INFORMATION
Tax-free Personal Allowance
The current tax year is from 6 April 2020 to 5 April 2021.
The standard Personal Allowance is the amount of income you do not have to pay tax on.
Allowance | 2020 to 2021 tax year |
---|---|
Personal Allowance | £12,500 |
The next tax year is from 06 April 2021 to 05 April 2022.
Allowance | 2021 to 2022 tax year |
---|---|
Personal Allowance | £12,570 |
Income Tax Rates
Income Tax you pay dependes on how much income is above the Personal Allowance.
Tax rate | Taxable income above your Personal Allowance |
---|---|
Basic rate 20% | £0 to £37,500 People with the standard Personal Allowance start paying this rate on income over £12,500 |
Higher rate 40% | £37,501 to £150,000 People with the standard Personal Allowance start paying this rate on income over £50,000 |
Additional rate 45% | Over £150,000 |
Dividend Allowance
There are different rules for tax on dividends.
Dividend allowance for tax year 2020 to 2021 is £2000. There is no change to Dividend tax rates in the 2021/22 tax year.
The tax you pay depends on which Income tax band you're in.
Tax band Tax rate on dividends over your allowance
Basic rate 7.5%
Higher rate 32.5%
Additional rate 38.1%
National Insurance classes
The class you pay depends on your employment status and how much you earn, and whether you have any gaps in your National Insurance record.
Who pays:
Class 1 Employees earning more than £183 a week and under State Pension age - they’re automatically deducted by your employer
Class 1A or 1B Employers pay these directly on their employee’s expenses or benefits
Class 2 Self-employed people - you don’t have to pay if you earn less than £6,475 a year (but you can choose to pay voluntary contributions)
Class 3 Voluntary contributions - you can pay them to fill or avoid gaps in your National Insurance record (currently rate is £15.30 a week or £795.60 a year)
Class 4 Self-employed people earning profits over £9,501 a year
If you’re employed
You pay Class 1 National Insurance contributions. The rates for most people for the 2020 to 2021 tax year are:
Your pay Class 1 National Insurance rate
£183 to £962 a week (£792 to £4,167 a month) 12%
Over £962 a week (£4,167 a month) 2%
If you're self-employed
You usually pay 2 types of National Insurance, depending on your profits:
Class 2 if your profits are £6,475 or more a year
Class 4 if your profits are £9,501 or more a year
You work out your profits by deducting your expenses from your self-employed income.
How much you pay
Class Rate for tax year 2020 to 2021
Class 2 £3.05 a week
Class 4 9% on profits between £9,501 and £50,000
2% on profits over £50,000 per year
If you're employed and self-employed
You might be an employee but also do self-employed work.
In this case your employer will deduct your Class 1 National Insurance from your wages,
and you have to pay Class 2 and 4 payments for your self-employed work (depending on your profits).
There are different National Insurance rules for Directors and Landlords.
National Insurance for Company Directors
Directors are classed as employees and pay National Insurance on annual income from salary and bonuses over £9,500.
If the directors own shares in a company they will pay tax on dividends that go above the dividend allowance in the tax year.
You have tax-free allowances for:
- savings interest
- dividends, if you own shares in a company
You may also have tax-free allowances for:
- your first £1,000 of income from self-employment - this is your ‘trading allowance’
- your first £1,000 of income from property you rent (unless you’re using the Rent a Room Scheme)
Find out whether you’re eligible for the trading and property allowances.
You pay tax on any interest, dividends or income over your allowances.
Trading allowance
The trading allowance is a tax exemption of up to £1,000 a year for individuals with trading income from:
- self-employment
- casual services, for example, babysitting or gardening (helpsheet 325 has more information about other taxable income)
- hiring personal equipment, for example, power tools
If your annual gross income from these is £1,000 or less, you do not need to tell HMRC, unless:
- you cannot use the allowances
- you must register for Self Assessment and declare your income on a tax return
You must tell HMRC if you have:
- gross trading income over £1,000 - register for Self Assessment
- other gross income over £1,000 up to £2,500 - contact HMRC
- other income over £2,500 - register for Self Assessment
This allowance does not apply to trading income from a partnership.
Property allowance
The property allowance is a tax exemption of up to £1,000 a year for individuals with income from land or property.
If you own a property jointly with others, you’re each eligible for the £1,000 allowance against your share of the gross rental income.
If your annual gross property income is £1,000 or less, you will not need to tell HMRC, unless you cannot use the allowances. If it’s higher, you’ll need to declare your property income.
You must tell HMRC if you have:
- gross property income over £1,000 up to £2,500 - contact HMRC
- property income over £2,500 - register for Self Assessment
You cannot use this allowance on income from letting a room in your own home under the Rent a Room Scheme.
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