The UK taxation system is based on different tax bands and tax rates, that depend on certain circumstances, and most notably, on the amount of yearly income (by yearly we mean financial year, which is from the 5th of Apr to next year’s 4th of Apr).
There are 3 main UK tax bands:
- Basic rate tax band: you pay 20% tax on this income (for income up to £34,500 after the personal allowance is deducted)
- Higher rate tax band: you pay 40% tax on the income that falls into this tax band (for income between £34,500 – £150,000, after the personal allowance has been deducted)
- Additional rate tax band: you pay 45% tax on income that falls in this tax band (for income above £150,000)
Apart from the tax bands above, you also have a personal allowance where you don’t pay tax – this sum varies each year. In the financial year 2018-2019, this sum is £11,850. This means, that if you earn below £11,850, you will not pay any tax. Also, if you earn above £11,850, you’ll still get that sum as tax free, and you’ll only pay tax on the sum that you’re earning above it.
Here is a simple illustration of the tax bands for earnings up to £100,000:
Personal allowance gets reduced after £100,000
One important thing to highlight is the fact that the personal allowance will start being reduced after you earn above £100,000. For each £2 you earn above £100K, the personal allowance will be reduced with £1. Therefore, as soon as your earnings reach £123K, your personal allowance will be £0.