or ever. It was all about avoiding disaster.

  • 33 rick24 May 25, 2014, 6:37 pm

    For the last 2 years, I’ve dumped every penny I earned over the higher rate threshold into my pension, thereby avoiding the higher rate.

  • 34 gadgetmind May 25, 2014, 7:10 pm

    The tax/etc advantages of putting money into a pension to avoid HR tax is why the annual allowance is now limited to £40k.

  • 35 gadgetmind May 25, 2014, 8:59 pm

    > We tend to have peer groups that have similar levels of income to us

    Sweeping statements are us.

    I have close friends that vary between long-term unemployed, multi-millionaires, retired and living on only state pension, hard-working “middle England” types, poets retired overseas, and even an acquaintance who’s just sold his first company for close to $2 billion despite being under 30.

    Dunno where I fit, dunno if I care, because we can all still share common interests and have a good time in each others company.

    Of course, rounds tend to be far less round, but that’s just a kind of an unspoken “it happens” rather than anything else.

  • 36 Dave May 27, 2014, 3:51 pm

    @gadgetmind
    I think income is likely to correlate for several reason:-
    1. interests have different costs(the long term unemployed rarely ski, play polo or visit London’s clubs).
    2. many friends are met via work(few professional people talk as intently to the cleaner as their colleagues).
    3. people tend to be friends with people in similar life stages to them(ie the people you meet in NCT groups are normally Double Income, No Kids folk who are about to get a lot poorer)
    4. many people meet friends at school(schools produce similiar outcomes, and our friends seem to be in similiar groups).

    I am not suggesting no-one socialises outside their age group, but friendship are correlated with income. The problem that many people have with inequality is that it limited wealth/income reduces access to power and people in power. Of our main political leaders David Miliband got his first job working for Tony Benn via his father and David Cameron had someone from “the palace” call the Conservative Party on his behalf.

  • 37 gadgetmind May 27, 2014, 4:04 pm

    > The problem that many people have with inequality is that it limited wealth/income reduces access to power

    For the vast majority of people, not having access to “power” doesn’t make one jot of difference, and as for “friendship correlated with income”, well perhaps this is a new definition of “friendship”!

    I guess our world views and how we interact with those around us are fundamentally different.

    And yes, I do often have long chats to our cleaners.

  • 38 Sov May 27, 2014, 4:27 pm

    I love this little anecdote – remind you of anything?

    “Suppose that once a month, ten men go out for beer and the bill for all of them comes to £100. If they paid their bill the way we pay our taxes and claim State benefits, it would go something like this;

    The first four men (the poorest) would pay nothing. The fifth would pay £1.
The sixth would pay £3.
The seventh would pay £7.
The eighth would pay £12.
The ninth would pay £18.
And the tenth man (the richest) would pay £59.

    So, that’s what they decided to do. The ten men drank in the bar every month and seemed quite happy with the arrangement until, one day, the owner caused them a little problem. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your weekly beer by £20.” Drinks for the ten men would now cost just £80.

    The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free but what about the other six men; the paying customers? How could they divide the £20 windfall so that everyone would get his fair share? They realised that £20 divided by six is £3.33 but if they subtracted that from everybody’s share then not only would the first four men still be drinking for free but the fifth and sixth man would each end up being paid to drink his beer.

    So the bar owner suggested a different system. The fifth man, like the first four, now paid nothing.
The sixth man paid £2 instead of £3 .
The seventh paid £5 instead of £7.
The eighth paid £9 instead of £12.
The ninth paid £14 instead of £18.
And the tenth man now paid £49 instead of £59. 
Each of the last six was better off than before with the first four continuing to drink for free.

    But, once outside the bar, the men began to compare their savings. “I only got £1 out of the £20 saving,” declared the sixth man. He pointed to the tenth man, “but he got £10!”

    “Yes, that’s right,” exclaimed the fifth man. “I only saved a £1 too. It’s unfair that he got ten times more benefit than me!”

    “That’s true!” shouted the seventh man. “Why should he get £10 back, when I only got £2? The rich get all the breaks!”

    “Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor!”

    So, the nine men surrounded the tenth and beat him up. Funnily enough, the next month the tenth man didn’t show up for drinks, so the nine sat down and had their beers without him.

