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UK tax brackets and personal allowances

Posted By The Investor On In Updated,Earning | 61 Comments

Hey, do you know your tax bracket? I’m talking about the crucial bands that determine whether you’re a basic (20%), higher (40%), or additional rate (45%) taxpayer.

Everyone knows their height and their shoe size. To be frank, most teenage boys spent a furtive moment with a ruler.

But many of us have no idea where each tax bracket starts and ends. Nor where our income falls within these bands.

It’s pretty ironic. Think about how much time we spend at work, wishing we earned [1] more money. Not to mention all those debates about public services, taxes, and spending.

Perhaps the freezing [2] of personal tax allowances in recent years has made people a little more aware.

Yet I suspect many people still don’t know how much of their own salary they get to keep.

Let’s begin with the hard numbers. Then we’ll get into what your tax bracket means for your take home pay.

2023/2024 UK tax brackets

The rate of tax you pay depends on your total income from all sources. This includes salary, interest, dividends, pensions, property letting, and so on.1 [3]

You add up all this income to get your total income figure.

You then subtract your personal allowance from the total to see which tax bracket you fit into. More on that in a mo’.

For England, Wales, and Northern Ireland, the income bands after allowances are currently:

Income Tax Rate 2023/2024 2024/2025
Starting rate for savings: 0% £0-£5,000 £0- £5,000
Basic rate: 20% £0- £37,700 £0- £37,700
Higher rate: 40% £37,701-£125,140 £37,701-£125,140
Additional 45% rate £125,141 and above  £125,141 and above

Source: HMRC [4]

Note: If your non-savings taxable income is above the starting rate limit, then the starting savings rate does not apply to your savings income.

Scotland has its own (similar) tax rates. See the Scottish Government [5] for the gory details.

If you prefer to think in terms of tax bands – that is, before deducting the personal allowance – then for England, Wales, and Northern Ireland these are:

Again, the higher rate threshold has been frozen until 2028.

Complicating factor alert! If you earn over £100,000 you’ll pay a marginal rate of 60% on some of your income. What joy! More on that below.

2023/2024 personal allowance

The tax year runs from 6 April to 5 April the next year.

All of us have a basic level of income – whether we’re employed or self-employed – that we can earn during this period before we have to pay income tax.

But after your allowance is used up, the government starts taking its due via income tax.

The personal allowance system was simplified a few years ago. Everyone now starts with the same personal allowance, regardless of age.

Your personal allowance may be bigger if you qualify for Married Couple’s Allowance or Blind Person’s Allowance. It’s smaller if your income is over £100,000. We’ll get to that in a minute.

Note the £12,570 personal allowance is the same as in 2021/22, and it’s frozen until 2028. This is purportedly [6] to raise revenue to pay for the extra State spending during the pandemic.

Freezing the allowance means that as your salary rises over the years, proportionally less of it is covered by the tax-free band. You’ll therefore lose a greater share of your income to tax.

Blind Person’s and Married Couple’s allowance

There are two other personal allowances you might qualify for:

These are added to the standard personal allowance, if you qualify. They can give you or your spouse a slightly higher personal allowance.

The 60% tax trap for those earning £100,000 or more

If you’re on a much-coveted six-figure salary, I’ve got some unpleasant numbers for you.

Anyone with an income of over £100,000 sees their personal allowance reduced by £1 for every £2 of income above the £100,000 limit.

This effectively increases the marginal rate [8] of tax you pay between £100,000 and £125,140 to 60%.

For income above £125,140, the 45% additional tax rate applies.

Ironically then, you’re taxed at a lower rate on earnings on your income over the £125,140 level. That’s because your personal allowance has been totally whittled away by this point.

The effective 60% marginal rate payable on that specific £25,140 chunk of income above £100,000 is far higher than the official tax rates would indicate.

The child benefit booby-trap

Got kids? There’s a similar effective hike in the marginal tax rate when either parent earns over £50,000 a year and so is disqualified from claiming child benefit.

See if you can increase your pension contributions in order to keep your child benefit [9] and so avoid being penalised.

How tax brackets work to determine the tax you pay

Let’s run through a couple of examples to show how this all works.

