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 for 2012-13 (2013-14 £2,790) 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 for 2012-13, then some or all of your savings income will be taxable at 10%. The figure of £10,815 is your personal allowance of £8,105 plus £2,710. The comparative figure for 2013-14 is £12,230 (£9,440 personal allowance plus £2,790 10% band).
For people entitled to the age allowance (you need to be aged 65 by 5 April 2013), the starting rate limit will be slightly higher.
If you are over 65 in 2012-13, 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+). For 2013-14 these limits are increased by £80 – so for those born between 6 April 1938 and 5 April 1948 the limit is £13,280; and for people born before 5 April 1938 the limit is £13,450. 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 starting rate for savings band . That is the 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 in 2012-13 (£32,010 for 2013-14). There are higher rates of tax on dividends of 32.5% and 42.5% on dividend income where total income is above this level in 2012-13 – these correspond to the 40% and 50% income tax bands. The rates for 2013-14 are 32.5% and 37.5% on income over £32,010, corresponding to the 40% and 45% rates of income tax on other income.
The basic rate – the normal rate of tax for most people – 20% on income up to £34,370 in 2012-13 (£32,010 for 2013-14)
The higher rate – a higher rate of tax for those with higher incomes – 40% on income between £34,370 and £150,000 per year (32,010 to £150,00 in 2013-14)
The additional rate of tax – a higher rate of tax of 50% for those with an income over £150,000 per year in 2012-14; which is reduced to 45% from 6 April 2013.
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