As part of our Tax and Financial Strategies 2021/22, this update on personal tax essentials for the year 2021/22 provides a useful overview on personal allowances, savings income and dividend income.
Tax and Financial Planning Strategies 2021-2022
Our latest Tax and Financial Planning Strategies 2020/21 website pages are designed to help you to make the most of your business and your personal finances by highlighting the main tax allowances and incentives and suggesting strategies that you might wish to incorporate into your own financial planning. For further information, please take a look at our other Tax and Financial Strategies 2021/22 website pages.
Tax and Financial Strategies 2021-2022 - an overview
Business tax strategies 2021-2022
Tax and employment 2021-2022
Business exit strategies 2021-2022
Personal and family financial strategies 2021-2022
Retirement planning strategies 2021-2022
Savings and investment strategies 2021-2022
Tax-efficient estate planning2021-2022
If you would like to discuss the impact of changes in tax legislation on you and your business, please do not hesitate to get in touch with our Personal Tax Team at DRG Chartered Accountants. We would be very pleased to hear from you.
Personal allowance
Each individual is entitled to his or her own personal allowance of £12,570 for 2021/22. The personal allownce reduces an individual’s taxable income. For those with income in excess of £100,000, the allowance is restricted.
After reducing income by the personal allowance a series of rate bands are assigned first to your non-savings (this may include income from wages, self-employment, property income and pensions), then to your savings income, and finally to any dividend income.
Income tax rates for 2021/22
Non-savings income for English and Northern Irish taxpayers is taxable as follows:
|
Band £ |
Rate % |
|
|
0 - 37,700 |
Basic rate (BR) |
20 |
|
37,701 - 150,000 |
Higher rate (HR) |
40 |
|
Over 150,000 |
Additional rate (AR) |
45 |
Welsh taxpayers
The National Assembly for Wales has the right to vary the rates of income tax payable by Welsh taxpayers. The Welsh rate of income tax has been set at 10% and is added to the UK rates, which are each reduced by 10%. This means that for 2021/22, the tax payable by Welsh taxpayers continues to be the same as English and Northern Irish taxpayers.
Scottish taxpayers
However, the following rates and bands apply for Scottish taxpayers (on non-savings and non-dividend income):
|
Band £ |
Band Name |
Rate % |
|
0 - 2,097 |
Starter |
19 |
|
2,098 - 12,726 |
Basic |
20 |
|
12,727 - 31,092 |
Intermediate |
21 |
|
31,093 - 150,000 |
Higher |
41 |
|
Over 150,000 |
Top |
46 |
Rates that apply across the UK
Savings income
The Personal Savings Allowance applies to income such as bank and building society interest. The allowance applies for up to £1,000 of a basic rate taxpayer’s savings income, and up to £500 of a higher rate taxpayer’s savings income each year. The allowance is not available to additional rate taxpayers.
In addition to the Personal Savings Allowance, some taxpayers benefit from the starting rate for savings, which taxes £5,000 of savings income at 0%. This is not available if the taxable non-savings income exceeds the starting rate band.
Dividend income
The Dividend Tax Allowance is £2,000. The Dividend Tax Allowance does not change the amount of income that is brought into the income tax computation. Instead, it charges £2,000 of the dividend income at 0% tax – the dividend nil rate. Like the Personal Savings Allowance, the Dividend Tax Allowance does not reduce total income for tax purposes, and dividends within the allowance still count towards the appropriate basic or higher rate bands. Dividends in excess of the Dividend Tax Allowance are taxed at 7.5% (BR); 32.5% (HR); and 38.1% (AR).
|
Case Study |
|||
|
Ellie has gross income of £56,000 (made up of £26,000 earnings, £5,000 of interest and UK dividends of £25,000). Her tax liability is £6,743.50. |
|||
|
Earnings (£) |
Interest (£) |
Dividends (£) |
|
|
Income |
26,000 |
5,000 |
25,000 |
|
Deduct: Personal Allowance |
–12,570 |
||
|
Taxable |
13,430 |
5,000 |
25,000 |
|
Tax at: |
|||
|
0% on Personal Savings Allowance / |
0 |
500 |
2,000 |
|
20% on |
13,430 |
4,500 |
|
|
7.5% on |
17,270 |
||
|
32.5% on |
5,730 |
||
|
Total tax |
2,686.00 |
900.00 |
3,157.50 |
|
Total tax liability £6,743.50 |
|||
The ‘hidden’ 45% and 60% tax rates
The top rate of income tax, for those with taxable income in excess of £150,000, is 45% (38.1% for dividends). The Personal Allowance is scaled back if ‘adjusted net income’ exceeds £100,000, being reduced by £1 for every £2 of income in excess of that limit. This means that an individual with total taxable income of £125,140 or more will not be entitled to any Personal Allowance. This gives an effective tax rate on this slice of income of 60% – higher if you are a Scottish taxpayer paying the Scottish Top rate of tax of 46%. It may be possible to reduce your taxable income and retain your allowances if approached with due consideration, e.g. by making pension contributions or Gift Aid donations. Please do get in touch with the DRG team if you wish to discuss minimising the impact of the top tax rates.
If you would you like to find out more about personal tax, savings and dividend income, please do get in touch with the DRG Chartered Accountants Personal Tax Team. We would be very pleased to hear from you.
DISCLAIMER: This information is for guidance only, and professional advice should be obtained before acting on any information contained herein. We will not accept any responsibility for loss to any person as a result of action taken or refrained from in consequence of the contents of this publication.
