Originally posted on: 19 August 2024
Updated on: 27 November 2025
I was talking to a friend last week, and he was asking me about UK tax bands and how they work with the taxation of his income. He earns a salary from his business and also draws dividends. He wanted to find out if paying tax on his salary at 20% means he would also pay tax on his dividends at 20%. Additionally, he was curious about how this impacts the capital gains tax rates that he pays if he were to sell a buy-to-let residential property.
This article explains the 2024/25 rates, bands, and allowances, helping you manage your taxes.
Key Takeaways
- The income tax structure for the 2024/25 tax year includes a personal allowance of £12,570, with bands ranging from 20% basic rate to 45% additional rate for high earners.
- Scottish taxpayers have unique tax bands with rates starting at 19%, and the advanced rate for incomes over £150,000 is set at 46%, differing from UK rates.
- National Insurance Contributions and Capital Gains Tax rates vary based on income level and type of asset, highlighting the importance of strategic financial planning to manage tax liabilities.
Income Tax Rates and Bands
Income tax rates and bands are fundamental for tax knowledge. For the 2024/25 tax year, the personal allowance is £12,570, meaning no income tax is paid on earnings up to this amount.
For incomes exceeding £100,000, the personal allowance is reduced by £1 for every £2 earned until it reaches £0 at £125,140. The basic rate of 20% applies to incomes from £12,570 to £50,270, while the higher rate of 40% is for incomes from £50,271 to £125,140, and the additional rate of 45% kicks in for incomes over £125,140.
Basic Rate
The basic rate band applies to incomes ranging from £12,570 to £50,270, taxed at 20%. For every pound earned over the personal allowance, 20 pence goes to the taxman. Around 79% of all UK tax payers earn an income up to the basic rate band, so its the most common band in use.
For example, a salary of £50,000 results in approximately £7,486 in income tax within this band. This tax amount is calculated by removing the personal allowance first and applying 20% to the remainder, which is (50,000 – 12,570) x 20% = £7,486. The 20% rate applied to taxable income helps anticipate tax obligations and plan finances.
Higher Rate
The higher rate band is designed for those with a higher income. This band applies to earnings from £50,271 to £125,140, taxed at a rate of 40%. This means that as soon as your income exceeds £50,270, you move into the higher tax bracket and pay a significantly higher percentage on the portion of your income within this band.
Higher rate taxpayers should be mindful of their tax obligations to pay tax and avoid unexpected bills.
Additional Rate
The additional rate band applies to incomes exceeding £125,140, taxed at 45%. High earners in this bracket should explore tax relief and other strategies to minimise the tax charge.
Scottish Income Tax Bands
Scottish taxpayers face a different landscape when it comes to income tax. Scotland has its own tax rates due to the devolution of certain tax powers to the Scottish Parliament. This power allows them to tailor tax policies to better meet the specific economic and social needs of Scotland.
For the 2024/25 tax year, these unique bands offer a distinct structure, impacting how much income tax individuals pay. The rates of Scottish tax are applied to income types such as salary/wages, self-employment, rental profit, and pension income. It does not apply to savings income or dividend income, which are both taxed using the UK tax rate and bands. In addition, national insurance contributions are taxed at the usual UK rates and bands.
Starter Rate
The starter rate is unique to Scotland and applies to income between £12,571 and £14,876. Within this band, taxpayers pay a 19% tax rate on their income over the personal allowance threshold. This reduced rate is designed to ease the tax burden on lower-income earners.
For example, a Scottish taxpayer earning £14,500 would pay 19% on the amount above £12,570 (compared to 20% for the rest of the UK). This means they would face a tax charge of £367 on their income (compared to £386 for the rest of the UK), making it a favorable rate band for those just above the personal allowance limit.
Basic Rate
Next up in the basic rate, which applied to income from £14,877 to £26,561. Within this band, taxpayers pay a 20% tax rate on their income over the starter rate. This rate is on par with what the rest of the UK pays in this particular band of income.
