The new tax year is fast approaching. So, the question ‘what tax band am I in?’ is likely on your mind.
The tax you pay over the 12 months of the tax year will depend on your location. Those in Northern Ireland (NI), England and Wales pay different Income Tax to people who live in Scotland (where there are five different bands: starter, basic, intermediate, higher and top).
If you live in England, Wales or NI, there are three tax rates: basic, higher and additional rate. All bands also have the Personal Allowance – the amount of income you can receive tax-free.
Thankfully, we’ve put this article together to provide a full overview of tax bands.
Income Tax
The Income Tax bands for 2020/21 will remain the same as 2019/20. These apply if you live in England, Wales or Northern Ireland. They are as follows, and will help you to answer the question ‘what tax band am I in?’:
| Bands and rates | Taxable income |
|---|---|
| Personal Allowance | £12,500 |
| Basic rate (20%) | £12,501-£50,000 |
| Higher rate (40%) | £50,001-£150,000 |
| Additional rate (45%) | £150,000+ |
From the 2021/22 tax year, both the Personal Allowance and basic rate limit will be indexed with the Consumer Price Index.
The Personal Allowance is how much you can earn tax-free – that is, without being legally obliged to pay Income Tax. Then, with the marginal bands, you only pay this tax rate on the stipulated portion of earnings.
So, if you were to have a taxable income of £37,000, you would pay 20% Income Tax on £24,500 (£37,000 minus the Personal Allowance of £12,500).
With England, Wales and NI tax bands now explained, what about if you live in Scotland? In this situation, your Personal Allowance is the same as the rest of the UK, as is the tax you pay on dividends and savings interest. However, you’ll pay Scottish Income Tax.
The Scottish Budget has proposed different tax bands for 2020/21, but these may not come into effect as Scottish Parliament must agree to them (in fact, changes are looking unlikely – although there may be an adjustment to the Personal Allowance).
These are the proposed new bands in comparison to those of the last tax year:
| Bands and rates | Taxable income 2019/20 | Taxable income 2020/21 |
|---|---|---|
| Starter rate (19%) | £12,501-£14,549 | £12,501-£14,585 |
| Basic rate (20%) | £14,550-£24,944 | £14,586-£25,158 |
| Intermediate rate (21%) | £24,945-£43,430 | £25,159-£43,430 |
| Higher rate (41%) | £43,431-£150,000 | £43,431-£150,000 |
| Top rate (46%) | £150,000+ | £150,000+ |
National Insurance
The amount of National Insurance you pay also depends on how much you earn, as well as if you are employed or self-employed.
For most people who are employed, they are as follows for the 2019/20 and 2020/21 tax years.
| Rates | Earnings per week (2019/20) | Annual salary (2019/20) | Earnings per week (2020/21) | Annual salary (2020/21) |
|---|---|---|---|---|
| 0% | Below £166 | Below £8,632 | Below £183 | Below £9,500 |
| 12% | £166-£962 | £8,632-£50,000 | £183-£962 | £9,500-£50,000 |
| 2% (on top of the 12%) | £962+ | £50,000+ | £962+ | £50,000+ |
The National Insurance rates are different if you’re self-employed, and therefore so is your tax bill.
Instead of Class 1 National Insurance Contributions (NICs), you’ll pay Class 2 (unless you earn less than £6,475 a year) and 4 (if you earn profits over £9,500 a year). These are on your self-employed earnings, which means you need to take away your expenses as tax relief to work out your taxable income.
Class 2 NIC rates for the previous and following 12 months are:
| Year | Small profits threshold | Rates |
|---|---|---|
| 2019/20 | £6,365+ | £3 per week |
| 2020/21 | £6,475+ | £3.05 per week |
And Class 4 NIC rates for 2019/20 and 2020/21 are:
| Annual profits 2019/20 | Annual profits 2020/21 | Rates |
|---|---|---|
| £8,632-£50,000 | £9,500-£50,000 | 9% |
| £50,000+ | £50,000+ | 2% on top of the 9% on profits) |
Scottish National Insurance rates are the same as those in Northern Ireland, England and Wales.
Capital Gains Tax
If you either sell or give away an asset that is worth more than £6,000, then you may potentially need to pay Capital Gains Tax (CGT).
HMRC’s criteria stipulates what you pay CGT on. Plus, whether you have to pay the tax depends on the annual exempt amount. For 2019/20 and 2020/21, it is set at £12,300. In terms of CGT rates, this will depend on what sort of taxpayer you are:
| Type of taxpayer | Rates (on gains from residential property) | Rates (on gains from other chargeable assets) |
|---|---|---|
| Higher or additional rate | 28% | 20% |
| Basic rate | 18% | 10% |
While the Scottish Income Tax brackets are different, when it comes to National Insurance and CGT, the bands and rates remain the same.
What will the impact of the 2020/21 tax changes be?
The Income Tax bands are applicable to non-savings, non-dividend income in England, Wales and Northern Ireland, as well as savings and dividend income in the UK.
The result is that 30.7 million will benefit will benefit in comparison to the previous year. 26.1 million basic-rate taxpayers will receive an average gain of £20. 4.1 million higher-rate taxpayers will get an average real gain of £228. And additional-rate taxpayers will be recipients of a £169 average real gain.
It’s anticipated that there will be 148,000 fewer people who would be legally required to pay Income Tax, and 314,000 individuals will no longer be expected to pay tax at the higher rate.
As a result (mostly) of the increases in the Upper Profits and Upper Earning Limits for National Insurance, 901,000 people are expected to have an average real loss of £64 in the 2020/21 tax year.
Now you know the Income Tax, National Insurance and CGT bands and rates for 2020/21, how they compare to 2019/20, and how any changes may impact taxpayers like you.
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