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Income tax

Rates

Income tax applies to the amount of income after deduction of personal allowances.

Income is taxed in a specific order with savings and dividend income taxed last.

The dividend rate is partially satisfied by a 10% tax credit given on dividends. Therefore for 2015/16 dividends falling within the basic rate band do not suffer any additional tax. For 2016/17 onwards the tax credit on dividends is abolished.

Savings and dividend allowances are available for 2016/17 onwards.

Dividend income and savings income falling within the dividend and savings allowances still form part of total income of an individual.

The starting rate band is only applicable to savings income. The 0% rate is not available if the taxable amount of non-savings income exceeds the starting rate band.

2016/17:

Type Band of taxable income (£) Rate (%) Dividend rate (%)
Starting rate for savings 0 – 5,000 0 N/a
Basic rate 0 – 32,000 20 7.5
Higher rate 32,001 – 150,000 40 32.5
Additional rate Over 150,000 45 38.1

Savings Allowance:

Banding of taxpayer Amount (£)
Basic rate 1,000
Higher rate 500
Additional rate 0

Dividend Allowance:

Banding of taxpayer Amount (£)
All 5,000

2015/16:

Type Band of taxable income (£) Rate (%) Dividend rate (%)
Starting rate for savings 1 0 – 5,000 0 N/a
Basic rate 0 – 31,785 20 10
Higher rate 31,785 – 150,000 40 32.5
Additional rate Over 150,000 45 37.5

Note…

  1. The starting rate band is only applicable to savings income. The 10% rate is not available if the taxable amount of non-savings income exceeds the starting rate band.

Allowances

A personal allowance gives an individual an annual amount of income free from income tax.

Income above the personal allowances is subject to income tax.

The personal allowance will be reduced if an individual’s ‘adjusted net income’ is above £100,000. The allowance is reduced by £1 for every £2 of income above £100,000.

An individual born before 6 April 1938 may be entitled to an age related personal allowance (for 2015/16) and if appropriate a married couple’s allowance but these are reduced if ‘adjusted net income’ is above the age allowance income limit (see table below).

Transferable allowance – 10% of the personal allowance may be transferable between certain spouses where neither pays tax above the basic rate. This Transferable Allowance is not available to couples entitled to the Married Couple’s allowance.

Personal Allowance

2016/17:

Age at end of tax year £
Personal allowance 11,000
Transferable allowance 1,100

2015/16:

Age at end of tax year £
Born after 5 April 1938 10,600
Transferable allowance 1,100
Born before 6 April 1938 1 10,660
Age allowance income limit 27,700

Note…

  1. Reduce age allowance by £1 for every £2 of ‘adjusted net income’ over £27,700.

Blind person’s allowance

£2,290 (2016/17 and 2015/16)

Married couple’s allowance

Either partner born before 6th April 1935.

The amount of reduction for Married couple’s allowance depends on income of husband or, for marriages (or civil partnerships) after 4 December 2005, the income of the highest earner.

Reduction in tax bill 2016/17 (£) 2015/16 (£)
Maximum 835.50 835.50
Minimum 322.00 322.00
Age allowance income limit 1 27,700 N/a

Note…

  1. Reduce married couples allowance by £1 for every £2 of ‘adjusted net income’ over £27,700.