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UK tax brackets and personal allowances

Know your tax bracket and personal allowance to learn what income is yours to keep

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 more money. Not to mention all those debates about public services, taxes, and spending.

Perhaps the freezing 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

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

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 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:

  • Personal allowance at 0%: £12,570
  • Basic rate 20% – £12,571 to £50,270
  • Higher rate 40% – £50,271 to £125,140
  • Additional rate 45% – £125,141 to the moon

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.

  • For 2023/24, the personal allowance is £12,570.

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 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:

  • Blind Person’s Allowance – £2,600
  • Married Couple’s Allowance – £1,260

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

  • MoneySavingExpert has a good guide to the Married Couple’s 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 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 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:

  • Basic rate tax of £7,540
  • Higher rate tax of £3,891
  • Total tax paid is £11,431

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 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

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. 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

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 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.

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.

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:

Source: IFS

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! 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 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 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 your total tax bill.

Use as much of your ISA allowance and/or a pension to shelter your savings as possible. Take steps to manage capital gains tax. You could also consider VCTs and EIS 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, so there’s a lot of headroom.

If you can cut your spending 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 of your retirement pot too. Just remember you’ll almost certainly have to pay some tax when you withdraw a pension income later.

Changes 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. []
  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! []
  3. Or 100% of income, whichever is lower. []
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Capital gains tax in the UK

UK capital gains tax explained

Until the government starts taxing sex, capital gains tax (CGT) is probably the most annoying tax to find yourself paying.1

Capital gains tax is levied on the profits you make when you sell or transfer most assets. These assets include shares, investment properties – even a stake in your own company.

Like a fly in your soup on your birthday, capital gains tax can really spoil the fun of making money.

Inheritance tax is a tax on your good fortune. Income tax is the cost of having a job.

CGT is a tax on investing success.

Take shelter from CGT! Always try to use tax shelters like ISAs and pensions to shield your investments from taxes where possible. No tax is payable on gains realised within these wrappers.

Of course, you won’t always make a profit when you sell an investment.

Sometimes you’ll lose money. That’s called a capital gains loss.

Unfortunately you don’t get money back from the government when you lose money.

However you can offset capital losses against your capital gains to reduce the total gain you pay tax on. You can also defuse unsheltered gains using your annual CGT allowance.

How UK capital gains tax works

Like income tax, CGT is calculated on the basis of the tax year. This runs from 6 April to 5 April the following year.

You pay tax on the total taxable gains you make selling assets in the tax year, after taking into account:

  • Your annual CGT allowance. (See below).
  • Other reliefs or costs that can reduce or defer the gains.
  • Allowable losses you made by selling assets that would normally be liable for CGT. (The opposite of a capital gain, in other words).

Everyone has an annual capital gains tax allowance, or ‘annual exempt amount’ in HMRC-speak. This allowance is £6,000 up to 5 April 2024. However, the allowance will be halved to £3,000 from the 6 April 2024, whereupon it will be frozen.

If your total taxable gains, minus any deductions, comes to more than your annual allowance, then you pay CGT on everything over that tax-free allowance.

Capital gains tax rates

There are several different rates for capital gains tax. The rate you’ll pay normally depends on two things:

  • Your total taxable income.
  • What sort of assets you’ve made a profit on. Second homes and buy-to-let properties are taxed at different rates from other assets.

For most taxable assets:

  • Basic rate taxpayers pay 10% on their capital gains.
  • Higher rate taxpayers pay 20%.

For second homes and buy-to-let properties2:

  • You’re charged 18% at the basic rate on your property gains.
  • Higher rate taxpayers pay 28%.

Your main home is nearly always exempt from capital gains tax under what’s called Private Residence Relief. This is automatically applied unless you’ve let your home out to more than a single lodger, used it for business, or if you’ve substantial acreage. In those cases, CGT might be payable.

Note that you might normally be a basic rate taxpayer, but pay a higher rate on your capital gains. This could happen if the money made via your gains moves you into the higher rate tax bracket.

To work out what rate you’ll pay, your capital gain is added to your taxable income from other sources (salary, dividends, savings interest, and so on).

It can get a bit complicated. See HMRC’s notes on working out your capital gains tax rate band.

What is CGT charged on?