Basic rate payer

Let’s say you will earn £45,000 in 2023/24 from all sources. Your taxable income is £45,000 minus your personal allowance of £12,571.

So £32,429.

This put all your income in the 20% tax bracket, as it’s less than £37,701 in the first table above.

In practice you’ll pay no tax on the first £12,571 you earn, and 20% on the remaining £32,429.

You’ll therefore pay £6,486 in tax on your income.

Higher rate payer

Now let’s imagine your total income adds up to £60,000.

By the same method (£60,000 minus £12,571) your taxable income is £47,429.

The first £37,701 of this will be taxed at 20%.

The rest – £9,728 – is taxed at 40%.

You’ll pay:

In nearly all cases you’ll also pay additional and hefty National Insurance contributions.

National Insurance

National Insurance is in practice an extra tax you pay on your earnings. It comes with its own fiddly rules – and in recent years the Government has been prone to messing with them.

That’s probably because people find it even harder to keep track of what they’re paying in National Insurance than with income tax. National Insurance rates are therefore less politically hot than income tax rates.

The big news recently [10] was that the main National Insurance rate for employees was cut from 12% to 10% on 6 January 2024. Class 2 National Insurance contributions for the self-employed will be scrapped in April, too. 

Yet only a couple of years ago, National Insurance rates were increased by 1.25%. Ostensibly this was to pay for the NHS and social care.

So you can see the Government has mostly just reversed its own hike made in April 2022.

One recent-ish change was more sensible. From 6 July 2022 the personal allowance became the threshold for starting National Insurance payments. This means everything you earn within the personal allowance is now 100% yours to keep – with no tax or National Insurance to pay.

A welcome piece of simplification in a sea of complexity.

Indeed, anything else we write here about National Insurance will not be exhaustive enough to stop someone saying “what about X?” in the comments.

Don’t blame us! Blame the labyrinthine UK tax system.

National Insurance rates

Just briefly then, most employees currently pay what are called ‘Class 1’ contributions at the following rates:

Your salary 6 April 2023 to 5 January 2024 From 6 January 2024 to 5 April 2024
£242 to £967 a week (£1,048 to £4,189 a month) 12% 10%
Over £967 a week (£4,189 a month) 2% 2%

Source: HMRC [11]

Your employer also pays National Insurance contributions, based on your salary. This gives rise to the technique known as ‘salary sacrifice’.

With salary sacrifice you give up some pay in return for some other benefit – usually pension contributions [12]. You get the benefit, and you and your employer also pay less National Insurance.

Self-employed people make different contributions, depending on profits. These are typically worked out via your self-assessment tax return.

As I’ve already moaned, it’s all an extra hassle to keep tabs on.

In a sensible world National Insurance would be merged with income tax. This doesn’t happen because (a) supposedly the money it raises is set aside for state pensions and other welfare funding (it’s not really) and (b) no UK government wants to been seen introducing an income tax rate that’s transparently above 50%.

Your tax bracket determines your take home pay

Like many students, I was philosophically a left-wing tax-and-spender.

It was a pretty low-stress position to hold when I paid no taxes!

But then I got a job.

Suddenly I saw how much money would be taken out of the meagre pay I received for ramming my head repeatedly into the coalface for 40 or more hours a week. Financially, I turned more to the right.2 [14]

As my dad used to say, quoting someone 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.

I’d add: if you don’t know your tax bracket then you haven’t got a clue.

Most of us care most about how much of what we earn we get to keep. Not so much about how we’re helping to fund the NHS or to pay interest on the UK’s national debt – vital though both may be.

When we start working – and we start paying taxes – we’re shocked by how much less of our pay we actually get to keep.

Beyond the sticker shock

But knowing your tax bracket is about more than just stopping you from fainting when you open your payslip.

Because armed with this knowledge, you can also be more strategic [15] about adding money to ISAs and pensions.

As we’ve seen, the tax system gets progressively more punishing as your salary passes through various thresholds. You might therefore prefer to put more of your more higher-taxed earnings into a pension.

Thanks to pension tax relief, this way you sacrifice less of a share of your post-tax disposable income, while building up a bigger retirement pot [16].

