UK tax brackets and personal allowances

Hey, do you know your tax bracket? I’m talking about those all-important bands that determine whether you’re a basic, higher, or additional rate taxpayer.

Most people know their height, their shoe size… To be frank, most men spent a furtive teenage moment with a ruler.

But many of us have no idea where each tax bracket starts and ends. Nor where our own 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.

Yet we often don’t know exactly how much of our own salary we get to keep.

Your tax bracket determines your take home pay

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

Then I got a job.

Suddenly I saw how much money would be taken out of the meager pay I received for ramming my head repeatedly into the coalface for 40 or more hours a week. In terms of economics, I turned to the right.

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.

Well, if you do not know your tax bracket at any age then you haven’t got a clue.

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

And so when we start work – and start paying taxes – we’re shocked by the reduction in the income we thought we’d signed up to.

Beyond the sticker shock

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

Armed with this knowledge, you can also be more strategic about adding money to ISAs and pensions.

The tax system gets progressively more punishing as your salary passes through certain thresholds. You might therefore prefer to put more of your higher-taxed earnings into a pension.

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

2022/2023 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 share via income tax.

The personal allowance system was simplified a few years ago. These days we all get the same personal allowance, regardless of age.

  • For 2022/23, the personal allowance is £12,570.

This is the same as it was in 2021/22.

Like several other allowances, the personal allowance has been frozen until 2026. This is purportedly to raise revenue to pay for the Covid relief measures.

The freezing means that as your salary rises between now and 2026, proportionally less of it will be covered by your personal allowance. You’ll therefore pay a greater share in tax.

Blind person’s and transferable marriage allowance

There are two other personal allowances you might qualify for:

  • Blind person’s allowance – £2,600

  • Transferable marriage allowance – £1,260

These are added to a standard personal allowance.

They can give you or a spouse a slightly higher personal allowance, if you qualify.

The 60% tax trap

If you’re on a much-coveted six-figure salary, I’ve got some less pleasant 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 (until £150,000) the rate drops back to 40%. That’s because your personal allowance has been totally whittled away by that point.

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

The child benefit booby-trap

On a related note, there’s a similar effective hike in the marginal tax rate when a parent earns over £50,000 a year and so is disqualified from claiming child benefit.

You may want to see if you can increase your pension contributions in order to keep your child benefit and so avoid being penalized.

2022/2023 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.

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

You then subtract your personal allowance from that total to see which tax bracket you fit into.

For England, Wales, and Northern Ireland:

Income Tax Rate2021/20222022/2023
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-£150,000£37,701-£150,000
Additional 45% rateOver £150,000Over £150,000

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 Which for the specifics.

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

  • Basic rate 20% – £12,571 to £50,270

  • Higher rate 40% – £50,271 to £150,000

  • Additional rate 45% – £150,000 to the moon

Again, the higher rate threshold has been frozen until 2026.

How tax brackets work to determine the tax you pay

We’ll run through a couple of examples.

Basic rate payer

Let’s say you will earn £45,000 in 2022/23 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

Note that 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, with its own fiddly rules.

The National Insurance rates were increased by 1.25% in April 2022, ostensibly to pay for the NHS and social care.

However there is some good news. From 6 July 2022 the personal allowance will also mark the threshold for beginning National Insurance payments.

This means that everything you earn within the personal allowance from that date on is 100% yours to keep – with no tax or National Insurance to pay.

It’s a rare and 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!

A brief look at National Insurance rates

Just briefly for the purpose of this overview, most employees currently pay what are called ‘Class 1’ contributions at the following rate

Your salaryClass 1
National Insurance rate
£190 to £967 a week (£823 to £4,189 a month)13.25%
Over £967 a week (£4,189 a month)3.25%

Source: HMRC

Your employer also pays National Insurance contributions, based on your salary. This gives rise to the technique of ‘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 both pay less National Insurance.

Self-employed people pay ‘Class 2’ and ‘Class 4’ contributions, depending on profits. These are typically worked out via your self-assessment tax return.

As I’ve already bemoaned, it’s all an extra ball-ache.

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

A fiscal drag

The tax take from British workers has mostly been rising for the past decade or so.

This has partly been achieved by what’s called ‘fiscal drag’. This sees rising salaries taking more workers into the higher rate tax bands, due to the tardier raising of the taxation thresholds.

After the financial crisis of 2008/2009, the threshold for higher rate tax was explicitly lowered, even as inflation ran over target. The move dragged millions more people into the higher-rate tax bracket.

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

On a brighter note, 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.

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

Bring me higher (tax) love

Some may quibble with the specifics of my simplified narrative above. But it’s directionally correct.

See this graph from the IFS:

Source: IFS

We can see that the numbers paying higher rates of tax (red line) has mostly increased since 2010. That’s even as the total number of taxpayers (green line) has fallen.

Perhaps that’s fine. You could argue it’s a reflection of rising wealth inequality, for instance. We can have the political debate another day.

I’m just pointing out how things have been going – and what might happen next.

Because as I type, inflation is running at 7%. And remember, both the personal allowance and the threshold for higher rate tax are frozen until 2026.

These two factors are near-certain to see even more workers dragged into paying higher rate – 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 once expected to, higher taxes may have something to do with it.

(Okay, and rising house prices, 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.

Again, I am well aware that the median annual income in the UK for employees is only a little over £24,000 – 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 on this, for what it’s worth.)

The fact stands. Paying higher rate tax these days hardly makes you Bertie Wooster.

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 avoid paying more tax than you have to.

You can 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, the extra costs, and the far greater risks.

Certainly higher rate taxpayers should consider making maximal contributions into their pension. Most people are allowed to pay up to £40,000 into their pension in a year, 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 40% tax you’d pay 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. Just remember you’ll probably 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-phobe, now prefer to lock away some of my money for many years in a pension rather than chuck it away by paying 40% tax on it today.

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

Note: This article was updated in May 2022 with the latest UK tax bracket and personal allowance numbers. Comments below may refer to old information. Check the dates if unsure.

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