Income Tax Rates

The basic rate of income tax is 20%, while the higher rate is 40% and the additional rate is 45%.  These rates will not rise during this parliament.

There are special tax rates for interest income and dividends.

Individuals whose total income is less than £15,600 currently pay no tax on their interest income.   This is the personal allowance of £10,600, plus the 0% starting rate for interest of £5,000.

As previously announced in March, a new personal savings allowance is to be introduced with effect from 6 April 2016.  This will affect the tax rate for interest paid on bank and building society accounts which are not ISAs.

For people with income of under £43,000 in 2016/17, this will exempt the first £1,000 of interest income from tax.

People with total income of £17,000 or less in 2016/17 won’t have to pay any tax on their interest income, because the first £11,000 of their general income will fall within the personal allowance.  If the rest of their income is bank interest, £1,000 of this within the personal savings allowance and the next £5,000 will fall within the 0% starting rate for bank interest.

People with income of between £43,001 and £150,000 in 2016/17 will have a personal savings allowance on the first £500 of their bank interest.

The personal savings allowance and starting rate for tax on interest will only affect the tax rate on your interest income, not the tax on your other income.

From April 2016, banks and building societies will stop automatically deducting 20% income tax from interest on non-ISA accounts.

A new dividend tax allowance will be introduced from 2016/17.  The first £5,000 of dividend income will be taxed at 0%.  Additional dividends will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.  As before, dividends will be treated as the “top slice” of an individual’s income for tax purposes.

Dividend tax credits will no longer apply, so dividends will not be “grossed up” and tax will be paid on the actual dividend received.

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Nov 25

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