Income Tax & NI

Income tax

Rates

Income tax applies to the amount of income after deduction of personal allowances.

Income is taxed in a specific order with savings and dividend income taxed last.

The dividend rate is partially satisfied by a 10% tax credit given on dividends. Therefore dividends falling within the basic rate band do not suffer any additional tax.

2015/16:
Type Band of taxable income (£) Rate (%) Dividend rate (%)
Starting rate for savings 1 0 – 5,000 0 10
Basic rate 0 – 31,785 20 10
Higher rate 31,785 – 150,000 40 32.5
Additional rate Over 150,000 45 37.5

Note…

1. The starting rate band is only applicable to dividends and savings income. The 0% rate is not available if the taxable amount of non-savings income exceeds the starting rate band.

2014/15:
Type Band of taxable income (£) Rate (%) Dividend rate (%)
Starting rate for savings 1 0 – 2,880 10 10
Basic rate 0 – 31,865 20 10
Higher rate 31,866 – 150,000 40 32.5
Additional rate Over 150,000 45 37.5

Note…

1. The starting rate band is only applicable to dividends and savings income. The 10% rate is not available if the taxable amount of non-savings income exceeds the starting rate band.

Allowances

A personal allowance gives an individual an annual amount of income free from income tax.

Income above the personal allowances is subject to income tax.

The personal allowance will be reduced if an individual’s adjusted net income is above £100,000. The allowance is reduced by £1 for every £2 of income above £100,000.

An individual born before 6 April 1938 (1948 for 2014/15) may be entitled to an age related personal allowance but this is reduced if adjusted net income is above the age allowance income limit (see table below).

For 2015/16 £1,060 of the personal allowance may be transferable between certain spouses where neither pays tax above the basic rate.

Personal Allowance

2015/16:
Age at end of tax year £
Born after 5 April 1938 10,600
Born before 6 April 1938 1 10,660
Age allowance income limit 27,700

Note…

1. Reduce age allowance by £1 for every £2 of adjusted net income over £27,700.

2014/15:
Age at end of tax year £
Born after 5 April 1948 10,000
Born after 5 April 1938 and before 6 April 19481 10,500
Born before 6 April 19381 10,660

Note…

1. Reduce age allowance by £1 for every £2 of adjusted net income over £27,000.

Blind person’s allowance

£2,290 (2013/14: £2,230)

Married couple’s allowance

Either partner born before 6th April 1935.

The amount of reduction for Married couple’s allowance depends on income of husband or, for marriages (or civil partnerships) after 4 December 2005, the income of the highest earner.

Reduction in tax bill 2015/16(£) 2014/15(£)
Maximum 835.50 816.50
Minimum 322.00 314.00

National Insurance

Class 1

From 6 April 2015 employer NIC for those under the age of 21 is reduced from the normal rate of 13.8% to 0%. For the 0% rate to apply the employee will need to be under 21 when the earnings are paid. This exemption will not apply to earnings above the Upper Secondary Threshold (UST) in a pay period. The weekly UST is £815 for 2015/16 which is equivalent to £42,385 per annum. Employers will be liable to 13.8% NIC beyond this limit.

Employees Class 1 NIC stop when they reach their State Pension age. The employer’s contribution continues.

Most employees and employers pay ‘contracted in’ rates i.e. the employee will accrue entitlement to the basic state pension and the Additional State Pension.

Employees (contracted in)

2015/16:
Earnings per week %
Up to £155 Nil1
£155.01 – £815 12
Over £815 2

Note…

1. Entitlement to state pension and other contribution-based benefits is retained for earnings between £112 and £155 per week.

2014/15:
Earnings per week %
Up to £153 Nil1
£153.01 – £805 12
Over £805 2

Note…

1. Entitlement to state pension and other contribution-based benefits is retained for earnings between £111 and £153 per week.

Employers – Class 1

2015/16:
Earnings per week %
Up to £156 Nil1
Over £156 13.8
Upper Secondary Threshold (for under 21s)
Up to £815
0

Other National Insurance payable by employers

Class 1A

13.8% on broadly all taxable benefits provided to employees.

Class 1B
13.8% on PAYE Settlement Agreements.

Class 2 and 4 (self-employed)

A self-employed person starts paying Class 2 and Class 4 NIC from 16 or over (if sufficient profits).

Class 2 NIC stop when a person reaches State Pension age.

Class 4 NIC stop from the start of the tax year after the one in which the person reaches State Pension age.

2015/16:
Class 2 (£)
Flat rate per week 2.80
Small Profits Threshold (per annum)1 5,965

Note…

1. No Class 2 is due if the amount of trading profits assessable to income tax and Class 4 NIC is below this figure. However, a person might decide to carry on paying class 2 voluntarily to accrue entitlement to the State Pension and entitlement to other benefits.

2014/15:
Class 2 (£)
Flat rate per week 2.75
Small earnings exception (per annum)1 5,885

Note…

1. Application must be made for the small earnings exception. However, a person might decide to carry on paying class 2 voluntarily to accrue entitlement to the State Pension and entitlement to other benefits.

Class 4

2015/16:
Annual profits %
Up to £8,060 Nill
£8,060.01 – £42,385 9
Over £42,385 2
2014/15:
Annual profits %
Up to £7,956 Nill
£7,956.01 – £41,865 9
Over £41,865 2

Class 3

A person needs 35 years (30 years if State Pension age is before 6 April 2016) of NIC to get a full State Pension.

Class 3 voluntary contributions can be paid to fill or avoid gaps in a NI record.

Flat rate per week

£14.10 (2014/15: £13.90)