Tax Bands Explained: What Tax Band Am I In?

As we enter the 2022/23 tax year, you can bet that many sole traders will be asking themselves the same question: ‘what tax band am I in?’. The answer depends on your taxable income and where you live in the UK.

From April 2022, self-employed people can submit their Self Assessment tax return for the 2021/22 tax year. HMRC will then use this to work out your taxable income and therefore which tax band you’ll fall into. They’ll factor in information such as your income and expenses, and your SEISS grant if applicable.

You’ll then either be classed as:

• A basic rate taxpayer, higher rate taxpayer, or additional rate taxpayer if you live in England, Wales or Northern Ireland
• A starter, basic, intermediate, higher or top rate taxpayer if you live in Scotland

Here, we discuss the various rates and thresholds by country, as well as how the latest tax changes may impact you this tax year.

INCOME TAX

The following tax bands for 2022/23 apply if you live in England, Wales or Northern Ireland. They should help you to answer the question ‘what tax band am I in?’:

Your personal tax allowance is maxed at £12,570. This means that you can earn anything below this figure and not pay tax.

Then, with the marginal bands, you only pay this tax rate on the stipulated portion of earnings. So, if you have a taxable income of £37,000, you would pay 20% Income Tax on £24,430 (£37,000 minus the Personal Allowance of £12,570).

Need to know! These are the tax rates for the 2021/22 and 2022/23 tax years.

In Scotland, taxpayers pay according to a slightly different model. Not only are there more bands, but the rates are different to other countries within the UK. The bands for the 2022/23 tax year in Scotland are:

National Insurance

When it comes to your National Insurance Contributions as a sole trader, you may pay both Class 2 and 4.

Class 2 National Insurance is a fixed weekly amount. If your profits are above £9,880, this will be £3.15 per week for 2022/23. If not, you’re exempt.

Class 4 National Insurance is calculated according to your earnings. The 2022/23 rates are as follows:

Scottish National Insurance rates are the same as those in Northern Ireland, England and Wales.

CAPITAL GAINS TAX

If you sell or dispose of an asset that is worth more than £6,000, then you may need to pay Capital Gains Tax. To help you determine whether or not this applies to you, HMRC has a list of what they mean by an asset.

The annual exemption amount for 2022/23 is set at £12,300. The rate of Capital Gains Tax you’ll pay depends on which tax bracket you fall into:

Tax band

Again, for Scottish taxpayers, the rates are the same.

What will the impact of the 2022/23 tax changes be?

As part of the 2021 Spring Budget, it was decided that Income Tax rates (including Personal Allowance) would be frozen until 2026. Due to inflation, the result is that an estimated 1.3 million people are expected to start paying Income Tax and National Insurance Contributions where they weren’t before. It is also expected that a number of taxpayers will find themselves in a higher bracket over the course of the five years.

This freeze isn’t restricted to Income Tax though. In fact, Inheritance Tax and Capital Gains Tax rates, as well as the Pension Allowance, are also frozen until 2026.

However, there will be added scrutiny on tax mistakes. As part of the Finance Bill 2021, the government is introducing a point-based penalty system for VAT and Self Assessment. Once in place, taxpayers will get a point for every missed submission deadline. When taxpayers accrue a certain number of points, they’ll get a £200 fine.

It’s a lot to take in, isn’t it? But don’t worry, you’re not alone. Our experts can conduct professional reviews of your tax return as an additional service to our Self Assessment software. They’ll check for any mistakes, ensure you’ve claimed any allowable expenses if available, and keep you on the right side of the taxman.

Arrange a review today. Alternatively, if you’d like to learn more, don’t hesitate to speak to our team.

Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.