What tax rates apply to me?

Updated on 28 July 2016

Under the UK tax system, generally your earnings and pensions or non-savings income is treated as being taxed first, then your savings income and then your dividends. We explain what tax rates apply to each of these. You can find the current and recent years’ tax rates and bands in the ‘useful links section' of this website.

What tax rates apply to my earnings and pensions or non-savings income?

Earnings and pensions or non-savings income includes wages, pensions, taxable state benefits, profits from self-employment and rental income. If you are a pensioner, it includes all the income you get from your pensions, including the state pension. This is not a complete list. Separately, we provide more information on 'what income is taxable?'.

You have to pay income tax on your 'taxable' earned income – that means the amount that exceeds your tax allowances. You are also allowed to deduct any allowable expenses that you have incurred.

You pay income tax at the basic rate of 20% on your taxable earned income that falls within the basic rate band. The basic rate band for 2016/17 is £32,000.

If you have taxable earned income that exceeds the basic rate limit, you have to pay more tax. This is firstly charged at the higher rate of 40% on the income above the basic rate limit. This means that in 2016/17 you pay tax at the rate of 40% on taxable earned income above the limit of £32,000.

If your taxable earned income exceeds the higher rate band limit, you have to pay tax at the additional rate of 45% on the income above the limit. The higher rate band limit is £150,000 for 2016/17.

If you live in Scotland, you might be a Scottish taxpayer. In this case, the Scottish rate of income tax (SRIT) applies to your earnings or non-savings income. There is more information in our section on the SRIT.

The example Thomas part 1 shows how earnings and non-savings income are taxed.

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What tax rates apply to my savings income?

As your taxable savings income is taxed after your earned income, the tax rates that apply to your savings income depend on how much earned or other non-savings income you have, for example, rents.

If your taxable savings income falls within the basic rate band, you will normally pay income tax at the rate of 20%. The basic rate band for 2016/17 is £32,000. There is also a 0% starting rate for savings income only, which may apply to your savings income in certain situations. If you are a basic rate taxpayer, you will also be eligible for the personal savings allowance.

If you have any taxable savings income above the basic rate limit, you will have to pay more tax on it. This is firstly charged at the higher rate of 40% on the income above that limit. This means that in 2016/17 you will pay tax at the rate of 40% on taxable savings income above the limit of £32,000. If you are a higher rate taxpayer, you will be eligible for a reduced personal savings allowance.

If your taxable savings income exceeds the higher rate limit, you will have to pay tax at the additional rate of 45% on the income above that limit. The higher rate band limit is £150,000 for 2016/17. If you are an additional rate taxpayer, you will not be eligible for the personal savings allowance.

There is more information on the interaction between earned and other non-savings income and savings income and the effect on the rate of tax you pay in the section below.

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How does the starting rate for savings work?

The starting rate for savings is a special 0% rate of income tax for savings income that falls within certain limits. It will only apply to you if your earned income is very low. The starting rate for savings band is £5,000 for 2016/17.

If your taxable earned or non-savings income is above the limit, after taking into account your tax allowances, the starting rate for savings will not apply to your taxable savings income.

If any of your taxable savings income falls within the first £5,000 of the basic rate band, you will not be liable to pay any tax on that taxable savings income, as the starting rate for savings income is 0%.

What are the upper and lower limits of income to get the starting rate for savings?

The guide below just provides the general rule. This may not provide you with the correct information if you have additional tax allowances or expenses that you can claim.

If you have taxable earned or non-savings income of between £11,000 and £16,000, the savings rate will apply to at least part of your savings income.

What are the upper and lower limits of income to get the starting rate for savings if you also get blind person's allowance?

The guide below provides the general rule. This may not provide you with the correct information if you have additional tax allowances or expenses that you can claim.

If you are also receiving blind person's allowance the upper limits will be increased by this amount and you will get the savings rate if your taxable non-savings income is between £11,000 and £18,290.

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How does the personal savings allowance work?

From 6 April 2016, banks and building societies do not deduct tax from savings interest. This means you receive your interest gross. There is also a personal savings allowance, which effectively means you can usually have some savings income tax free.

The personal savings allowance does not reduce the amount of your taxable income. It is a nil rate band of tax for savings interest. You look at whether it applies to you after you have considered whether or not you are eligible for the 0% starting rate for savings.

You have to work out how much your total taxable income is and what your highest rate of tax is to find out what level of personal savings allowance you are eligible for.

