PLEASE NOTE: The charity TaxAid advises only those people on low incomes whose problems cannot be resolved with HMRC.

Tax rates and taxable bands

Income Tax

Income tax is paid at different rates on different types of income. The rate of tax also changes with the amount of income.

The main rates of income tax are:

The starting rate for savings – a 0% rate of tax is available for  savings (in 2015-16 and 2016-17), subject to strict conditions, to cover savings income (of income from savings or investments, e.g. interest on bank or building society accounts, bonds, gilts etc.) of up to £5,000.

You only get the 0% rate on your savings income if your other, non-savings, income in the tax year is low. Other ‘non-savings’ income includes income from employment, pensions, self-employment, rental income etc.

This means that for an individual entitled to the £11,000 personal allowance in 2016-17 (£10,600 personal allowance in 2015-16), the 0% rate for savings would be available only if their non-savings income is less than £16,000 (£15,600 2015-16).

From 6 April 2016, there is also a Personal Savings Allowance of £1,000 for a basic rate taxpayer (£500 for higher rate taxpayer). This means that the first £1000 (£500 for higher rate taxpayers) of savings income is free of tax.

There is guidance on the HMRC web pages at https://www.gov.uk/apply-tax-free-interest-on-savings.

The dividend allowance – from 6 April 2016

From 6 April 2016, the way dividends are taxed changes. There is now a Dividend Allowance of £5,000. This mean that the first £5,000 of dividend income is not taxed, but additional tax is due if you have dividend income over this level and your total taxable income is greater than your personal allowance.  See https://www.gov.uk/government/publications/dividend-allowance-factsheet/dividend-allowance-factsheet for details.

Dividend income – to 5 April 2016 – the dividend  ordinary rate of 10%

To 5 April 2016, dividend income is taxed at 10% where total taxable income is no more than £31,785 in 2015-16. There are higher rates of tax on dividends of 32.5% and 37.5%, where total income is above this. These correspond to the 40% and  45% income tax bands.

The basic rate – the normal rate of tax for most people – 20% on income up to £32,000 (£31,785 in 2015-16).

The higher rate – a higher rate of tax for those with higher incomes – 40% on income between £32,000 and £150,000 (£31,785 and £150,00 in 2015-16).

The additional rate of tax – a higher rate of tax of 45% for those with an income over £150,000 per year.