Income - What, if any, taxes apply to an individual’s income?
Income tax is levied on an individual’s income from all sources: employment, profits of a trade or business, savings and investments.
Under the existing rules, a UK-resident individual who is domiciled outside the UK may claim, or be automatically entitled to, the remittance basis of taxation in relation to his or her foreign income. Otherwise, UK-resident individuals are taxable on their worldwide income as it arises, subject to any double tax treaty relief where foreign income has been taxed at source.
An individual who is resident outside the UK is taxable only on his or her UK income and, if that income is also taxed in the individual’s country of residence, he or she may be entitled to relief under a double taxation treaty if there is one in force between the UK and the country of residence.
Rates
The personal allowance for income that can be earned in any tax year before income tax is paid is £12,500 for individuals with an annual income of £100,000 or less. Above that limit, the allowance is reduced by £1 for every £2 of extra income, until it is exhausted when income exceeds £125,000. There are certain other allowances for blind people, and for individuals and married couples over the age of 65 or 75, although age-related allowances are also subject to income limits.
| Savings income | Up to £5,000: 0% in certain circumstances (see below) | Above £5,000: rates are as for non-savings income | ||
|
Dividend income |
Up to £2,000: 0% |
£2,001 to £37,500: 7.5% |
£37,501 to £150,000: 32.5% |
Over £150,000: 38.1% |
|
Other income |
|
Up to £37,500: 20% |
£37,501 to £150,000: 40% |
Over £150,000: 45% |
As set out in the table above, for dividends, there is a tax-free dividend allowance. Under this allowance, in tax year 2020-21, there is no tax on the first £2,000 of dividend income regardless of what non-dividend income is available. However, any dividends received over £2,000 are taxed at 7.5 per cent within the basic rate band, 32.5 per cent within the higher rate band, and 38.1 per cent within the additional rate band.
As indicated in the table above, savings income of up to £5,000 may be taxable at zero per cent if non-savings income is under £17,500. Every £1 of non-savings income above the personal allowance of £12,500 reduces the starting rate for savings income by £1.
There is also a personal savings allowance of £1,000 available for savings income for basic rate taxpayers and £500 for higher rate taxpayers.
England & Wales Guide
The England & Wales guide answers the principal questions for Private Clients relating to the law in this jurisdiction.