    But when it came to pay for their drinks, they discovered something important – they didn’t have enough money between all of them to pay for even half the bill.”

    I believe this anecdote originated from Max King, Investec. Apologies if this is incorrect!

    Sov,
    http://www.break50.com

  • 39 Marco May 27, 2014, 11:04 pm

    The 60% tax rate now affects all earnings £100 – 120k . 62% is you include NI.

    Without a non earning spouse to help with tax efficiency I would not bother doing the extra work.

  • 40 Mr Maker October 27, 2014, 2:11 pm

    One thing that I’m unclear on is how childcare voucher thresholds work. Some sites talk about childcare vouchers (ie salary sacrifice) being one of the methods that can be used to avoid higher rate tax. My total income is in the region of 44.5K. However once you take off the childcare voucher sacrifice of £2916 it becomes 41.5K so below higher rate (although interest and dividend payments will probably push me over the top by a few hundred pounds).

    However according to the most recent rules, higher rate taxpayers can only claim a max of £124 a month in vouchers (£1488 per annum). So when exactly am I higher rate with regards to the voucher scheme? Is that part of it based upon my salary before the sacrifice is taken off or after?

    Its an important question for me because I want to keep the benefits of the vouchers while my kids are in nursery. I certainly don’t want to end up having to pay back tax at the end of the year because I’m claiming too much in vouchers. Therefore I was planning to open a SIPP and use pension contributions to bring me back below higher rate. However depending on which way round this works, the contribution will either be very small (a few hundred pounds) or large (4-5K).

    Perhaps someone can help me understand this better?

  • 41 The Investor October 27, 2014, 9:12 pm

    @Mr Maker — I’m afraid I don’t know how the vouchers work. For my sins I wrote one of the first articles pointing out the general method regarding child benefit and higher rates — http://monevator.com/how-to-keep-child-benefit-and-retire-richer/ — but clearly things have moved on since then.

  • 42 Mr Maker October 28, 2014, 12:32 pm

    Thanks for your response ‘The Investor’

    It seems that eligibility is based upon post sacrifice earnings. See the following paragraph from a voucher provider’s website:

    “HMRC requires employers to conduct an earnings
    assessment to determine each employee’s voucher
    allowance. The assessment consists of calculating each
    employee’s ‘relevant earnings’ and then comparing the
    result to the tax band thresholds. This then determines
    whether they should be treated as a basic, higher or
    additional rate taxpayer for the purpose of their childcare
    vouchers.

    The assessment of relevant earnings should include:
    – Basic contractual pay
    – Commission
    – Contractual or guaranteed bonuses, including loyalty
    bonuses
    – London weighting or other regional allowances
    – Taxable benefits
    – Shift allowances
    – Skills allowances and market rate supplements
    – Guaranteed overtime
    There is no need to include:
    – Performance-related or discretionary bonuses
    – Non-guaranteed overtime payments
    – Tax-exempt benefits such as pension contributions
    and payroll giving
    – Expense allowances which are exempt from PAYE

    Where childcare vouchers are provided by salary
    sacrifice, the earnings assessment should be based on
    post-sacrifice earnings. Similarly, the assessment should
    allow for other salary sacrifice arrangements such as
    pension schemes or company cars.”

    That is the way I was hoping it would work!

    Sorry to bang on about my own situation, but I am not all that clued up on the tax system and trying to understand it all as best I can!

    It seems like the calculation of eligibility for childcare vouchers excludes things like dividends and interest on savings. So excluding those I come in about £200 below the threshold for this year. Based on my reading of this it seems like the full voucher amount should be safe regardless of other income sources. Do other people agree with that?

    When it comes to the other issue of whether I pay higher rate tax on the rest of my combined income I think I’ll end up around £1000 or so above the tax bracket. So, if I contribute roughly that amount to a SIPP that will bring me under this. I presume I have to tell the tax office to receive the tax relief? I guess as its a private pension it would be best to tell my employer as well so its included in the childcare voucher calculation to give an extra margin of safety?

    I do earn a good salary but once you take off a large mortgage and mortgage sized childcare costs it is surprising how much is eaten away. Hence the desire to hang on to the considerable benefits of the vouchers.

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