The UK financial system features a broad range of tax brackets, allowances and earnings thresholds that apply to both private individuals and organisations alike. Businesses in particular need to be continually mindful of what the Government expects of them to ensure that they remain compliant and avoid any enforcement action from HMRC.

Without an in-depth understanding of the rule and regulations, the UK tax system can often be difficult to navigate. To help, we’ve put together a comprehensive summary of the UK’s personal and company tax regulations for the 2021/22 tax year to give you a head start. We’ll keep this article updated when changes are announced, so make sure you keep it bookmarked.

Below we’ll cover off tax rates, bands and allowances in England, Wales, Scotland and Northern Ireland, but it’s important to understand that the Scottish Parliament sets its own tax rates and thresholds under the authority of the devolved Scottish Government in Holyrood.

Table of Contents

Personal Tax

Your tax-free personal allowance in the UK

Tax-free allowances are broken down into two main types:

  • Allowances: The amount of money you’re able to earn before the Government asks you to pay any tax whatsoever.
  • Tax relief: Beyond the basic threshold, there are additional relief measures available based on a variety of personal circumstances.

What is the Personal Allowance for the 2021/22 and 2020/21 tax years?

A person’s Personal Allowance represents the amount of money someone can earn before being asked to pay tax. Most people are allowed to earn £12,750 per year before paying income tax, for which there are variable rates depending on their annual salary.

In addition, if a person earns over £100,000 a year, their personal allowance goes down by £1 for every £2 they earn over £100,000, reducing their non-taxable income based on how much they earn, even if it means their personal allowance goes down to zero. If this happens, a person pays income tax on all of their salary, although they would have to be earning £125,500 for this to occur.

Allowances 2021/22 2020/21
Personal Allowance £12,570 £12,500
Income limit £100,000 £100,000

An individual whose total annual earnings comes in under the UK’s basic personal allowance is likely either a part-time worker or a young person earning a lower minimum wage rate.

For comparison, a full-time adult employee (23 years or older) earning the UK minimum wage (£8.91 per hour) and working for 37.5 hours per week earns a gross income of £17,374.50, but given that they are able to earn £12,570 tax-free, only £4,804.50 of their gross income is taxable (at the basic rate of 20%).

 

How does the Personal Allowance affect the self-employed?

The short answer is that if you’re self-employed, you benefit from the same tax-free Personal Allowance as a person who is employed by a company or organisation.

If, however, you have two jobs – one of which counts you as self-employed, there are a few things to consider.

UK Government tax rules dictate that a Personal Allowance can only be applied to one job. It’s standard practice to apply your Personal Allowance on the job that provides you with the most income.

If the Personal Allowance covers all the income on your main job, you’ll pay tax on all your earnings from your second job.

If you work two jobs, and neither of them provides you with an income of £12,570, you’re allowed to split your Personal Allowance between both of them.

A quick and easy way to establish where your Personal Allowance is being applied if you have two jobs is to look at the tax code on your payslip:

  • 1250L – Classed as your main job
  • BR, D0 or D1 – Classed as your secondary job

 

Tax on savings income & Personal Savings Allowance

The Government allows people to earn income from their savings, in the form of interest, without paying a certain amount of tax.

Earnings on savings are based upon three main factors:

  • Your Personal Allowance – if your annual income was lower than your Personal Allowance, you can apply your Personal Allowance towards income gained from interest on your savings.
  • The ‘starting rate’ for savings – if your other income amounts to less than £17,570, 0% income tax is applied to savings income up to £5,000 per year (after deducting allowances such as your Personal Allowance and Blind Person’s Allowance).
  • The Personal Savings Allowance – depending on what Income Tax band you’re in, you’ll also be able to receive interest on your savings of up to £1,000, without the need to pay income tax on it.
Income Tax band Personal Savings Allowance
Basic rate £1,000
Higher rate £500
Additional rate £0

A Personal Savings Allowance covers interest from the following sources:

  • Bank and building society accounts
  • Savings and credit union accounts
  • Unit trusts, investment trusts and open-ended investment companies
  • Peer-to-peer lending
  • Trust funds
  • Payment Protection Insurance (PPI)
  • Government or company bonds
  • Life annuity payments
  • Certain life insurance contracts

 

Marriage Allowance

Marriage Allowance permits a spouse to transfer £1,260 of their Personal Allowance to their husband, wife or civil partner if it hasn’t been used. This means that the person transferring their Personal Allowance will ordinarily have an income lower than their Personal Allowance, thus creating a surplus.

Marriage Allowance can sometimes be difficult to calculate when taking into account other forms of income and taxation. The UK Government provides a handy tool to work out how much couples can save.

Transferring your Personal Allowance to your spouse is sometimes seen as a trade-off. Whilst one person may be asked to pay more tax, it usually means increasing the household’s disposable income.

