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January 9, 2021
January 9, 2021
Tax essentials

What's a tax band and how do they work?

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Do you also struggle how to calculate what tax rate you're paying on your income?

It's commonly accepted that most of us will be taxed on our income. However, not everyone can afford to pay the same amount. HMRC uses a system of tax bands to make income tax fairer and charge different rates to people earning different amounts of money.

In England and Wales there are four different bands for income tax:

It all starts with an allowance

The first band, the tax-free allowance, is the amount of money you can earn before paying tax.

The standard worker in the UK has a tax free allowance of £12,570 for the tax year 2021/22. Your tax-free allowance can go up or down depending on your marital status, your total income, or other specific circumstances. For example:

Incremental tax bands

After the tax allowance, income is split into bands, each of which is taxed at a different rate. It's important to remember that moving into another band doesn't mean you pay more tax on all your income, just the bit that's over the threshold.

The Basic rate band

The Basic rate applies to all income you earn above your tax-free allowance and before you are charged the higher rate. In the 21/22 tax year, this is between £12,571 and £50,270. Anything you earn within the band is taxed at 20%.

As an example, if someone earns £13,570 a year, they pay 0% tax on the first £12,570, then on the additional £1000, they pay 20% (or £200).

Higher and Additional rate bands

The Higher and Additional rates work in a similar way.

To give another example, take someone earning £55,000. They would pay:

Why does it work like this?

The system is designed to tax people more on their higher earnings. The logic being that as people earn more, they can afford to pay more tax to HMRC.

How does my self employed or side income play into this?

Your income tax is based on your total income. If you have a side income, it's everything from your employer plus your profit from your side income. While your employment income is taxed monthly through PAYE, your side income is taxed when you submit your tax return.

Consider someone earning £15,000 from employment and £5,000 from their side income:

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