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:

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:

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%.

• Learn more if you’re a masochist on the official National Insurance pages.

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. [↩]

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. [↩]

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.

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