The criteria for Marriage Allowance is as follows:

  • You’re married or in a civil partnership
  • You don’t pay Income Tax, or your income is below your Personal Allowance
  • Your partner pays Income Tax at the basic rate, which usually means their income is between £12,571 and £50,270 before they receive Marriage Allowance

For a full breakdown, visit the UK Government website.

 

Married Couples Allowance

If you or your spouse was born before 6th April 1935, and you’re currently living together, you may be eligible for Married Couple’s allowance – a reduction in your tax bill of between £353 and £912.50 a year for the 2021/22 tax year.

For marriages before 5th December 2005, Married Couple’s Allowance is applied to the husband’s earnings. For marriages and civil partnerships from 6th December 2005 onwards, it’s applied towards the income of the highest earner.

To find out how much your allowance is, use the UK Government’s Married Couple’s Allowance calculator.

 

Blind Person’s Allowance

Blind Person’s Allowance allows you to earn more before being asked to pay income tax, over and above the standard Personal Allowance.

Tax Year Blind Person’s Allowance Amended Basic Personal Allowance
2021 to 2022 £2,520 £15,090
2020 to 2021 £2,500 £15,000

Eligibility criteria for Blind Person’s Allowance differs within the UK, depending on what country the applicant lives in:

England and Wales

  • A person is registered with a local council as blind or severely sight impaired
  • A person has an official certificate that confirms their status as blind or severely sight impaired

Scotland and Northern Ireland

  • A person is unable to do work for which eyesight is essential
  • A person has an official certificate that confirms their status as blind or severely sight impaired

Property Allowance

Anyone who earns over £1,000 in income from land or property has to inform HMRC, either directly or via their Self-Assessment tax return.

Property allowance allows you to earn up to £1,000 a year tax-free from a property or piece of land unless the income originates from the following sources:

  • A company you, or someone connected to you, owns and/or controls
  • A registered partnership
  • Your employer or your spouse’s/civil partner’s employer

If you own shares in a property, all of the owners are allowed to apply Property Allowance towards their own share of the total income earned by the property.

Pension Contributions

Pension tax relief is a big consideration for anyone who is mindful of providing themselves with a comfortable living upon retirement.

Tax relief is available for private pension contributions that amount to 100% of your annual earnings, and unlike most other relief schemes, it’s often collected automatically, making it much less of a headache.

Tax relief on pensions is applied automatically in two scenarios:

  • Your employer deducts workplace pension contributions before accounting for Income Tax
  • If you earn Income Tax at the basic rate (20%), your pension provider will add it to your total pension pot (also known as ‘relief at source’). In Scotland, if your Income Tax rate is 19%, your provider will still be able to claim the relief at 20%.

If you’re relying on your pension provider to collect the relief at source, there are certain conditions that you need to agree to before they’re able to do so.

If you live in England, Wales or Northern Ireland, depending on how much you earn, additional tax relief is available via your Self-Assessment filings:

  • 20% up to the amount of any income you have paid 40% tax on
  • 25% up to the amount of any income you have paid 45% tax on

We have a separate article that explains in detail how pension tax relief for higher rate and additional rate taxpayers works – including detailed examples,

If you live in Scotland, the Self-Assessment rules are a little different. Pension tax relief is:

  • 1% up to the amount of any income you have paid 21% tax on
  • 21% up to the amount of any income you have paid 41% tax on
  • 26% up to the amount of any income you have paid 46% tax on

If you don’t pay any Income Tax at all but pay into a pension, you get tax relief at 20% on the first £2,880 you pay. Also, your pension provider can claim tax relief at source, at 20%.

Annual Allowance

Your Annual Allowance represents the maximum amount of pension savings within a tax year that benefit from tax relief. Think of it in the same way as your Personal Allowance but relating to your pension contributions.

  • The annual allowance for 2021/22 is the same it’s been since 2015/16 – £40,000
  • If you earn £40,000 or less, you can contribute all of your income (minus Income Tax) towards your pension and pay no further tax

Lifetime Allowance

The current Lifetime Allowance is set at £1,073,100. This is the total amount of pension contributions that you are allowed to accrue before paying tax on them. The Lifetime Allowance applies to all pension schemes that you’re enrolled in.

The amount of tax that the Government asks you to pay on your total pension pot varies on how you’ve decided to receive your pension.

  • If you’re going to get the money using the lumpsum approach, you’ll be taxed at 55% over the Lifetime Allowance
  • If you’ve decided to opt for incremental payments, the rate is reduced to 25%, and you can make income tax payments at your marginal rate

Your pension provider will inform you when you’ve exceeded your lifetime allowance and tell you how much tax you’re in line to pay.

