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Income Tax Brackets & Personal Allowance

Ever wondered which tax bracket you were in? Find out what your bracket means for you, along with your Personal Allowance limit for the year. We also explain the difference between income tax and national insurance.

Ever wondered which tax bracket you were in? Find out what your bracket means for you, along with your Personal Allowance limit for the year. We also explain the difference between income tax and national insurance.

Anelda Knoesen
From the Money team
5
minute read
Do you know someone who could benefit from this article?
Posted 17 APRIL 2020

What is my Personal Allowance in 2020?

The current Personal Tax Allowance income tax threshold, for 2019/2020 is £12,500. This means that you don’t get taxed on the first £12,500 of what you earn.

Which Income Tax band am I in?

It’s quite simple to work out which income tax band you’re in. It’s all based on the amount of taxable income you earn each tax year. The UK tax brackets work out as below:

Income tax band Income tax threshold Income tax rate
Personal Allowance £0 - £12,500 0%
Basic Rate £12,501 - £50,000 20%
Higher Rate £50,001 - 150,000 40%
Additional Rate £150,000+  45%

As you move up, or down, the UK tax bands, the money you earn is taxed at each threshold. For example, the first £12,500 you earn is your tax free allowance, while earnings you make after that, between £12,501 and £50,000 are taxed at a rate of 20%. If you were to then earn more than this, the earnings above that £50,000 would then be taxed at a rate of 40%.

It’s designed so that the tax system is as fair as possible. It means that the bulk of tax is paid by the wealthiest of the population, while the lower earners contribute less.

Is National Insurance separate from income tax?

National Insurance is a separate form of tax, in addition to income tax. It’s applicable to anyone over 16, earning more than £166 a week, or a profit of £6,365 a year for those who are self-employed.

Find out which National Insurance category you are in below:

Category Definition
A Employees who do not qualify for the below categories 
B Married women and widows (pay reduced National Insurance) 
C Employees over the State Pension age 
H Apprentices under 25 
J Employees who are already paying National Insurance through another job
M Employees under 21 
Z Employees under 21 who are already paying National Insurance through another job 

The amount of National Insurance deducted from your pay can be broken down to the following categories:

Category Annual salary
  £8,632 £8,632 - £50,000  £50,000+ 
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%

What if my income is above £100,000?

If your annual income rises above £100,000, your Personal Tax Allowance (originally £12,500) decreases by £1 for every £2 over £100,000 you’re earning. This means that, once you’re earning £125,000 a year or more, your Personal Allowance falls to £0.

What is Marriage Allowance?

Marriage Allowance is a way for married couples to share a portion of their Personal Tax Allowance. It lets you transfer up to £1,250 of your Personal Allowance to your spouse or civil partner.

To qualify for Marriage Allowance, you must meet the following criteria:

  • You’re married or in a civil partnership
  • One of you does not pay Income Tax, or has an income below the Personal Allowance limit. In 2020, this is £12,500.
  • The other of you pays the basic income tax rate. In 2020, this is 20% and applies to those earning between £12,501 and £50,000 (£12,501 and £43,430 in Scotland).

This is useful if one of you is the main or sole earner in the relationship, providing them with a tax benefit of up to £250 a year, as of 2020.

For example, you earn £12,000 a year, which is £500 below the 2020 Personal Tax Allowance of £12,500. Therefore you don’t pay tax. Your partner is the main earner in the household, and earns £40,000 a year. They also have a Personal Allowance of £12,500, which means they have a taxable income of £27,500.

With Marriage Allowance, you can transfer £1,250 of your Personal Allowance to your spouse. This means that your Personal Allowance will drop to £11,250, meaning you’ll be taxed on £750 of your annual income (at 20% this is £150). Meanwhile, your parner’s rises to £13,750, meaning they will be saving £250 a year on tax (at 20% of £1,250). This means you’re saving £100 as a couple.

What is Personal Savings Allowance?

On top of your Personal Allowance, you can also receive a tax free allowance of interest each year. This is your Personal Savings Allowance, which is up to £1,000 in 2020.

Savings earned with an ISA do not contribute to your Personal Savings Allowance. Find more information on ISAs here.

Your Personal Savings Allowance depends on your Income Tax band

Income Tax Band Personal Savings Allowance
Basic Rate £1,000
Higher Rate £500
Additional Rate £0

What happens if income tax thresholds are raised in 2020?

A rise in income tax thresholds is something that affects us all, and a change that most of us will be able to relate to. The income tax threshold has risen from £11,000 in 2016, to £12,500 in 2020. The Higher Rate threshold has also increased to £50,000, at which point you’ll start getting taxed at a rate of 40%.

The increase in Personal Allowance, along with a rise on the higher rate threshold, means you’re being taxed for less of your annual income, and can earn more before you’re taxed more heavily. This should leave you better off. Of course, a rise in the cost of living and inflation may mean you the benefits feel less obvious.

This is why it’s important to try and save what you can. It’s worth taking the time to see why a savings account, or taking advantage of tax-free savings with a cash ISA, might be good for you.

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