Historically-speaking, CGT has been a fairly avoidable tax for most everyday investors in the UK.

(Remember, you’re allowed to mitigate your taxes. Tax evasion is illegal.)

However the big decline in the annual CGT allowance – from over £12,000 a few years ago to just £3,000 from 6 April 2024 – has made it much harder to mitigate a potential capital gains tax bill.

Putting assets into tax shelters where possible before they make any gains has thus become even more important.

Most capital gains on asset sales are taxable, but in the UK capital gains tax is NOT charged on:

  • Your main home (in 99% of cases)
  • UK Government bonds (gilts)
  • ISA and SIPP holdings
  • Personal belongings worth less than £6,000 when you sell them
  • Your car, unless used for business
  • Other possessions with a limited lifespan
  • Betting, lottery, or pools winnings (including spreadbets)
  • Money which forms part of your income for Income Tax purposes
  • Venture Capital Trusts
  • Certain business holdings that qualify for entrepreneur’s relief

That still leaves many key assets liable for UK capital gains tax:

Remember if you can hold these assets inside a tax shelter (ISA or pension) you’ll escape the clutches of capital gains tax.

As I’ve already mentioned, you also have that annual capital gains tax allowance. So you won’t necessarily be liable for CGT just because you’ve sold some taxable assets and made a profit. It all depends on your total gains for the year.

You might also be able to postpone paying your CGT bill by claiming deferral relief on certain special government-sanctioned investment schemes (EIS and SEIS). However these investments can be very risky.

Do your research, and don’t risk big losses just to cut your tax bill.

When to report capital gains tax

You need to report your taxable gains via your self-assessment tax return:

  • If your total taxable gain in the tax year exceeds your CGT allowance, and/or
  • If your sales of taxable assets are in excess of £50,000.

Under the current regime, if you sold £20,000 worth of shares in the year for a total gain of £5,000, there’s no need to report any of it. £5,000 in gains is below the 2023-2024 annual allowance. And your total sales were less than £50,000.3

In contrast, if you’d sold £55,000 of shares, say, you would have to report the details to HMRC, regardless of your total gain. You’ve sold taxable assets in the year excess of the £50,000 annual threshold.

Note that the prior annual reporting limit (which was set at four times the annual CGT allowance) was replaced in April 2023 by the fixed £50,000 figure.

Capital gains are pooled together

All capital gains and losses go into the same ‘pot’ from the Inland Revenue’s point of view.

For example, if you made a gain (that is, after your costs) of £15,000 selling shares and £8,000 selling an antique wardrobe, your total capital gain is £23,000.

Here losses might help you out.

For example, let’s imagine you make a taxable gain on your shares but a loss on selling your buy-to-let property. Your property loss can be offset against your capital gains on shares to reduce or even wipe out the tax bill that might otherwise be due.

See my article on avoiding capital gains tax for other strategies.

Who pays Capital Gains Tax in the UK?

Very few members of the general population ever pay capital gains tax.

A recent study of anonymised personal tax returns found that 97% of people never make any capital gains. And those who did were generally drawn from the ranks of the wealthy.

According to a Guardian story on the research:

Just 0.3% of people with income under £50,000 had taxable gains in an average year, compared with almost 40% of taxpayers with incomes over £5m receiving some gains.

Almost half of those who made a capital gain lived in the south-east. A quarter lived in London.

So we can see that paying capital gains tax puts you into a fairly exclusive club.

For investors, however, capital gains is an occupational hazard. If you are not able to do all of your investing inside ISAs and pensions, then you will pay CGT sooner or later.

Especially now that the annual CGT allowance has been slashed.

Capital gains tax and me

I’ve paid CGT. I wasn’t even very wealthy at the time. Certainly my annual income was no great shakes.

When I began investing 20-odd years ago, it was with a biggish lump sum that I’d originally saved up as a house deposit.

I should have steadily put this cash into ISAs over the ten years or so it took me to save it. But I was silly and I didn’t. And so when I began investing, I had to build up my ISA tax shelter capacity from scratch. One year’s allowance at a time.

Many years on this landed me with a five-figure CGT bill when I finally sold the last of my unsheltered investments – despite years of diligently defusing my gains along the way, as best I could.

