What Is the UK Tax Threshold?
The amount of income tax you pay HM Revenue and Customs (HMRC) depends on how much of your income is taxable, and which tax rate is applicable to each portion of your earnings. As an individual and business owner, these somewhat tricky figures are crucial to your financial calculations. To work out how much tax you owe, you need to total your taxable income, deduct your tax-free allowances and apply the appropriate tax rates.
Here’s What We’ll Cover:
What Is the Threshold for Income Tax?
What Are the UK Tax Brackets for 2019-20?
When Do I Have to Pay Scottish Rates of Income Tax?
What Are the UK Tax Brackets for 2020-21?
How Much National Insurance Do I Pay?
What Is the Dividend Allowance?
This Is Much More Complicated Than I Thought It Would Be…
What Is the Threshold for Income Tax?
The majority of taxpayers are entitled to a personal allowance. This is the amount you can earn without having to pay any income tax at all. The personal allowance can change every tax year, which runs from April 6th one year, to April 5th the next.
We are currently in the 2022-23 tax year, which started on 6th April 2022 and ends 5th April 2023.
- Personal allowance for 2022-23 is £12,570
This means you can earn up to £12,570 before you have to start paying any income tax.
If you earn over £100,000, your personal allowance starts to decrease as your income increases. For every £2 you earn over £100,000, your personal allowance amount is reduced by £1. In the 2022-23 tax year, by the time your income reaches £150,000, your personal allowance amount is down to zero and it is all taxable. This threshold will be lowered to £125,140 in the 2023-24 tax year.
What Is Taxable Income?
Not all your earnings (income) is subject to income tax. Yay! But there are specific things that are required to have income tax paid against them. The whole income tax thing can be a little confusing, so here it is broken down:
The Citizens Advice Bureau has put together a very comprehensive list of all the taxable and non-taxable income options. This deals with less frequently accessed non-taxable income, like maintenance payments, compensation payouts, and adoption allowances. And it also lists other taxable income, such as social security benefits, pensions, and other earned income like bonuses and commissions. So if you have a slightly more obscure source of income, check the list to see if it’s subject to income tax.
The most common taxable income streams are:
- Wages or salary you are paid by your job
- Self-employed profits
- Income from property rental
- Benefits that are part of your job
- Particular state benefits
- Interest made on savings that are over your savings allowance
- Personal, company, and state pensions and retirement annuities
- Some government grants, including the Coronavirus Job Retention Scheme, Self Employment Income Support Scheme, and the Small Business Grant Fund
FreshBooks has a whole section for ‘other income‘ on your dashboard, so you can keep track of everything, all in one place.
Non-taxable income includes:
- Accounts that are tax-exempt, like Individual Savings Accounts (ISAs)
- Dividends that are under your dividends allowance
- Your trading allowance, which is the first £1,000 of self-employed income
- The first £1,000 you make from property rental
- National Lottery and premium bond wins
- Some state benefits
You don’t need to factor in any non-taxable income when you are calculating your tax liability.
What Are the UK Tax Brackets for 2022-23?
Scotland and Wales have some devolved powers from the central government, which include the ability to set their own income tax rates. At the moment, Wales is the same as England and Northern Ireland. Scotland has its own tax brackets and tax rates. The personal allowance amount and other tax allowances and reliefs are applicable in all four UK nations.
In England, Northern Ireland, and Wales, there are three tax brackets and tax rates: Basic rate, higher rate, and additional rate. They vary year-on-year—these are the tax rates for each bracket for the 2019-20 tax year.
- Personal allowance: 0% to pay on earnings between £0 and £12,570
- Basic rate: 20% to pay on income between £12,571 and £50,270
- Higher rate: 40% to pay on income between £50,271 and £150,000
- Additional rate: 45% to pay on income over £150,000
Example:
- You earned £75,000 in the 2022-23 tax year
- First £12,570: £0 tax to pay
- £12,571 – £50,270: 20% tax to pay on this £37,699 (basic rate)
- £50,271 – £75,000: 40% to pay on this £24,729 (higher rate)
You only pay the higher rate and additional rate on the portion of your income that is over the threshold for that bracket, not the whole amount. Otherwise, you pay the basic rate.
