Most people know their height, their shoe size – to be frank, most men spent a furtive teenage moment measuring their intimate details with a ruler.
An awful lot of us though have no idea where the different tax brackets start and end, nor where our income sits within them.
I find that pretty ironic given how much time we spend at work, wishing we earned more money, not to mention all the debates about public services, taxes, and spending.
Like nearly every student with a soul, I was a leftwing tax-and-spender before I got my first full-time job. Then I started work, saw how much money was taken out of my meager reward for ramming my head repeatedly into the coalface for 40 hours a week, and, economically at least, my head turned to the right. (It also spurred me into getting a more enjoyable job!)
As my dad used to say, quoting somebody else:
If you’re not a socialist at 20 you haven’t got a heart.
If you’re not a capitalist at 30 you haven’t got a head.
With the UK confronting a towering national debt and the righteous mob on Question Time rejecting all specific proposals to tackle State bloat, you might think it’s a wonder that income taxes didn’t rise over the past few years.
And you’d be right to wonder, because although it attracted little comment at the time, in 2010 income taxes did rise.
From 6th April 2011 they rose again. Once more, nobody seemed to notice. That’s because income taxes rose the modern way, by the stealthy adjustment of tax brackets to drag people into the higher rate, ignoring the reality of inflation.
In addition, in March 2011 the government announced it would begin uprating allowances with the CPI inflation rate, rather than the higher RPI rate – another way to wring a few pennies from us without any nasty headlines.
It’s only in 2014 that higher-rate payers1 have had some very minor relief. As of April 2014 the higher rate threshold (where the 40p rate kicks in) has inched up from £41,450 to £41,865. It will rise by a further 1% to £42,285 in 2015.
Before you break out the cut-price champagne from Aldi, let’s look at the numbers to see how you can calculate your own income tax position.
2014-2015 income tax allowances
Every tax year runs from 6 April to 5 April the following year. All of us have a basic level of income that we’re allowed to earn during each year before the government starts taking its share via tax.
What this sum is for you depends on your age and your total income in the tax year, including income from all sources such as pensions, investments, and so on.
Here are the basic allowances2 for 2014 to 2015, plus last year’s for context:
|For those born between 6/4/1938 and 5/4/1948||£10,500||£10,500|
|For those born before 6/4/1938||£10,660||£10,660|
|Income limit for personal allowance||£100,000||£100,000|
|Income limit for allowances if born before 6/4/1938||£26,100||£27,000|
The hiking of the basic personal allowance to £10,000 has been the only good news on income tax over the past few years. A higher allowance potentially reduces tax bills (though other changes have outweighed the benefit for higher earners), and I think it’s psychologically heartening – and fiscally meaningful, if you’re a lower-earner – that the first £10,000 you earn is tax-free.
For those gallivanting within pensionable age, the news is less rosy. The personal allowance has been frozen at £10,660. The plan is to eventually have one personal allowance for all ages.
For more details of the more Byzantine age-related allowances, see the income tax allowances page from Citizens Advice Bureau.
If you’re on a much-coveted six-figure salary, the news is mixed. Since 2010, anyone with an income over £100,000 has seen their personal allowance reduced by £1 for every £2 of income above the £100,000 limit. This applies irrespective of age, and effectively increases the marginal rate of tax between £100,000 and £121,000 to 60%.3
On the other hand, the 50% additional tax rate for those earning over £150,000 has been cut to 45%, as detailed below.
2014/2015 tax brackets
The rate of tax you pay depends on your total income from all sources – salary, gross cash interest, dividends, pensions, property letting income, and so on.
Add it all up to get your total income, and then subtract your personal allowance from the table above to see which tax bracket you fit into:
|Starting rate for savings: 10%.||£0-£2,790||£0- £2,880|
|Basic rate: 20%||£0- £32,010||£0- £31,865|
|Higher rate: 40%||£32,011-£150,000||£31,866-£150,000|
|Additional 45% rate (from 6/4/2013)||Over £150,000||Over £150,000|
For example, if you will earn £40,000 in 2014/15 from all sources and you’re under 65, then your taxable income is £40,000 minus your basic allowance of £10,000, so £30,000.
That will put all your income within the 20% tax bracket, as it’s less than £31,865 in the table above; you’ll pay no tax on the first £10,000 you earn, and 20% on the remaining £30,000.
If you earn £50,000, then by the same method4 your taxable income is £40,000. The first £31,865 will be taxed at 20%, and the other £8,135 at 40%.
Note that in nearly all cases you will also pay hefty National Insurance contributions.
Two further complications:
The special savings tax rate of 10% is for savings income only. It is most relevant to those living off their savings and/or their spouses (in which case make sure you have investigated HMRC’s little-known form R85 to get your interest paid without tax taken off) and those with very low taxable earnings and savings income. See this HMRC page for more.