This particular investment had gone up more than ten-fold since I bought it.

Lucky me you say, but remember I wasn’t super-rich. I began as just a determined saver trying to keep up with the runaway London housing market. My initial deposit comprised of several tens of thousands of pounds of hard-won savings that I could have spent instead on holidays, clothes, or simply having more fun in my 20s and 30s, like most of my friends did.

Which is why I write ‘make’ a capital gain, or even that you ‘earn’ such a gain.

Whereas The Guardian with its own biases says you ‘receive’ it. As if the capital gain just falls from the sky – like windfall.

That is true of an inherited gain, say, at least for the recipient. But capital gains nearly always come after you’ve put your own money at risk.

So do what you can to keep hold of the reward in full.

  1. Update: since I first wrote this article I bought my own home and paid Stamp Duty Land Tax at 5%. Turns out that’s just as annoying. []
  2. Held personally. Properties held via a limited company are on a different regime. []
  3. Remember, these are sales outside of an ISA or SIPP. Sales within shelters are not liable for CGT and not counted at all. []
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UK dividend tax explained

Dividends are taxed more generously than savings interest.

For years now, dividend tax rates have been increasing. In addition investors have been hit with a massive reduction in the already miserly tax-free dividend allowance.

Let’s run through the current dividend tax rates and allowances. We’ll then consider how we got here, and what you can do about it.

Dividend tax rates for 2023-24 and 2024-25

The rate of tax you’ll pay on your dividends depends on your income tax band.

UK dividend tax rates are currently:

  • Basic rate taxpayers: 8.75%
  • Higher rate taxpayers: 33.75%
  • Additional rate taxpayers: 39.35%

But note that depending on your total earnings – and where it comes from – you could pay tax at more than one rate on your income.

These higher dividend tax rates went into effect on 6 April 2022. At that point the tax rate for each band was hiked by 1.25 percentage points.

A pledge to reverse the hike was made with the Mini Budget of 2022. But this was scrapped by replacement chancellor Jeremy Hunt when he took office.

I hope you’re keeping notes at the back.

We’re talking about dividends paid outside of tax shelters. Dividends earned within ISAs and pensions are ignored with respect to tax. Adding up your dividends for your tax return? Don’t include dividends paid in ISAs or pensions. Forget about them when it comes to tax. (Enjoy them for getting rich.)

The tax-free dividend allowance 2023-24 and 2024-25

As of 6 April 2023, the annual tax-free dividend allowance was reduced to £1,000.

It’ll halve again in April 2024 to £500 for 2024-25.

Dividends you receive within the tax-free dividend allowance are not taxed. But breach the allowance and the rest is taxed according to your income tax band.

Like other tax allowances such as the personal allowance for income tax, the dividend allowance runs over the tax year. (From 6 April to 5 April the next year).

The £1,000 dividend allowance means you only automatically escape dividend tax on the first £1,000 of dividend income. This level of dividend is tax-free, irrespective of how much non-dividend income you earn and your tax bracket.

As already noted, things get worse from April 2024. From then you’ll only be able to receive £500 before you start paying tax on your dividend income.

(You read somewhere about the old Dividend Tax Credit system? It was scrapped years ago.)

What are dividends?

Dividends are cash payouts made by companies:

  • You may be paid dividends by shares listed on the stock market or by funds that own them.
  • You might also be paid dividends from your own limited company, as part of your remuneration.

Dividend tax only comes into the picture on dividends you receive outside of a tax shelter.

Using ISAs and pensions is key to shielding your income-generating assets from tax for the long-term.

What tax rate will you pay on your UK dividends?

If your dividend income exceeds the tax-free dividend allowance, you’ll pay tax on the excess.

This liability must be declared and paid through your annual self-assessment tax return.

For example, if you received £6,000 in dividends, then tax is potentially charged on £5,000 of it. (£6,000 minus the 2023-2024 £1,000 tax-free dividend allowance).

As we said, the rate you’ll pay depends on which tax bracket your dividend income falls into.

Beware of being bounced into a higher tax band

If you own dividend-paying shares outside of an ISA or pension, then the dividends may add substantially to your total income. Perhaps enough to push you into a higher tax bracket.

To avoid taxes reducing your returns you should invest within ISAs or pensions.