  • If you are a basic rate taxpayer (that is, none of your taxable income is taxable at the higher or additional rates of tax), you have a personal savings allowance of £1,000;
  • If you are a higher rate taxpayer (that is, some of your taxable income falls within the higher rate band), you have a personal savings allowance of £500;
  • If you are an additional rate taxpayer (that is, some of your taxable income falls within the additional rate band), you do not have any personal savings allowance.

You only have to pay income tax on savings income that exceeds your personal savings allowance.

Income that is covered by your personal savings allowance still counts as taxable income and therefore still uses up your basic rate band or your higher rate band of tax. This can affect the rate of tax you pay on savings income that exceeds your personal savings allowance, the rate of tax you pay on dividend income, and the level of the personal savings allowance you can get.

There is information about the personal savings allowance, including some simple examples, in the factsheet on GOV.UK.

We have also produced our own factsheet, ‘Savings and dividend tax’, which explains both the personal savings allowance and the dividend allowance (see below). It also contains examples that explain how these two allowances interact and how they interact with the 0% starting rate for savings.

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What tax rates apply to my dividends?

As your taxable dividend income is treated as being taxed after your earned income and your savings income, the tax rates that apply to your taxable dividend income depend on how much earned income and unearned income (including savings income) you have.

The tax rates for dividends are different to those for earned income, other unearned income (such as rents) and savings income. All individual taxpayers are entitled to a dividend allowance.

If your taxable dividend income falls within the basic rate band, you will pay income tax at the rate of 7.5%. The basic rate band for 2016/17 is £32,000.

If you have any taxable dividend income above the basic rate band limit, you will have to pay tax at the higher rate of 32.5% on the income above that limit. This means that in 2016/17 you will pay tax at the rate of 32.5% on taxable dividend income above the limit of £32,000.

If your taxable dividend income exceeds the higher rate band limit, you will have to pay tax at the additional higher rate of 38.1% on the income above that limit. The higher rate band limit is £150,000 for 2016/17.

Before 6 April 2016, UK dividend income used to come with a tax credit of 10%. In effect, the amount you receives was 90% of the gross dividend. This meant that if your dividend income fell within the basic rate band, you did not have to pay any further tax on it, as the tax due was offset by the 10% tax credit.

UK dividend income received from 6 April 2016 onwards does not have a tax credit – the dividend you receive is the gross dividend on which you pay tax.

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How does the dividend allowance work?

From 6 April 2016, UK dividend income is paid to you gross and there is no dividend tax credit. There is also a dividend allowance of £5,000 available to anyone who receives dividend income, which effectively means you can get some dividend income tax-free.

The dividend allowance does not reduce the amount of your taxable income. It is a nil rate band of tax for dividend income. The dividend allowance means that you do not need to pay any tax on the first £5,000 of dividend income that you receive.

You only have to pay income tax on dividend income that exceeds your dividend allowance. You pay income tax on the excess dividends at the special dividend rates.

Income that is covered by your dividend allowance still counts as taxable income and therefore still uses up your basic rate band or your higher rate band of tax. This can affect the rate of tax you pay on dividend income that exceeds your allowance. It can also affect the level of the personal savings allowance you can get.

There is information about the dividend allowance, including some simple examples, in the factsheet on GOV.UK.

We have also produced our own factsheet, ‘Savings and dividend tax', which explains both the dividend allowance and the personal savings allowance (see above). It also contains examples that explain how these two allowances interact and how they interact with the 0% starting rate for savings.

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More information and examples

What if my only taxable income is savings income?

If you have no taxable earned income and all your income is taxable savings income, you will get your personal allowance against part of your income. The next part of your income that falls within the starting rate for savings band will be taxed at 0%, meaning no tax will be due on that part of your income. The next part of your savings income will fall within the personal savings allowance, meaning that it will also be taxed at 0%. The balance of your income that exceeds the starting rate band and the personal savings allowance will be taxed at the basic rate of 20%.

The example Thomas part 2 shows how this works.

What if my non-savings or earned income is above the upper limit for the starting rate for savings?

If your taxable non–savings or earned income is more than the upper limits for the starting rate for savings the 0% savings rate will not be available. The first part of your savings income will fall withint the personal savings allowance. The balance of your savings income will be taxed in full at 20%.

The example Thomas part 3 shows how this works.

What if my earned income is less than my tax allowances?

