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Understanding British (UK) Income Tax Rules
Want to understand British Income Tax rules? Here is how to reduce your tax burden.
Understanding the UK income tax system is crucial for anyone earning income in the United Kingdom (or planning to).
Whether you’re a resident or a non-resident, if you earn income in the UK, you’re subject to UK income tax.
This article will explain the details of the UK income tax rules and tax brackets and provide tips on how to minimize your tax liability.
UK Income Tax Rates
The UK tax year runs from April 6 to April 5 of the following year. You must file your tax return by January 31, after the end of the tax year.
For example, for the tax year ending April 5, 2024, you must file your tax return by January 31, 2025.
The UK income tax system is progressive, meaning the more you earn, the higher your tax rate.
The system is divided into three tax brackets: the basic rate, the higher rate, and the additional rate.
- The Basic Rate: If your income is between £12,571 and £50,270, you fall into the basic rate tax bracket. The tax rate for this bracket is 20%. This means that you pay 20% of your income above the personal allowance of £12,570.
- The Higher Rate: If you earn between £50,271 and £150,000, you’re in the higher rate tax bracket. The tax rate for this bracket is 40%. This means that you pay 40% of your income above £50,270.
- The Additional Rate: If your income is over £150,000, you fall into the additional rate tax bracket. The tax rate for this bracket is 45%. This means that you pay 45% of your income above £150,000.
These tax brackets apply to your taxable income, which is your total income minus your personal allowance and any other tax reliefs or deductions you’re eligible for.
The personal allowance is the amount of income you can earn each year without having to pay taxes.
For the 2023/2024 tax year, the personal allowance is £12,570. However, if your income is over £100,000, the personal allowance reduces by £1 for every £2 you earn above £100,000.
Tips For Paying Less
While paying taxes is a civic duty, there are legal ways to minimize your tax liability (nothing to be ashamed of).
Here are some tips:
- Maximise Your Personal Allowance: Make sure you’re making the most of your personal allowance. If your spouse or civil partner earns less than you and has an unused personal allowance, consider transferring some of your income to them to utilize their allowance.
- Use ISAs: Individual Savings Accounts (ISAs) allow you to save or invest money tax-free. The money you put in an ISA, up to the annual limit, is free from income tax and capital gains tax.
- Contribute to a Pension: Contributions to your pension can reduce your taxable income. The government provides tax relief on pension contributions up to 100% of your earnings or a £40,000 annual allowance, whichever is lower.
- Claim Tax Deductions and Reliefs: You can reduce your taxable income by claiming tax deductions and reliefs. This includes costs related to work, charitable donations, and maintenance payments.
- Consider Incorporation: If you’re self-employed, consider incorporating your business. Corporation tax rates are often lower than income tax rates, and you can take advantage of various tax deductions and reliefs.
This article helps you know how much of your income you’ll keep after taxes and how much you’ll contribute to the state.
By utilizing the tips provided, you can legally minimize your tax liability and keep more of your hard-earned money.
Others who are interested in British income tax rules usually consider The Netherlands as well — read here.