A fiscal drag

The tax take from British workers has been rising for more than a decade.

This was partly achieved by ‘fiscal drag’.

Fiscal drag sees rising salaries pulling more workers into the higher rate tax bands, because the tax band thresholds and allowances are frozen or only raised by a bit – despite high inflation.

After the financial crisis of 2008/2009, the threshold for higher rate tax was even explicitly lowered, despite inflation running over target. That move dragged millions more people into the higher rate tax bracket [17].

National Insurance rates rose for higher rate tax payers. And the wheeze that slashed the personal allowance for those earning over £100,000 was introduced.

True, the additional rate of income tax was cut from a short-lived 50% to 45% in 2013. And eventually both the personal allowance and the higher rate tax threshold were lifted.

But as we’ve seen they’ve since been frozen – and they will stay frozen for years to come.

In short, if you remember the arcade game Frogger, that’s a good analogy for the ever-changing UK tax landscape.

Bring me higher (tax) love

Some may quibble with my simplified narrative. But it’s directionally correct.

See this graph from the IFS, and pay particular attention to the yellow line:

[18]

Source: IFS [19]

You can see that the numbers paying higher rates of tax (yellow line) has hugely increased since 2009 – let alone 1990.

Perhaps that’s fine. As well as the freezing of tax bands, you could also argue it’s a reflection of rising wealth inequality.

We can debate that another day. I’m just pointing out how things have been going – and what might happen next.

We’re living through a period of historically high inflation. After peaking in double-digits, inflation is still above target at over 4%.

Yet both the personal allowance and the threshold for higher rate tax are frozen until 2028.

Unless the government changes course, this will drag even more workers into paying higher and additional rate taxes over the next few years.

A higher calling

If you’re a higher earner wondering why you’re not feeling as wealthy as you think you should, higher taxes may have something to do with it.

Okay, and higher mortgage rates, inflation, and energy bills.

(Not to mention hedonic adaption [20]! But let’s stay on-topic.)

The truth is being a higher rate tax payer is no longer enough to classify you as wealthy.

Yes, I’m well aware that the median annual income [21] in the UK for full-time employees is still less than £35,000 – well below the higher rate bracket. Nobody needs to get on a soap box to shout at me.

I’m not saying life is fair, either, or that income inequality isn’t a problem. (My voting record reflects my views.)

But the fact stands. Paying higher rate tax hardly makes you Bertie Wooster [22] these days.

Resistance is tax-efficient

I’m all for taxing, spending, and the UK offering a decent welfare safety net.

But I’m not going to leave a tip.

I’m a law-abiding citizen. However there are sensible and legal steps you can take to mitigate [23] your total tax bill.

Use as much of your ISA allowance [24] and/or a pension [25] to shelter your savings as possible. Take steps to manage capital gains tax [26]. You could also consider VCTs and EIS [27] schemes if you’re up for the research, extra costs, and greater risks.

Higher rate taxpayers should consider making maximal contributions into their pension. Most people are now allowed to pay up to £60,000 into a pension in a year3 [28], so there’s a lot of headroom.

If you can cut your spending [29] by enough to make big contributions, you might be able to get the higher rate tax you’d otherwise have to pay entirely wiped out by tax relief. Depending on how much you earn, of course.

Large pension contributions can really accelerate the growth [25] of your retirement pot too. Just remember you’ll almost certainly have to pay some tax when you withdraw a pension income later.

Changes [30] over the past decade have made pensions much more attractive than they were. Even I, a former pension-phobic person, would prefer to lock away some of my money for many years in a pension than chuck it away by paying 40% or 45% tax on it today.

The bottom line is taxes are continuing to rise. Take cover, or take the pain.

Note: This article was updated in February 2024 with the latest UK tax bracket and personal allowance numbers. Comments below may refer to old rates. Check the dates if unsure.

  1. There exist allowances and reliefs for some of these income sources, such as dividends and savings. These can reduce how much of that income is taxable. [↩ [35]]
  2. To be clear, I’ve no problem with a reasonable level of taxation, public spending, and redistribution. It’s more that back then I had no idea what was already being taxed and spent! [↩ [36]]
  3. Or 100% of income, whichever is lower. [↩ [37]]