If you own funds outside of tax shelters, you could also owe tax on reinvested dividends. Choosing accumulation funds doesn’t spare you the tax rod – unless they’re safely bunkered in your tax shelters.

Watch out for withholding tax on dividends

If you’re paid dividends from overseas companies, you may be charged tax on them twice. Once by the tax authorities where the company is based, and again by Her Maj’s finest in the UK.

You may even pay this withholding tax on foreign dividends held within an ISA or pension.

However there are reciprocal tax treaties between the UK and other countries. These can at least reduce the total amount of dividend tax you pay.

Your broker should take care of this for you.

Some territories do not charge withholding tax on dividends received in a UK pension. The US is the most notable one. (This doesn’t apply to ISAs. Choose where you shelter your US shares accordingly.)

Again, make sure your platform is paying you any US dividends in your pension without any tax having been charged.

It can all get a bit fiddly. See our article on withholding tax.

Why was the old dividend tax system changed?

Then-chancellor George Osborne revamped UK dividend taxation in the Summer Budget of 2015.

He apparently wanted to remove the incentive for people to set themselves up as Limited Companies and then use dividends as a more tax-efficient way to get paid, compared to salaries.

Osborne also said the changes enabled him to reduce the rate of corporation tax.

But whatever his intentions, as we’ve seen today’s regime applies equally to dividends received from ordinary shares.

Even worse, the initially fairly-generous dividend allowance of £5,000 – designed to avoid small shareholders being taxed on legacy dividend-paying portfolios – will be just £500 from April 2024.

Osborne’s problem with dividends

The old system of tax credits on dividends was designed roughly 50 years ago.

Corporation tax rates then were above 50%. Add in personal taxation, and some people saw the income earned by the companies they held taxed by 80% or more.1

Since those ancient days, however, corporation tax rates have fallen.

And the government wanted to simplify things.

The good news was the confusing tax credit system got the chop.

The bad news was we now pay much more tax on dividends.

The changes threw a spanner into the works of some older wealthy people. They had based their portfolios (and their retirement plans) on how dividends were previously taxed.

That’s because before 2016 the implicit ‘dividend allowance’ was as much as £31,786, so long as your income from non-dividend sources was below your personal allowance.

So some people held huge income portfolios outside of tax shelters. At the time this was fine because of how much you could get in dividends before taxes kicked in.

How things have changed!

Some people saw their dividend tax bills soar

Most small investors have not been hit by changes to dividend tax. Most of us hold our shares within ISAs and pensions nowadays.

However there are exceptions.

Small business owners paid a dividend by their limited companies now pay more tax. Salary-sized dividends chew straight through today’s puny dividend allowance.

There also exists that dwindling cohort of older investors who built up a big portfolio of income shares outside of ISAs and pensions. They’re paying much more tax too.

Always use your tax shelters

For years I urged these dividend investors to move as much money as possible into ISAs. They could do this by defusing gains to fund their ISAs, for instance.

The ISA allowance is a use-it-or-lose-it affair. You must build up your total capacity over many years.

Yet inexplicably to me, some argued – even in the Monevator comments – that there was no point.

Dividends were not taxed until you hit the higher rate band, they said. So why bother?

That was true under the old system. And maybe there was a harder choice to be made if you also had massive cash savings. Because when interest rates were higher, there was more competition for your annual ISA allowance. (A dilemma that’s returned again with interest on savings accounts back around 5%.)

But the truth is taxes on dividends were always liable to change. And eventually they did.

At that point, the people who had declined to move some or all of their portfolios into ISAs – just to save a few quid – were hit with big tax bills.

I hate to say I told you so. (Truly – I write a blog to help people.)

ISA sheltering costs nothing. Even back then there was at most a trivial cost difference with an ISA versus a general account. Nowadays there’s usually none.

Get any non-sheltered portfolios into an ISA (and/or a SIPP) as soon as possible, if you can. Not just to avoid dividend tax, but also to shelter from capital gains taxes and other future regulatory changes.

Note: I’ve removed talk about the old way UK dividends were taxed in the comments to reduce confusion. We have to let go! But the discussion may still refer to old (or incorrect) dividend tax rates and allowances. Check the dates if unsure.

