Tax rates and taxable bands

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 10% rate of tax is sometimes available on up to £2,710 (2011-12 £2,560) of income from savings or investments (e.g. interest on bank or building society accounts, bonds, gilts etc).

You only get the 10% rate on your savings income if your other income in the tax year is low. Other ‘non-savings’ income includes income from employment, pensions, self-employment, rental income etc.  If you are under 65, your income includes some income from savings, and your ‘non-savings income’ is less than £10,815 then some or all of your savings income will be taxable at 10%. The figure of £10,815 is your personal allowance (£8,105) plus £2,710.  If you are over 65, the 10% savings rate should apply if your  ‘non-savings income’ in 2012-13 is under £13,200 (for ages 65 -74) or £13,370 (for ages 75+). The calculation to work out how much income can be taxed at  the 10% savings rate  is quite complex. Essentially the 10% rate only applies to the amount of savings income which falls within the £2,710 band of income first taxable immediately after the personal allowance. Remember, savings falling within the personal allowance are not taxable at all and so the savings rate does not need to be applied.

There is guidance on the HMRC website at http://www.hmrc.gov.uk/tdsi/ten-per-cent-guidance.htm. See also:  Taxation of savings and Pensioners sections.

The dividend ordinary rate of 10% - dividend income is taxed at 10% where total taxable income is no more than £34,370. There are higher rates of tax on dividends of 32.5% and 42.5% on dividend income where total income is above this level – these correspond to the 40% and 50% income tax bands.

The basic rate – the normal rate of tax for most people – 20% on income up to £34,370

The higher rate – a higher rate of tax for those with higher incomes – 40% on income between £34,370 and £150,000 per year

The additional rate of tax – a higher rate of tax of 50% for those with an income over £150,000 per year. The March 2012 Budget proposal is  to reduce this to 45% from April 2013.