Different tax bands applicable in UK in 2022-23
How much income tax you pay every year depends on how much income you have above your personal allowance and how much of your income falls within different tax bands.
Tax bands are the different ranges that are used to calculate your income tax. To pay income tax pertaining to a certain band, your annual income must reach a particular range. If it doesn’t reach that range, you don’t have to pay that rate of income tax.
What is personal allowance when calculating income tax?
Personal allowance is the amount of money you earn without paying any income tax. If you earn more than your personal allowance, you pay tax at the applicable income tax rate. Even if you earn more than the exempted personal allowance, your allowance money remains untaxed.
In the UK, the personal allowance is under £12,570 annually or £225 weekly. If you’re making more than that, you pay income tax based on what tax band your income reaches.
For example, if you earn £15,600 annually, your text will not be calculated on the entire £15,600 but the amount exceeding £12,569 (£3031). In case you are visually impaired, £2520 is added to your personal allowance.
Is personal allowance the same for all income brackets? It is not.
Your personal allowance is £12,569 if your income is less than or equal to £100,000. Above this, your personal allowance goes down by £1 for every £2 of adjusted net income that you have over £100,000. This means your personal allowance becomes zero if your income is £125,140 or above (source: as per 2022-2023 tax brackets).
You can get additional allowance on your marital status or whether you are earning interest on personal savings.
What income tax band are you in?
To be able to calculate how much tax you need to pay, you need to find in which tax band your income falls. Your tax rate band can be anywhere between 20% and 45%. Your band is “basic rate tax” if you need to pay 20% tax on your income. Any income above your “basic rate tax” is in the category of “higher rate tax” which is currently 40%, according to 2022-23 tax calculations. There is also an “additional rate tax” that goes up to 45%. There may be slight changes in the calculations depending on whether you live in England, Wales, Northern Ireland, or Scotland.
There is also concept of “marginal bands” which means you only pay a specified percentage of tax on that portion of the salary that belongs to that band. For example, if your salary puts you in the 40% tax band, you pay 40% tax only for that segment of your income that falls between 20% and 40%.
Let’s take an example of the tax brackets applicable in the regions of England, Wales, and Northern Ireland (rates for 2022-23):
- Below £12,570 there is no tax.
- From £12,570 to £50,270 you pay 20% tax.
- From £50,270 to £150,000 you pay 40% tax.
- Note: £1 is deducted from your personal allowance for every £2 you earn over £100,000.
- Over £150,000 you pay 45% tax.
Suppose your annual income is £85,000.
Till £12,569 you pay 0% tax.
Till £50,270 you pay 20% tax, so, from the perspective of this example, the tax for this band is going to be approximately £7540 (on the amount of £37,701).
But your annual income falls under the bracket of £50,270 to £150,000 (£85,000).
The remaining amount above £50,270 is £34,730 for which you’re going to pay 40% tax, which comes out to be £13,892.
So, according to applicable tax bands, your total tax is going to be £7540 + £13,892 = £21,432
If you live in Scotland, the tax bands differ slightly for 2022-23.
- You pay no income tax up till £12,569.
- Between £12,570 and £14,667 you pay a tax of 19%.
- Between £14,667 and £25,296 you pay 20% tax.
- From £25,296 to £43,662 you pay 21% tax.
- From £43,662 to £150,000 you pay 41% tax.
- Again, your personal allowance drops by £1 for every extra £2 you have over £100,000.
- If your annual income is over £150,000 you pay 46% tax.
The tax drawn on income is direct tax. If you are a salaried person, this tax is calculated by your payroll. If you are self-employed, you need to self-assess.
Another thing you need to keep in mind is that these tax bands are subject to change. They may remain unaltered for a range of years, but usually, they are reviewed and revised every April. The figures mentioned on this page are based on 2022-23 UK tax bands.