If your taxable non-savings or earned income is below your tax allowances, you will be able to set some of your tax allowances against your savings income.

Any savings income that exceeds your tax allowances will be taxed at the starting rate for savings of 0% to the extent that it falls within the starting rate band – no tax will be due on this savings income. The balance of your savings income that exceeds the starting rate band will firstly fall within the personal savings allowance – no tax will be due on this savings income. The balance that exceeds the personal savings allowance will be taxed at the basic rate of 20%.

Before 6 April 2016, banks and building societies used to deduct tax at 20% before adding savings income or interest to your account. From 6 April 2016 onwards, banks and building societies do not deduct tax from your interest – you receive savings interest gross.

If some of your savings income is liable to income tax, you will need to tell HM Revenue & Customs (HMRC), so that they can collect the tax that is due. HMRC normally collect the tax through your tax code or through self assessment.

The example Thomas part 4 shows how this works.

What if my non-savings or earned income falls between the lower and upper limits for the starting rate for savings?

If you have used up your tax allowances against your non-savings or earned income, but your remaining non-savings income is less than the upper limit of the starting rate band, you can use the balance of the starting rate band against your taxable savings income. This means that the 0% starting rate will apply to some of your taxable savings income. You will then be able to use your personal savings allowance against your savings income, meaning that it is taxed at 0%. You are then taxed on the balance of your taxable savings income at the basic rate of 20%.

The examples Thomas part 5 and Thomas part 6 show how this works.

What if I have savings income and dividend income?

If you have savings income and dividend income, you may need to make use of both the personal savings allowance and the dividend allowance.

You will need to look at your total income (including dividends) to work out what level of personal savings allowance you have.

The examples Thomas part 7, Thomas part 8 and Thomas part 9 show how this works.

Examples

Thomas part 1

Thomas, born in 1954, works part time and gets wages of £11,400 year. He also has a pension from his old job of £6,000 a year. He has no other income. Thomas' tax is worked out like this:

  £
Earned Income (wages £11,400 plus pension £6,000) 17,400
Less: tax free personal allowance 11,000
Taxable income 6,400
Tax at 20% basic rate 1,280


Thomas part 2

Looking at Thomas again but now he has only £17,400 of savings income rather than earned income. His tax will be worked out differently:

  £
Savings income (gross) 17,400
Less: tax free personal allowance 11,000
Taxable income 6,400


Thomas has no earned income and he has not used up any of his starting rate for savings tax band so he will be taxed up to the limit of £5,000 at 0%. The next £1,000 will fall within his personal savings allowance of £1,000 and also be taxed at the rate of 0%. The balance of £400 will be taxed at the 20% basic rate.

  £
£5,000 @ 0% 0
£1,000 @ 0% 0
£400 @ 20% (6,400 taxable savings income less 5,000 savings rate band,
less 1,000 personal savings allowance)
80
Tax due 80


Thomas will have to make sure that HMRC know that he has savings income on which he will have to pay tax. As Thomas does not have any earned income, HMRC will have to collect the tax through a direct demand for payment or through self assessment, by asking Thomas to complete a tax return.

Thomas part 3

In this example, Thomas has earnings of £16,200 and savings income of £1,200. His earned income is more than the upper limit of £16,000, which is the personal allowance of £11,000 plus the starting rate band of £5,000. So, £1,000 of his savings income falls within his personal savings allowance is taxed at 0%. He is taxed on the balance of £100 savings at the 20% basic rate. His tax will be worked out as follows:

  £
Earned income 16,200
Savings income (gross) 1,200
Less: tax free personal allowance 11,000
Taxable income 6,400
   
Earned income £5,200 @ 20% 1,040
Savings income £1,000 @ 0% 0
Savings income £200 @ 20% 40
Tax due 1,080


Thomas part 4

Thomas has total taxable income of £17,400, made up of £9,400 wages and £8,000 savings interest.

Earned income uses £9,400 of Thomas' personal allowance of £11,000, leaving £1,600 to go against his savings income. This means only £6,400 of his savings income is liable to tax.

So his tax can be worked out as follows:

  £
Savings income £5,000 @ 0% 0
Savings income £1,000 @ 0% 0
Savings income £400 @ 20% (6,400 taxable savings income less 5,000 savings rate band,
less 1,000 personal savings allowance)
80
 

80


Thomas part 5

Thomas has total taxable income of £17,400, made up of £11,600 wages and £5,800 savings.

