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%.
- 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.
- 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. [↩]
- 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! [↩]
- Or 100% of income, whichever is lower. [↩]
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.
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.
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.
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).
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.
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…)
>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
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.
@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!
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? 😉
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?
@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/
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
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.
@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.
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
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!
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*.
@Gregor
If you want to reclaim tax, there’s some information here: http://www.hmrc.gov.uk/incometax/overpaid-thro-job.htm
@Greg — Indeed. But that’s another article in itself.
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?
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.
@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.
Oops – I meant to write invidious (but the tax system is insidious too!).
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!
> 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.
> 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.
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.]
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.
> 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.
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!
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.
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.
The tax/etc advantages of putting money into a pension to avoid HR tax is why the annual allowance is now limited to £40k.
> 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.
@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.
> 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.
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
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.
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?
@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.
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.
Interesting read, especially since this article is now 3 years old. I’m not entirely sure if wealth can be determined. As others mentioned, ‘wealth’ nowadays doesn’t get you far in life. Take the 2017 tax brackets as an example, the higher tax band stands at a threshold of £45,000 plus, which is taxed at 40% and what the government consider ‘wealthy’.
The truth of the matter is with this income, a council flat in London is barely affordable…
So not quite sure how the government defines wealth if I’m completely honest.
This is a really great tax calculator that compares tax thresholds over the past few years: https://www.income-tax.co.uk/
Worth mentioning the child “benefit” (it’s really a tax rebate for those with a job) claw back at 50k. Which leaves those with 3+ kids facing with a massive marginal tax rate between 50-60k. So big, I know plenty who prefer to earn a bit less and have an easier life…
That’s right Andy, for 22/23 tax year you’re looking at a 62% marginal tax rate on the £50k-£60k band even if you only have 2 kids. If you have 3 or 4, then the rates rise to 69% and 77% respectively.
Much better to either earn less or at least salary sacrifice, or find sources of income that don’t count towards it (rent a room, spouse takes part time job, etc).
The median wage should probably also be updated for the 2022/3 tax year. The source you’ve linked to is now paywalled, but the ONS provides a similar datapoint, median equivalised household income, measured at £29900 for the 2020/1 tax year.
https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/householddisposableincomeandinequality/financialyear2020
And whadya know, the median income is up to £31,400 for the 2020/1 tax year (I misread the year in the previous link, it was tax year ending in 2020, not starting, so for the 2019/20 tax year):
https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/householddisposableincomeandinequality/financialyearending2021
If household income isn’t good enough, https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/bulletins/annualsurveyofhoursandearnings/2021 provides median weekly earnings
£504 per week for all employees => £26,200 yearly
£611 per week for full time only => £31,770 yearly
Sorry for multiposting, please choose the most fitting statistic and delete the other comments.
@Pikolo — Thanks for the data. However you’re looking at household income there (which can be two wage earners, or even I believe more than that if say a child works but lives at home — not certain of the latter actually) rather than what a single person earns.
I believe I did get an up-to-date figure for median earnings when I updated the piece. But I’ll double check when I get a moment, based on your paywall comment.
@David @Andy — I did have a bit about child tax credit in before, but I cut it out as the change was made, what, ten years ago? I agree it’s significant but it also felt dated with respect to this piece. It’s a bit more tangential than the tapering of the personal allowance above £100,000.
I wrote about the merits of boosting a pension to keep it back in 2012, incidentally 🙂
https://monevator.com/how-to-keep-child-benefit-and-retire-richer/
I was going to say about the marginal rate of tax for people claiming child benefit, but see a number above have. I actually think it’s important as a lot of people are in the £50K-60K bracked having been fiscally dragged into it (like the 100K smoke and mirrors too). Obviously more will be too as TI states.
TI Perhaps have a line item to your link about it in the main text since having to get to the link on resp 50 is quite a trek 🙂
TI, you have a type. You talk about a 45K example, then proceed to use £40K but still have the answer at what 45K would be. Just change 40K to 45K.
– ‘Most people can pay £40,000 into a pension a year, so there’s a lot of headroom.’
This is nit-picking because I understand the point you’re trying to make. However, ‘most people’ certainly cannot pay 40k, a year, into a pension!
When I started work the basic rate of tax was 30%. They don’t know they are born…
@all — Okay, I’ve taken the hint on child benefit being important enough to at least note and have added a couple of sentences accordingly. Cheers for the feedback.
@Marked — Thanks for the typo spot! Came from updating the old version. Fixed now.
@Hague — Yes, it means “most people” in the sense of “most people have a £40,000 annual allowance” not that they can actually do it. I’ll look at rephrasing slightly. 🙂
Technically you can only pay the lesser of your total earnings in the year or £40K in to a pension, not £40K arbitrarily if you have a lump sum to hand (e.g. via a gift or inheritance).
Even with carry-forward if you earn £30K this year, have contributed £5K already, and suddenly inherit £100K, you can only put £25K more in!
@Andrew — Yes, that’s mentioned in the footnote. 🙂
Thanks for the child benefit update – it’s very relevant for edge cases, like mine.
I was recently forced back into permanent employment (thanks Sunak & IR35, a few more £££ into the coffers of Infosys at my expense, and a loss to HMRC) and, as a single income household, did some “back of fag packet” effort/reward maths. Due to extortionate levels of income tax I worked out that for me, under current family circumstances, I’m better off to earn 90k in a tax year, then stop working. Obvs 40k to pension, 50k for living expenses. My employer doesn’t yet know I’ll down tools for a period each financial year, but I prefer to have the family time instead of working to fund the govt and being grateful for the small % they allow me to keep. Crazy we have a tax system that discourages work.
Does anyone know how the pension top up works for the self employed? If I was to earn say £55,000 but put £5000 into a SIPP before the tax deadline, would I only pay tax on the £50,000? I’ve tried to have a look everywhere but I’m not sure it’s that straight forward?
@Gary — That’s basically how it works, yes.
If you’re a sole trader taxed via self-assessment it works just like that.
If you’re set-up as a limited company then the pension contributions are a cost deducted from your revenues before any profit and tax is calculated, so it amounts to the same thing. (You don’t pay tax on revenues spent on costs, and you wouldn’t pay dividend tax on the money leaving the company).
Note: This is not personal tax advice, I don’t know your circumstances, I’m just a blogger on the Internet. Please DYOR. 🙂
@The Investor – I do trade as a sole trader and will have a chat with my accountant before doing anything. Thanks for the ‘blogger on the internet’ advice
> 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.
I’d be grateful if anyone had a clear explanation how the total income is calculated for the purpose of setting the amount of interest allowance, dividend tax rate and CGT rate.
Are interest and dividends *below the respective tax-free allowances* added towards that total income figure?
Do employee pension contributions reduce that total income?
Do charity donations reduce it?