From April 2015 the 10% savings tax rate will be abolished and replaced with a new 0% rate. Also, the special savings rate band will be widened that year to £0-£5,000. The official government factsheet has more details.
Dividend income from shares is taxed differently again: there’s theoretically a 10% ordinary rate; a 32.5% dividend for higher rate taxpayers; and an additional rate of 37.5% for any lucky readers earning over £150,000 a year. (Important note: The effective rate you pay in practice is lower – see my article explaining tax on dividends for more information).
A fiscal drag
Provided you know roughly what income you’ll get from your day job plus other sources like share dividends, you should now have a pretty good idea of what tax you’ll pay in 2014-15.
Are you feeling het up about it? I hope so!
Most middle-income earners are paying much more tax than they might have expected a few years ago, and many don’t even realise it.
Check out the table above and you’ll find the 40% tax bracket in 2014/15 starts at £31,866. Just a few years ago it began at £37,401. Inflation has been running above target for years, but the higher-rate tax threshold has been lowered, not raised.
As a result, the IFS estimates two million more people will have been dragged into the higher-rate tax bracket under the Coalition government.
Do you recall the big debates about massively increasing the tax burden on the moderately well-off? Me neither. We’ve heard a lot about how the very rich have been taxed (or not) and how the poor have been hit by welfare cuts, but the far bigger take from the 40p rate has been a stealth tax par excellence.
In addition, higher rate National Insurance was doubled in 2011 to 2% for higher-rate tax payers. (This comes on top of the 12% contributions deducted from earnings below that level).
This means that effectively the standard higher tax rate on earnings is 42%.
Of course, the personal allowance has been raised over the past few years, too. Not enough to offset the fiddling around with the 40% tax threshold for most higher earners, though.
Now, you may say it’s better that lower paid workers have taken less of the strain of sorting out Britain’s public finances than the better-off, and I’d agree.
But don’t let anyone tell you that the Coalition has only hit the poor and given the middle classes an easy ride.
It’s just not true.
Resistance is tax-efficient
If you’re a higher-earner wondering why you feel poorer compared to a few years ago (and unless you’re benefitting from an ultra-cheap mortgage, most do), then higher taxes, above-target inflation, and the withdrawal of certain perks such as child benefit for higher income households explains much of it.
Perhaps you think this is a fair price to pay for the banker-brokered recession, the Brown government’s over-promising, and the measures needed to keep interest rates low to bail out the millions who over-stretched in the housing bubble.
I’m not sure I do, though – and I’m certainly not going to leave a tip.
However, I’m also a law-abiding citizen. In practice, resistance means taking sensible steps to avoid paying more tax than you have to.
Higher rate taxpayers might also want to consider making extra contributions into their pension. Done carefully, you can effectively get the 40% tax you pay wiped out via a reclaim on your self-assessment form, though remember you’ll probably pay some tax when you withdraw a pension income later.
Even I, a former pension-o-phobic, now prefer to lock away some of my money for 20 years in a pension rather than chuck it away pay 40% tax on it.
I’ve previously used VCTs to reduce my tax bill, but as my income has increased and I’ve had my fill of these horridly illiquid vehicles, I bit the bullet and opened a Self Invested Personal Pension.
Recent changes have made pensions much more attractive than they were.
Taxing matters for the hardly rich
If you live in Hull or Anglesey, perhaps it seems rather mean-fisted of me to be earning a higher-rate salary and yet trying to shelter every penny I can from tax.
To which I say: Let me take you by the hand and lead you through the streets of London. Or at least take a look at what £250,000 buys you in terms of a home down here in the South East. A mansion it is not.
Higher-rate tax is no longer the preserve of the wealthy by any sensible definition. As a result, nor is tax avoidance (as opposed to illegal tax evasion).
Finally, if you are proper income-wealthy – that is you’re earning over £100,000 a year – then you’ll need specialist advice or a lot of long nights with boring documents. The political imperative to meddle with the tax system for maximum democratic output has made taxes above this level about as predictable as a silver orb flying about a pinball machine.
The bottom line is taxes have been steadily rising, and you’ll have less money than you might have expected. Take cover, or take the pain.
- Hargreaves Lansdown has a great page on all the various tax bands.
- Use this calculator to see how much tax you’ll pay in 2014/2015.
Note: This page was updated in May 2014 with new UK tax bracket and allowance information. Comments below may refer to old tax brackets or old information, so please scroll down.
- I can’t bring myself to write “high earners”, given when the 40% rate now starts. [↩]
- Special allowances apply for elderly married couples and blind people. See this HMRC table for details [↩]
- Above £121,000 the marginal rate drops back to 40% because all your personal allowance will have been used up. [↩]
- £50,000 – £10,000. [↩]