Scotland’s Income Tax Brackets and Tax Rates
The Scottish Government has broadened its tax arrangements to include five different tax brackets, each with a different tax rate.
For the 2019-20 tax year in Scotland:
- 0% personal allowance applies to all earnings up to £12,570
- 19% starter rate: Income between £12,571 and £14,732
- 20% basic rate: Income between £14,733 and £25,688
- 21% intermediate rate: Income between £24,689 and £43,662
- 41% higher rate: Income between £43,663 and £150,000
- 46% top rate: Income over £150,000
When Do I Have to Pay Scottish Rates of Income Tax?
You pay Scottish rates of income tax if you:
- Live in Scotland all year round.
- Live in Scotland more than anywhere else in the UK, even if you move back and forth.
- You have more than one home, and your main home is in Scotland. Your ‘main home’ can be owned, rented or you might be lucky enough to live in it for free. If it’s where you spend most of your time, most of your things are there, your family is there and you are registered with titles like GP Surgery, then it’s classed as your main home for tax purposes.
Your tax code will be different if you pay Scottish income tax. The number part of the code will have the prefix ‘S.’ For example, if you get the personal allowance and there are no other special circumstances, it will be S1250L. This lets employers know they have to use the Scottish income tax rates.
If you submit a Self Assessment tax return, there’s a designated box to declare to HMRC that you pay Scottish income tax.
What Are the UK Tax Brackets for 2022-23?
The 2022-23 tax year tax brackets for England and Wales:
- £0-£12,570: 0% personal allowance
- £12,571-£50,270: 20% basic rate
- £50,271 – £150,000: 40% higher rate
- £150,000+ – 45% additional rate
Here are the rates for the 2022-23 tax year in Scotland:
- 0% personal allowance applies to all earnings up to £12,570
- 19% starter rate: Income between £12,571 and £14,732
- 20% basic rate: Income between £14,733 and £25,688
- 21% intermediate rate: Income between £25,689 and £43,662
- 41% higher rate: Income between ££43,663 and £150,000
- 46% top rate: Income over £150,000
Remember, to work out which tax bracket (and tax rate) you’re in, you need to total your taxable income. Take into account any tax-free allowances and apply any tax relief. The answer to that calculation gives you your tax bracket and the rate of tax you have to pay on your income.
How Much National Insurance Do I Pay?
National Insurance contributions (NICs) are another payment you have to make to the government that connects to your income. NICs go towards paying your State Pension and other state benefits. There are different rates, or ‘classes,’ of NICs which are defined by your employment position.
As a self-employed taxpayer or an employer, things get a bit more complicated. HMRC’s full breakdown for each type of taxpayer can be found here.
Employed Taxpayers
For the 2022-23 tax year, you should consult the HMRC website here to determine the rates and thresholds for your National Insurance Contributions (NICs).
For, 2022-23, employees will typically pay NICs at a rate of 12% on their earnings above the Primary Threshold and until their earnings reach the ‘Upper Earnings Limit (UEL)’, equivalent to £50,270 per year, at which point NICs were charged at 2%.
Employers’ National Insurance Contributions
The government announced that employers’ NICs would increase by 1.5% from April 2022. This meant that employers NICs increased to 15.05% on all earnings above the secondary threshold for almost all employees.
This increase was subsequently shelved meaning that different NIC rates were in place during the 2022/23 tax year.
| Rate | Date payable |
| 15.05% | On or before 5 November 2022 |
| 13.8% | On or after 6 November 2022 |
The employment allowance reduces the amount of employer NICs payable by some businesses up to the allowance limit, currently £5,000 per year. The reduction is only available to businesses with a total NIC bill below £100,000. This means at least 90% of small businesses would be eligible for the allowance.
Self-Employed National Insurance Contributions
If you are self-employed, you pay either weekly flat rate Class 2 NICs or Class 4 NICs on your profit.
For 2022-23, Class 2 NICs are charged at £3.15 per week. You pay these if your profits are above the Lower Profits Limit, £11,908 for 2022/23. If your profits are below the Small Profits Threshold, £6,725 in 2022/23, then you can choose to pay voluntary Class 2 NIC.