Income Tax rates and Tax Brackets

Income tax rates and tax brackets for 2021/22 and 2020/21 tax years for England, Wales & Northern Ireland (after allowances)

Band Rate Income after allowances 2021/22 Income after allowances 2020/21
Starter rate - savings 10% Up to £5,000 Up to £5,000
Basic rate 20% Up to £37,700 Up to £37,500
Higher rate 40% £37,701 to £150,000 £37,501 to £150,000
Additional rate 45% Over £150,000 Over £150,000

Income tax rates and tax brackets for 2021/22 and 2020/21 tax years in Scotland (after allowances)

Band Rate Income after allowances 2021/22 Income after allowances 2020/21
Starter rate 19% Up to £2,097 Up to £2,085
Basic rate 20% £2,098 to £12,726 £2,086 to £12,658
Higher rate 40% £31,093 to £150,000 £30,931 to £150,000
Top rate 45% Over £150,000 Over £150,000

Income tax bands and rates for previous tax years for England, Wales & Northern Ireland (after allowances)

Band Rate Income after allowances 2019/20 Income after allowances 2018/9
Starter rate - savings 10% Up to £5,000 Up to £5,000
Basic rate 20% Up to £37,500 Up to £34,500
Higher rate 40% £37,501 to £150,000 £34,501 to £150,000
Additional rate 45% Over £150,000 Over £150,000

Income tax rates and tax brackets for 2021/22 and 2020/21 tax years in Scotland (after allowances)

Band Rate Income after allowances 2021/22 Income after allowances 2020/21
Starter rate 19% Up to £2,049 Up to £2,000
Basic rate 20% £2,050 to £12,444 £2,001 to £12,150
Higher rate 40% £30,931 to £150,000 £31,581 to £150,000
Top rate 45% Over £150,000 Over £150,000

Dividend Tax Rates and Tax Brackets 

A dividend is a sum of money paid by a company to its shareholders out of its profits. Your Dividend Allowance is the total amount of income you’re allowed to earn from dividends without paying tax.

The Dividend Allowance for the tax year 2021/22 is £2,000.

It’s important to remember that whilst you pay tax on some dividend payments, you only do so if those payments take you out of your Personal Allowance. To work this out, simply add the total amount of dividends you’ve received (or are in line to receive) to your standard income.

How much dividend tax do I need to pay?

If you go over the dividend allowance, the amount of tax you pay on further dividend payments is linked to your Income Tax band:

Income Tax band Tax rate on dividends over £2,000
Basic rate 7.50%
Higher rate 32.50%
Additional rate 38.10%

Employee National Insurance Contributions

Like Income Tax and other forms of taxation, the amount you pay in National Insurance (NI) contributions is linked to your employment status, your age (under-16s are exempt), the NI category you’re in, and how much you get paid:

Category Description
A All employees apart from those in groups B, C, J, H, M and Z
B Married women and widows entitled to pay reduced NI
C Employees over the State Pension age
J Employees already paying NI in another job
H Apprentices under 25
M Employees under 21
Z Employees under 21 already paying NI in another job

Employee National Insurance contributions by band

For the 2021 to 2022 tax year, the following table shows how much NI employers deduct from their employees’ monthly earnings:

Category £520 to £797 £797.01 to £4,189 Over £4,189
A 0% 12% 2%
B 0% 5.85% 2%
C N/A N/A N/A
H 0% 12% 2%
J 0% 2% 2%
M 0% 12% 2%
Z 0% 2% 2%

Self-employed National Insurance contributions

If you’re self-employed, your NI contributions are linked to how much profit you make, rather than your total monthly income.

For the tax year 2021-22, self-employed people pay NI at two separate rates:

  • Class 2 – Fixed at £3.05 per week if your annual profits exceed £6,475
  • Class 4 – 9% of profits between £9,501 and £50,000 and 2% on profits over £50,000

Self-employed people sometimes choose to make voluntary NI contributions, primarily to ensure that they are eligible for the State Pension upon retirement, or even in cases where their profits are not sufficient to warrant NI contributions.

Capital Gains Tax Rates and Tax Brackets

Capital Gains Tax is a tax that applies whenever you sell (or ‘dispose’ of) certain assets that are worth more than what you’ve paid for them. Capital Gains Tax isn’t concerned with the amount of money you’ve sold something for, only on the gain you’ve generated from the transaction.

UK Capital Gains Tax is collected on the following items (also known as ‘chargeable assets’):

  • Personal possessions worth £6,000 or more (excluding a car)
  • Any property that’s not your main home
  • Your main home if you’ve rented it out, used it for commercial purposes, or if it’s very large
  • Any shares that are not in an ISA or PEP
  • Business assets

Anyone who disposes of chargeable assets is granted a Capital Gains tax-free allowance, similar to their Personal Allowance, of up to £12,300 (or £6,150 for trusts).