  1. Remember, companies paying you a dividend have already paid corporation tax on their profits. That’s before any dividend is paid to you. []
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Weekend reading: five graphs that justify the gloom

Our Weekend Reading logo

What caught my eye this week.

I have often been chided for being too negative over the past few years – both in comments on Monevator and elsewhere.

Just last week, regular reader SLG asked:

It might just be that my complainy pants news filter is set too high to assess the state of the nation but are you sure you’re getting a balanced reading breakfast to keep your glass topped half way up @TI?

That was in response to a post where I was indeed being negative about the returns from investing lately – once you excluded the big gains from the so-called ‘Magnificent Seven’ US tech giants.

Well, investing returns – equities and bonds alike – have been mediocre-to-bad since I first got negative in late 2021 and then more so. Especially once you adjust for inflation.

I do understand this is in on top of my multi-year negativity about the rubbish results from Brexit, though.

Eeyore stories

Let’s be clear. I wholeheartedly agree there’s plenty of great stuff going on in the world, from new vaccines to the renewable energy cost collapse to the ongoing joys of K-Dramas.

But (geo) politically and economically it’s been rough sledding. Better, in some respects, than it might have been, especially when it comes to the US economy. But thin gruel elsewhere at best, and war at worst.

Here are five fairly random graphs I came across just this week that shine light on the gloom.

Graph #1 from: Britain has been reduced to Trabant-status among the West

In this Telegraph article the author rightly accuses the British State of self-harm against its own economy and citizens, but studiously avoids mentioning Brexit as one of the causes. (See Goldman’s latest estimate on the damage from Brexit in the links below).

Anyway his graph illustrates why workers feel they’ve not gotten any richer for many years.

It’s because they haven’t. That’s a fact, not me being negative.

Graph #2 from: UK economy falls into recession

Here we see the UK economy has stagnated for two years – and was in recession for the second half of 2023.

That’s a fact, not me being negative.

Graph #3 from: What is the UK inflation rate and how does it affect me?

Households are living through the worst inflation shock for generations. January inflation unexpectedly held steady – a small rise was forecast – which was welcome. But inflation is still double the official target rate.

Inflation should fall fast from here (more global strife notwithstanding).

But the pain is real and it will have lasting consequences.

Graph #4 from Where UK house prices officially fell the most in 2023

Falling house prices are good news from the personal perspective of priced out would-be buyers. You can argue too that a permanently lower level of prices would help the economy, by aiding mobility or redirecting investment to more productive areas.

Nevertheless, their own home is many people’s biggest investment and asset. Lower prices make them and the country poorer.

Property prices fell in 2023 as mortgage rates leapt higher.

That’s a fact, not me being negative.

Graph #5 from Decarbonsation, an annually-updated presentation by analyst Nat Bullard

You may be a Blimp-ish climate change denier – aka scientifically wrong – but for the rest of us, this is grim viewing.

Happily there’s far more positive visuals showing progress in the fight to curb carbon emissions if you click through the rest of Nat’s presentation.

But that’s for the future. Right now things are bleak.

When the facts change I’ll change my mind

I’m not having a go at any reader who feels Monevator has been a bit morose in recent years. Reader SLG above was perfectly civil about it – and I appreciated their nice words about the effort that goes into compiling these weekly links, too.

I am fed up with the negativity myself. The difference is I believe it is out in the world, and that noticing it is warranted.

Putting your fingers in your ears doesn’t make it go away.

Coming out of the financial crisis Monevator was sometimes accused of being a haven for happy-clappy permabulls. I look forward to getting there again.

And as I’ve already said, it’s true things could be worse.

The greatest architects of Britain’s self-harm – among the worst set of politicians we’ve seen in power in the UK for hundreds of years – are no longer fully in charge. The virus that was responsible for even more of the recent misery is a fading memory. Wars lamentably rage on, but so far they’ve not metastasised a into wider conflict.

Oh and at least it’s not the 1970s, as a wonderful series of podcasts from The Rest Is History this week reminded me. Start with that first podcast covering 1974 and work your way through the darkly comic chaos.

We survived the 1970s and we will get through this. Poorer, but who knows maybe wiser for the journey.

Have a great weekend.

[continue reading…]

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