Intermediate Rate
The intermediate rate band applies to incomes from £26,562 to £43,662, with a tax rate set at 21%. This rate is higher than the basic rate but still lower than the higher rate, providing a middle ground for those with moderate earnings in the context of UK income tax rates.
This tax bracket helps ensure a progressive tax system where higher incomes contribute more.
Higher Rate
Then we have the higher rate which applied to income from £43,663 to £75,000. Within this band, taxpayers pay a 42% tax rate on their income. This rate is higher than what the rest of the UK pays for this income tax band and reflects a tax system that asks those who earn more to contribute a larger share.
Advanced Rate and Top Rate
Finally, we have the remaining two tax bands. Income earned between £75,001 to £125,140 is taxed at 45%, and income in excess of this threshold is taxed at the top rate of 48%. Generally speaking you can see from these tax rates that a tax payer earning in excess of £26,561 will pay more tax in Scotland tha the rest of the UK.
National Insurance Contributions
National Insurance Contributions (NICs) are mandatory payments that fund various state benefits and services. Both employees and self-employed individuals are required to make these contributions, which are calculated based on earnings or profits.
The National Insurance Fund (NIF) holds NICs paid by employees, employers and the self employed. Voluntary contributions are also paid in. Money paid into NIF is kept separate from all other national tax revenue and is used to pay social security benefits like contributory benefits and the State Pension.
NICs are essential for comprehending overall tax obligations and ensuring compliance with UK tax laws.
Employee Contributions
Class 1 National Insurance Contributions are a significant part of employees’ tax obligations. For the 2024/25 tax year, the main rate is 8%, down from the historical rate of 12%. These contributions are deducted directly from salaries, making it important to understand the rates and thresholds.
Self-Employed Contributions
Class 4 National Insurance Contributions (NICs) are the standard contributions for self-employed individuals, calculated based on annual taxable profits. In the 2024/25 tax year, the rate is 6% on profits between £12,570 and £50,270. Profits above £50,270 are subject to a 2% rate. This system ensures contributions are generally proportionate to income.
If your annual profits are below £12,570, you are not required to pay Class 4 NICs for the year.
Those earning below £6,725 in the 2024/25 tax year can choose to voluntarily contribute £3.45 per week towards their State Pension. Self-employed earnings above £6,725 automatically qualify as a “contributing year” towards state benefits, eliminating the need for voluntary contributions.
“…the service has been fabulous.”
Ah Mike, we think you’re pretty fabulous too!
Capital Gains Tax Rates
Capital gains tax is levied on the profit made from selling certain types of assets, such as residential property and investments. Understanding these tax rates can help you pay capital gains tax and plan your investments and sales strategically.
The rates vary based on the type of asset and the taxpayer’s income level, making it important to be well-informed about these differences.
Residential Property Gains
For residential property gains, the capital gains tax rates are set at 18% and 24% for basic rate and higher rate taxpayers, respectively, for the 2024/25 tax year.
For example, if you sell a residential property after 6 April 2024 and fall into the higher rate tax bracket, you will pay 24% on the gains from the sale. This increase underscores the need for proactive tax planning when managing property investments and sales.
Other Assets
Capital gains tax rates on other assets, such as stocks and bonds, are set at 10% for basic rate taxpayers and 20% for higher rate taxpayers. This distinction ensures that those with higher incomes contribute more to the tax system.
For basic rate taxpayers, this means a more favorable tax scenario for investment gains, while higher rate taxpayers face a steeper tax charge.
Dividend Income Tax Rates
Dividend income is a significant aspect of many investors’ portfolios and is also super important for our limited company contractor clients. Understanding the tax rates for dividends is key for maximising your returns and ensuring compliance with tax laws. For the 2024/25 tax year, the tax-free dividend allowance is £500.
