Every year we are given a personal tax allowance, this year its £12,570 (2021-22) last year it was £12,500 (2020-21).
The allowance is the amount we can earn before we pay tax.
The tax bands are currently (2021-22)
| Band | Taxable income | Tax rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £150,000 | 40% |
| Additional rate | over £150,000 | 45% |
But on your tax return the personal allowance is allocated in a specific order
- Non-savings income – comprised of earnings, pensions, taxable social security payments, trading profits and income from property. The highest type gets the first allocation.
- Savings income
- Dividend income is the top slice.
The Rules are in the Income Tax Act 2007 (legislation.gov.uk)
Section 25 (2) states …deduct the reliefs and allowances in the way which will result in the greatest reduction in the taxpayer’s liability to income tax.
What makes this even more complicated is the the way that other allowances work for example the Savings Allowance and Dividend Allowance.
Your allowances for earning interest before you have to pay tax on it include:
- your Personal Allowance
- starting rate for savings
- Personal Savings Allowance
Starting rate for savings
You may also get up to £5,000 of interest and not have to pay tax on it. This is your starting rate for savings.
The more you earn from other income (for example your wages or pension), the less your starting rate for savings will be.
If your other income is £17,570 or more
You’re not eligible for the starting rate for savings if your other income is £17,570 or more.
If your other income is less than £17,570
Your starting rate for savings is a maximum of £5,000. Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.
Personal Savings Allowance
You may also get up to £1,000 of interest and not have to pay tax on it, depending on which Income Tax band you’re in. This is your Personal Savings Allowance.
To work out your tax band, add all the interest you’ve received to your other income.
| Income Tax band | Personal Savings Allowance |
|---|---|
| Basic rate | £1,000 |
| Higher rate | £500 |
| Additional rate | £0 |
Dividend Allowance
The Dividend Allowance is currently £2,000
You only pay tax on any dividend income above the dividend allowance.
| Tax band | Tax rate on dividends over the allowance |
|---|---|
| Basic rate | 7.5% |
| Higher rate | 32.5% |
| Additional rate | 38.1% |
Your SA302 Tax Calculation should show you how the allowances have been allocated.
