Income Tax rates and bands – What do you need to know?

Understanding how Income Tax works is vital for anyone earning an income in the UK. This is particularly true if you are self-employed, a company director or someone who has various streams of income. 

Even if you are on Pay as You Earn (PAYE), having an understanding of tax bands can help you make better financial decisions.  

What are tax bands? 

Income Tax is generally calculated based on a progressive system, which means the more you earn, the higher the percentage of your income you will pay in tax, but only on the income over certain thresholds.  

The thresholds are categorised into different ‘bands’ or tiers’, which dictate how much tax you owe.  

The Income Tax rates for the 2023/24 tax year are as follows for England, Northern Ireland and Wales: 

• Personal Allowance: Up to £12,570 – 0 per cent  
• Basic rate: £12,571 to £50,270 – 20 per cent 
• Higher rate: £50,271 to £125,140 – 40 per cent  

• Additional rate: Over £125,140 – 45 per cent 

Scotland has different rates and bands.  

How do tax bands work? 

Tax bands are applied progressively. Please see how below: 

• Personal Allowance: Everyone has a tax-free personal allowance of £12,570. This means the first £12,570 of your income is not subject to tax.  

• Basic rate: If your income falls between £12,571 and £50,270, you will pay a tax rate of 20 per cent on this portion of your income.  
• Higher rate: Income between £50,271 and £125,140 is taxed at a 40 per cent rate.  
• Additional rate: Any income over £125,140 is taxed at 45 per cent.  

Example calculation  

Let’s say you earn £60,000 per annum.  

1. The first £12,570 is tax-free due to the Personal Allowance 

1. The next £37,699 (£50,270 – £12,571) is taxed at 20 per cent, amounting to £7,539.80 

1. The remaining £9,729 (£60,000 – £50,271) is taxed at 40 per cent, amounting to £3,891.60. 

The total tax liability will be £7,539.80 (basic rate) + £3,891.60 (higher rate) = £11,431.40 

Understanding Income Tax rates and bands can seem complex, but breaking it down makes it more manageable.  

It is essential to stay updated as tax bands and rates can change.  

Always consider consulting an accountant for tailored advice to your situation.  

If you would like advice on your personal Income Tax situation, please don’t hesitate to get in touch.