the uk income tax bands explained in simple terms

Today I want to cover the topic of taxes in the UK. And in particular – the UK income tax. The UK has the so-called progressive tax system. What this means is that the more you earn the more tax you have to pay. 

This topic is simple and easy. However I was really confused when I was looking into taxes. Based on that, I decided to share my personal experience and hopefully make the tax a bit easier for you to understand.

what are the UK income tax bands and how are these set up?

There are currently four different tax brackets in the UK. Just below you can see a summary of all four of these. The tax you have to pay varies from 0% all the way up to 45%.

Each individual in the UK doesn’t have to pay taxes on the first £12,570. Well, actually there are some who have to pay tax even on this. I will explain when you lose your tax free allowance further in the article.

This amount is called your personal allowance. You don’t have to pay any tax on your personal allowance. This is obviously in place to help those of us who are less fortunate and are earning less money. Those of us who are in better paid jobs do you benefit from this as well.

does income tax go up significantly the moment I earn a £1 above bands limit?

This was actually the point that was confusing for me back in the days. I was thinking, as I move from £12,570 (or actually, the amount that it was back then as this can change from year to year) into a higher tax bracket all of my income would be taxed. This however was my biggest mistake.

In my head, any amount earned up to £50,000 was taxed at 20% basic rate. This would mean £10,000 of tax if you were at the top of that band. The reality however is different. The moment you start earning in the basic tax bracket the first £12,570 still remain tax-free.

So actually, if you are earning £50,000 a year you would be required to pay tax only on £37,430. This benefit equates to just over £2,500 tax saving for you. The total tax bill would be £7,486.

does the same apply to when I earn even more?

It is the exactly same principle when you move into higher tax bracket. You still get the benefit of your personal allowance which is tax-free. This is followed by 20% tax on the next £37,700. Only then the 40% tax kicks in. You are only paying 40% tax on income above the basic tax rate bracket.

When I wasn’t aware of how the tax worked I was thinking that if I was to move from basic tax bracket just into the higher tax bracket my actual take-home salary would all of a sudden drop due to paying 40% tax on all of my income.

Thanks God I was wrong on this one!!!

who are the ones not to benefit from personal tax allowance?

As I mentioned above there are some people who don’t get the personal tax allowance. Just to remind you, this is the tax-free amount.

Once you start earning over £100,000 that’s the point when you begin to lose your personal tax allowance. For every £2 you earn above that figure your personal tax allowance gets reduced by £1.

As an example, if your total earnings are £110,000 per annum your personal tax allowance would reduce by £5,000. It’s also means that for individuals whose annual income is £125,140 or above there is no the tax-free personal allowance whatsoever.

summary

I hope that the above helped you to understand what the progressive tax system actually means. I know there are many people who find this topic confusing. Some even say that if you earn £12,000 and can only get a small pay rise it isn’t worth doing so.

I was in the same camp myself a while back and this was a massive mistake of mine. I hope the article made this myth a lot clearer for you and gives you confidence to continue moving up the career ladder and earn more money for yourself.