What are the tax bands and thresholds for 2021-22
Tax took the lead in Rishi Sunak’s pandemic budget. Around it revolves the central question of how thed UK will balance the books. Do you raise revenue by pushing up taxes or encourage growth by keeping them low. In the end it was a mixture of both. Tax increases are coming, but some of them have been pushed down the road.
The result will be some complicated calculation for both businesses and individuals. Understanding tax obligations can be complicated at the best of times, so we’ve listed all the relevant bands to help you understand what you’ll be paying.
Income tax is the amount most employees see deducted from their pay packets. They range from basic rate at 20% to the additional rate on all incomes above £150,000 which is 45%.
|Basic rate: The rate most people pay.||£12,500 – £50,000: 20%||£12,570 – £50,270: 20%|
|Higher rate: The middle tier for higher earners.||£50,000 – £150,000: 40%||£50,270 – £150,000: 40%|
|Additional rate: The top rate for the highest.||Over £150,000: 45%||Over £150,000: 45%|
They do things differently in Scotland
For 2021/22, Scotland has different tax rates for Scottish residents. As with the rest of the UK, the Personal Allowance is reduced by £1 for every £2 earned over £100,000. This is the same as the rest of the UK.
|Starter rate||£12,500 – £14,585: 19%||£12,571 – £14,667 (£2,097)|
|Scottish Basic Rate||£14,585 – 25,158: 20%||£14,668 – £25,296 (£10,629)|
|Intermediate rate||£25,158 – £43,430: 21%||£25,297 – £43,662 (£18,366)|
|Higher rate||Over £43,430 – £150,000: 41%||£43,663 – £150,000|
|Top rate||Over £150,000: 46%||Over £150,000|
The personal allowance is the limit below which you pay no taxes on your income. However, this year the government announced it will freeze income tax at 2021/22 levels until 2025/26.
|Personal allowance: £12,570|
|When personal allowance is reduced (£1 of personal allowance for each £2 you earn above £100,000)||£100,000|
|Point at which personal allowance ends||£125,000|
Here’s where things can get difficult. National Insurance bands and rates can be some of the most confusing around – mainly because things are different depending on whether you’re an employee, sole trader or director of a limited company.
If you’re an employee, you will have to pay Class 1 National Insurance Contributions. These will be calculated by your employer and taken out of your pay packet
|Class 1 National Insurance thresholds||2020 to 2021||2020 to 2021|
|Lower earnings limit||£6240||£6,240 per year|
|Primary threshold||£9,500||£9,568 per year|
|Secondary threshold||£8,788||£8,840 per year
|Upper secondary threshold (under 21)||£50,000||£50,270 per year|
|Apprentice upper secondary threshold (apprentice under 25)||£50,000||£50,270 per year|
|Upper earnings limit||£50,000||£50,270 per year|
Earnings above the upper limits are taxed at 2%.
NIC for the self employed
Earnings above the upper limits are taxed at 2%.
If you decide to go self-employed you will usually pay Class 2 or 4 National Insurance depending on your profits.
|Small profits threshold – No NICs for earnings below the threshold.||£6,475||£6,515|
|Class 2 NICs – If your company earns more than the small profits threshold.||£3.05 per week||£3.05 per week|
|Class 4 – Over this limit, class 4 national insurance will apply at 9% of profits||£8,632||£9,658|
|Upper Profits Limit – Profits over this limit are charged at 2%.||£50,000||£50,270|
Dividend tax rates
Dividend taxes are lower than general income tax which is why many self-employed people choose to incorporate as limited companies. This enables them to optimise their tax bill by paying themselves a salary at around the lowest rate and taking the rest through dividends. This year the allowance below which you do not pay any tax, and the bands have remained unchanged.
|Dividend ordinary rate||7.5%|
|Dividend upper rate||32.5%|
|Dividend additional rate||38.1%|
Capital Gains Tax
Whenever you sell or dispose of an asset that has increased in value, you’ll be liable to capital gains tax on the profit. This is not the amount you receive. How much you pay will be linked to your taxable income. These rules can be extremely complex so it can help to talk to an accountant.
|Annual capital gains exemption||£12,300|
|Basic rate taxpayers||Gains from other residential property||18%|
|Gains from other chargeable assets||10%|
|Higher Rate taxpayers||Gains from other residential property||28%|
|Gains from other chargeable assets||20%|
Entrepreneurs have a lifetime relief of 10%.
Companies will have to shoulder a number of taxes. The most well-known is corporation tax. Under the conservatives it has fallen to 19%. For 2021 rates remain the same, but the Chancellor plans to raise it to 25% starting from 2023.
Financial year beginning April 2022: 19%
Financial year beginning April 2023: 25%
Small profits rate for the financial year beginning 2023 19%
The level of revenue at which you must register for VAT also remains unchanged at £85,000. From then on, the general VAT rates are as follows:
|Standard: The VAT rate which applies to most goods or services. It’s the one most of us will expect to pay.||20%|
|Reduced rate: A lower rate for certain goods and services.||5%|
A zero rate applies to certain goods such as foods and children’s clothes.
Tourists and Hospitality VAT rate 12.5%
Certain goods or services have a zero-rate applied which means there will be no VAT.
Flat Rate VAT scheme sector rates
The flat rate scheme was introduced to simplify VAT for smaller businesses. You will only have to submit a flat rate to HMRC which reduces the amount of paperwork you have to manage. It also allows you to keep the difference between the flat rate and the amount charged to customers, which can be a handy little bonus. If your turnover exceeds £230,000 per year you can no longer use the flat rate scheme and if you are a limited cost trader you must use the 16.5% rate regardless of the sector.
Rates vary depending on the business sector, so if you want to join a scheme you should select your sector and look at the rates for all transactions where VAT applies. Again, this can all be complicated which is why it’s a good idea to consult an expert.
Business mileage can be claimed at specific rates. This is called the approved mileage allowance payments (AMAP).
|First 10,000 miles||Over 10,000 miles|
|Car / van||£0.45||£0.25|
Sorting out your Tax
Whether you’re just an employee or have gone self-employed, tax can be a complicated minefield, which is why it may well be worthwhile employing a person or company to help manage your accounts. It can cost money and many contractors and small businesses will choose to manage all their accounts themselves. This can lead to mistakes and missing various opportunities to reduce your tax bill. A good accountant, therefore, could more than repay that investment when it comes to paying your taxes at the end of the year.
At 3 Wise Bears, we offer a range of accountancy services including managing your end of year accounts. This means we’ll take away the burden of filling in your tax forms, ensure you comply with all the rules and optimise your tax bill.