Dividends exceeding this allowance are taxed at varying rates depending on your income level: 8.75%, 33.75%, or 39.35%. These rates highlight the importance of strategic planning in managing your dividend income.
Dividend Allowance
The dividend allowance allows individuals to receive a certain amount of dividends tax-free. For the current tax year, this allowance is set at £500 (two years ago it was £2,000). This reduction from previous years means that managing your investment portfolio efficiently is more important than ever.
Understanding the dividend allowance is essential for maximising tax-free income from dividends. Investors can receive up to £500 in dividends without incurring any tax. This knowledge is a valuable tool in tax planning, helping to minimise tax liabilities and enhance overall returns.
Tax Rates for Dividends
The tax rates for dividends are structured into different bands. For the 2024/25 tax year, dividends above the £500 allowance are taxed at 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers.
Personal Savings Allowance
The personal savings allowance enables individuals to earn a certain amount of interest tax-free, based on their income tax band. This allowance plays a significant role in managing savings efficiently and minimising tax liabilities on interest earned from savings. It works in a very similar way to the dividend allowance.
Allowance Limits
The personal savings allowance varies depending on your tax band. Basic rate taxpayers can earn up to £1,000 in interest tax-free. This generous allowance encourages saving and provides a significant tax advantage for those within this tax bracket.
For higher rate taxpayers, the tax free personal allowance is reduced to £500. Those with incomes above £125,140 do not benefit from any personal savings allowance. Understanding these limits helps in planning your savings strategy and maximising your tax-free interest.
Starting Rate
You can earn up to £5,000 in savings interest tax-free through the starting rate for savings. However, this benefit decreases as your other income (like wages or pensions) rises. If your other income is £17,570 or more, you’re not eligible. For other income below £17,570, every pound earned above your Personal Allowance reduces your £5,000 starting rate for savings allowance by a pound. This benefits individuals whose savings income makes up a significant portion on their total earnings and makes it easier for those with lower incomes to build up their savings without being penalized by taxes.
Inheritance Tax Rates
Inheritance tax is applied to the value of an estate above a certain threshold. For the 2024/25 tax year, the standard nil rate band is set at £325,000, a figure that has remained unchanged since April 2009. Any value above this threshold is taxed at 40%.
With high rates like this, it’s vital for estate planning to ensure beneficiaries receive the maximum inheritance possible.
Nil Rate Band
The nil rate band allows estates valued up to £325,000 to avoid inheritance tax entirely. This threshold applies to each individual’s estate, meaning most estates below this value are exempt from inheritance tax. This band provides significant relief to many families, ensuring that smaller estates are not burdened with tax.
However, if an estate exceeds £325,000, the portion above this threshold is subject to a 40% tax rate. This makes strategic estate planning essential to minimise tax liabilities and maximise the value passed on to heirs.
Residence Nil Rate Band
The residence nil rate band offers an additional tax-free threshold for estates passed to direct descendants. Currently, this band allows an additional £175,000 exemption on properties passed to children or grandchildren. This significantly increases the amount exempt from inheritance tax, making it a very useful consideration in estate planning.
“…the service has been fabulous.”
Ah Mike, we think you’re pretty fabulous too!
How Tax Bands Work Together
Now that we have covered how the various tax bands work along with their respective tax rates, let’s take a look at how different forms of income interact with these tax bands. This will help us determine how each type of income is taxed overall.
Stacking the Tax Bands
Income is taxed in a specific order, which affects how it is applied across different tax bands. This is the most important step in calculating how your income is taxed.
Non-savings and non-dividend income, such as employment, pensions, profit from self-employment, rental income and state benefits, is taxed first. Next comes your savings income, which is typically interest from bank and building society accounts. Finally, your dividend income is taxed last and is always treated as the top slice of income.
While Capital Gains Tax (CGT) is calculated separately, the rate applied will depend on your income tax band. The taxable gain is added to your taxable income to determine the applicable CGT rate. This means that if adding the gain pushes the total income into a higher tax band, a higher CGT rate will apply.