For the 2021/22 tax year, any profits on chargeable assets above the tax-free allowance are taxed at the following rates, linked to a person’s income:

  • Annual income is below £50,270 – 10% (18% for residential property) for the whole gain.
  • Annual income is above £50,270 – 20% (28% for residential property) for the whole gain.
Type of asset Basic rate Higher rate
Shares 10% 20%
Residential property 18% 28%
Cryptoassets & cryptocurrency 10% 20%
Other 10% 20%

Inheritance Tax Rates and Tax Bands

Inheritance tax is a one-off tax on the ‘estate’ (e.g. houses, money, assets, possessions) of someone who has passed away.

As of the 2021/22 tax year, Inheritance Tax isn’t applied if:

  • The total monetary value of the estate is less than £325,000
  • Everything above the £325,000 threshold has been bequeathed to:
    • A spouse or civil partner
    • A charity
    • A community amateur sports club

In certain circumstances, such as when a residential property has been left to a person’s child / children, the Inheritance Tax threshold increases to £500,000.

If the total value of the estate exceeds the relevant threshold, Inheritance Tax is fixed at 40% on any amounts above the threshold.

If someone has bequeathed 10% or more of the net value of their estate to a charitable organisation, their estate has the option to pay Inheritance Tax at a rate of 36% on amounts over the threshold, instead of 40%

Company Tax

Corporation Tax Rates and Tax Brackets

Corporation tax is paid by three types of commercial entities:

  • A UK limited company
  • A foreign company with a UK branch or office
  • A club, co-operative or other unincorporated association

How much Corporation Tax your company pays depends entirely on how much profit it makes from:

  • Doing business (also known as ‘trading profits’)
  • Investments
  • Selling assets and making a profit (see ‘chargeable assets above’)

In 2015, the UK simplified its Corporation Tax rules by introducing two flat rates for most UK limited companies that generate a profit, which has remained the same in 2021/22:

  • 20% – Unit trusts and open-ended investment companies
  • 19% – All other companies

Certain other companies – also known as ‘ring-fenced’ companies – such as oil and extraction firms or businesses that derive profits from the sale of patents, are subject to different rates.

Find out more about our Corporation Tax Return service.

VAT Registration Threshold

The turnover threshold at which companies need to register for VAT in 2021/22 is £85,000 – the same it has been since 2017.

If your business has a taxable turnover in excess of £85,000 in the last 12 months (or you’re lucky enough to be able to project a taxable turnover of £85,000 in a 30-day period), you need to become VAT registered.

VAT registration for firms with a taxable turnover of less than £85,000 is still voluntary, depending on the kind of goods and services they sell.

Employer National Insurance Contributions

For the 2021/22 tax year, employer’s are expected to pay a rate of 13.8% below towards their employees’ monthly NI contributions, depending on the NI category and the employee’s monthly earnings:

Category £520 to £797 £797.01 to £4,189 Over £4,189
A 0% 13.80% 13.80%
B 0% 13.80% 13.80%
C N/A 13.80% 13.80%
H 0% 0 13.80%
J 0% 13.80% 13.80%
M 0% 0% 13.80%
Z 0% 0% 13.80%

The 13.8% flat rate indicated also applies towards Class 1A and 1B NI payments on expenses and benefits and lump sum redundancy payments.

 

Mileage Allowances

You can claim tax relief if you use a car, van, motorcycle or bicycle to do your job. The maximum amount per business mile is also known as the approved mileage allowance payment (AMAP).

Your employer is able to reimburse you directly into your salary – tax and NI free – for yearly mileage accrued at the below rates (unchanged from 2020/21):

 First 10,000 miles Above 10,000 miles
Cars and vans 45p 25p
Motorcycles 24p 24p
Bikes 20p 20p

Car Benefit (Benefit-in-Kind)

The UK Government encourages the use of company cars that feature low emissions.

Last year, the Government changed from using the NEDC model to the WLTP system for any cars registered from 6th April 2020 onwards.

Company car tax is based on a percentage of the car’s value (also called the P11D)and also based on its CO2 emissions.

An employee using a company car is then taxed via the Benefit-in-Kind (BiK) system at the relevant personal tax rate. Generally speaking, the lower the CO2 emissions, and the further a car is able to travel on electric power, the lower the tax rate will be.

For the tax year 2021/22, BiK rates start at 1% for fully electric cars and increase based on a car’s CO2 up to 37% for the highest polluting.

The total amount of tax payable on a company car by an employee is calculated by multiplying the P11D value by the BiK rate and the employee’s income tax rate.

At DS Burge & Co, we offer a complete range of accountancy services to help companies and private individuals get on top of their finances and reduce their tax liability.  Our friendly team are experts in all areas of UK tax, and we can even handle the stress of HMRC on