His tax can be worked out as follows:

  £
Earned income 11,600
Less: allowances 11,000
Earned income liable to tax: £600 @ 20% 120


Of the £5,000 starting rate band, £600 has been used up by the earned income above his personal allowance, so £4,400 remains for Thomas to use for his savings income:

  £
£4,400 @ 0% 0
£1,000 @ 0% 0
£400 @ 20% (5,800 taxable savings income less 4,400 remaining savings rate band,
less 1,000 personal savings allowance)
80
Total tax due (including tax due on non-savings income) 200


Thomas part 6

Thomas has total taxable income of £17,400, made up of £5,800 wages and £11,600 savings.

His tax can be worked out as follows:

  £
Earned income 5,800
Less: allowances 5,800
Taxable earnings 0
Savings income 11,600
Balance of allowance unused (11,000 - 5,800) 5,200
Taxable savings income 6,400
Tax due:  
£5,000 @ 0% 0
£1,000 @ 0% 0

£400 @ 20% (6,400 taxable savings income less 5,000 savings rate band,
less 1,000 personal savings allowance)

80
Total tax due: 80

 

Thomas part 7

Thomas has total taxable income of £17,400, made up of £15,000 wages and £1,400 savings and £1,000 dividends.

His tax can be worked out as follows:

  £
 Earned income 15,000
 Less: allowances 11,000
 Taxable earnings  4,000
 Earned income liable to tax: £4,000 @ 20% 800

 

Of the £5,000 starting rate band, £4,000 has been used up by the earned income above his personal allowance, so £1,000 remains for Thomas to use for his savings income; in addition, since Thomas’ income (£17,400) all falls within the basic rate band, he is entitled to the £1,000 personal savings allowance. Thomas also has a £5,000 dividend allowance:

  £
 £1,000 @ 0% (starting rate) 0
 £400 @ 0% (personal savings allowance) 0
 £1,000 @ 0% (dividend allowance) 0
 Total tax due (including tax due on non-savings income) 800

 

Thomas part 8

Thomas has total taxable income of £27,400, made up of £20,000 wages and £1,400 savings and £6,000 dividends.

His tax can be worked out as follows:

  £
 Earned income 20,000
 Less: allowances 11,000
 Taxable earnings 9,000
 Earned income liable to tax:
​ £9,000 @ 20%
1,800

 

All of the £5,000 starting rate band has been used up by the earned income above his personal allowance. Since Thomas’ income (£27,400) all falls within the basic rate band, he is entitled to the £1,000 personal savings allowance. Thomas also has a £5,000 dividend allowance:

  £
 £1,000 @ 0% (personal savings allowance) 0
 £400 @ 20% (1,400 taxable savings income less 1,000 personal savings allowance) 80
 £5,000 @ 0% (dividend allowance) 0
 £1,000 @ 7.5% (6,000 dividends less 5,000 dividend allowance) 75
 Total tax due (including tax due on non-savings income) 1,955

 

Thomas will have to make sure that HMRC know that he has dividend income on which he will have to pay tax. HMRC will probably collect the tax through Thomas’ PAYE code or through self assessment, by asking Thomas to complete a tax return.

Thomas part 9

Thomas has total taxable income of £47,400, made up of £40,000 wages and £1,400 savings and £6,000 dividends.

His tax can be worked out as follows:

  £
 Earned income 40,000
 Less: allowances 11,000
 Taxable earnings 29,000
 Earned income liable to tax: 
 £29,000 @ 20%
5,800

 

All of the £5,000 starting rate band has been used up by the earned income above his personal allowance. Since some of Thomas’ income (£47,400) falls within the higher rate band, he is only entitled to the £500 personal savings allowance. Thomas also has a £5,000 dividend allowance. Note also that the basic rate band is £32,000; Thomas’ earned income has used £29,000 of this band, leaving £3,000 for the savings and dividend income:

 Savings income £
 £500 @ 0% (personal savings allowance) 0
 £900 @ 20% (1,400 taxable savings income less 500 personal savings allowance) 180
   
 Dividend income £
 £5,000 @ 0% (dividend allowance) 0
 £1,000 @ 32.5% (6,000 dividends less 5,000 dividend allowance) 325
 Total tax due (on non-savings, savings and dividend income) 6,305

 

Note that the dividend income exceeding the dividend allowance is taxable at the higher rate. This is because the income that falls within the personal savings allowance and the dividend allowance still uses up the basic rate band.

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