Tax Bands – Practical Example 1
Josh, an avid golfer and self-employed physiotherapist operating through his own limited company, draws a mixture of salary and dividends totalling £50,000 each year from his business. He plans to sell his UK buy-to-let property and use the proceeds to purchase a small house in the Algarve to pursue his golfing passion. His income places him in the basic rate tax band. He has calculated he faces taxable capital gain of £30,000 on the sale of his UK property, and his question is how much capital gains tax he will pay.
At first glance, being a basic rate taxpayer means he will face a capital gains tax rate of 18%. However, the size of the gain brings him total income and gains over the basic rate threshold, so some of the gain will be taxed at 18%, and the rest will be taxed at 24%. Let me explain.
Total salary + dividends = £50,000
Basic rate tax band applies for income up to £50,270
Capital gain taxed at basic rate band (18%) = 50,270 – 50,000 = 270
Capital gain taxed at higher rate band (24%) = 30,000 – 270 = 29,730
So in this case £270 of the capital gain is taxed at 18%. After this, his total income and gains exceeds the basic rate threshold of £50,270, so the remainder of the gain is taxed at 24%. Although Josh is a basic rate taxpayer, most of his capital gain was taxed at the higher rate.
Tax Bands – Practical Example 2
Lexie has retired and collects an annual pension of £15,000. She also receives bank interest income of £2,000 per year (which was gross income of £2,500 with £500 in tax deducted by the bank), and dividend income of £5,000. How are these three income types taxed?
Firstly, it’s fair to say that Lexie should take a look at her cash and share investments and see if they can be invested via an Individual Savings Accounts (ISA). It’s simple enough to do and would mean that she pays no tax on any interest or dividend income. But for the sake of this example let’s say she didn’t do this and wants to see what tax is due.
Her Pension income is taxed first (from Stacking the Tax Bands above). Pension income of £15,000 less the personal allowance of £12,570 = £2,430. This will be taxed at the basic rate of 20%.
Next up is her bank interest. Because her total income from the previous step does not exceed £17,570, she gets access to the Starting Rate. In fact, her pension income plus her bank interest combined do not exceed £17,570, so she gets the Starting Rate (0% tax) on all of her bank interest.
And finally, we have the dividend income. She gets to use the tax-free allowance of £500 on dividends, which means the remaining £4,500 is taxed at the basic rate of 8.75%.
In this case, Lexie will pay tax on a small portion of her pension income at the basic rate, she gets her interest income completely tax free and pays tax at the basic rate on most of her dividend income.
Summary
Understanding the various UK tax slabs, from income tax rates to inheritance tax bands, is essential for effective financial planning. Navigating through basic, higher, and additional tax rates, as well as specialised rates for Scottish taxpayers and self-employed individuals, highlights the complexity of the tax system. The insights into capital gains tax, dividend income tax, personal savings allowance, and inheritance tax provide valuable knowledge to maximise tax-free allowances and minimise liabilities. Being well-informed empowers you to make smarter financial decisions and ensures that you can optimise your tax position to benefit your financial future.
Frequently Asked Questions
What is the personal allowance for the 2024/25 tax year?
The personal allowance for the 2024/25 tax year is £12,570. This amount is the threshold below which individuals do not pay income tax.
How are capital gains on residential property taxed?
Capital gains on residential property are taxed at 18% for basic rate taxpayers and 24% for higher rate taxpayers, effective from 6 April 2024. You need to be aware of your tax bracket to ensure accurate reporting and payment.
What is the dividend allowance for the 2024/25 tax year?
The dividend allowance for the 2024/25 tax year is £500. This means any dividends received up to this amount are tax-free.
What is the nil rate band for inheritance tax?
The nil rate band for inheritance tax is set at £325,000 for the 2024/25 tax year. This amount can be passed on without the estate incurring inheritance tax.