For 2022-23, Class 4 NICs, the lower limit is between £11,909 and the upper limit of £50,270. The rate is 9.73 percent and then 2.73% above £50,270.
You pay this as part of the self-assessment tax return process. FreshBooks helps you with this process by having all the necessary information organised for you. Its integration with GoSImpleTax even makes the filing easier. You just have to import your FreshBooks profit and loss report straight into your GoSimpleTax account, and it populates your tax return instantly.
What Are Class 3 National Insurance Contributions?
Class 3 NICs are a voluntary option for people with gaps in their National Insurance contribution records. They want to make up the payments so that they definitely get their full State Pension and Benefits. For 2022-23 gaps, you would pay £15.85 per week.
What Is the Dividend Allowance?
If you own shares in a company you get paid dividends, which are considered taxable income. But you don’t have to pay tax on all of your dividend payments. There is an annual dividend allowance that you can earn tax-free. In our current tax year, this is £2,000. If your dividend payments don’t take you over the personal allowance, and you have no other income, then you won’t pay any income tax at all.
If you do have to pay tax on your dividends, the rate is dependent on your tax bracket.
The 2022-23 dividend tax rates are the same.
- Dividend allowance: £2,000 tax-free (dropping to £1000 from April 2023)
- Basic rate taxpayers: 8.75% rate to pay on dividends
- Higher rate taxpayers: 33.75% to pay on dividends
- Additional rate taxpayers: 39.35% to pay on dividends
Example:
In the 2022-23 tax year, you earn £35,000 salary and £5,000 dividends. Your total taxable income is £40,000. Deduct your £12,570 tax-free personal allowance, leaving you with £27,430 taxable income. £27,500 is in the basic rate tax bracket
So your income tax bill is:
- £22,500 in wages taxed at 20%
- £2,000 dividend allowance, tax-free
- £3,000 remaining dividends taxed at 8.75%
Value Added Tax (VAT) Rates
The UK VAT threshold is VAT taxable turnover that is over £85,000 a year. At this point, businesses must register for VAT. You can also become VAT registered if you are under this threshold and it makes better financial sense for your business.
There are three rates of VAT:
- Standard rate: VAT is charged at a rate of 20% and is applicable to most goods and services.
- Reduced rate: VAT is 5% and is applied to things like domestic energy and car seats.
- Zero rate: Zero-rated goods and services are VAT taxable and must be included in your VAT return, but you apply a 0% charge. These items include children’s clothes, books, and some safety equipment.
HMRC provides a comprehensive list of all goods and services, so you can identify the correct VAT rate for your business.
Capital Gains Rates
Capital gains tax is payable on the profit from asset sales of over £6,000. It only applies to the minority of taxpayers and there is a capital gains allowance for individuals of £12,300 for the 2022-23 tax year. The rate of capital gains tax you pay on sales over that amount depends on your other taxable income.
- Standard rate capital gains tax is 10% on all assets, except residential property which is 18% if your overall annual income is below £50,270
- Higher rate capital gains tax is 20% on all assets, except for 28% on residential property if your overall annual income is above £50,270
Your business only pays capital gains on the sale of assets if you are a self-employed sole trader or part of a business partnership. These transactions are part of limited companies’ corporation tax calculations.
A business pays 20% on all assets, apart from any residential property, which is charged at 28%.
There is no capital gains allowance for businesses, but there are tax reliefs that can reduce or delay your bill.
This Is Much More Complicated Than I Thought It Would Be…
You’re not alone in this thought!
HMRC has a massive set of rules and regulations because they need to account for every possible situation. Working out your tax liability for any situation outside straightforward pay as you earn (PAYE) employment needs some time and patience. Wading through all the ifs, ands and buts can make finding the regulations that actually apply to you quite time-consuming.
Luckily, you don’t have the same trouble with your own information. It’s all there, organised and analysed in your FreshBooks account. And when you’re ready to talk to an accountant, it’s ready for them to access. Between the three of us, you’ll be totally tax-efficient—meeting all your liabilities without losing a penny in overpayments.
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