Like anything, you normally only look at the bottom line. How much does the dreaded Taxman want from me this time???
But have you ever looked at the actual rates of tax that you pay?
Well, as true (Creative) geeks, we have here at WardWilliams Creative and we wanted to share these with you, as well as some thoughts on this.
First off, from a tax perspective, *everyone* has a personal allowance (PA). For the current tax year, this stands at £12,500 i.e. the first £12,500 of income is tax free.
*We say everyone but those whose income exceeds £100,000 have their personal allowance reduced by £1 for every £2 they go over £100,000.
Secondly, it is key to recognise that different types of income have different tax rates. Income is taxed in the following order:
- Non-savings income (eg. employment income, self employment income, rental profits)
- Savings income (eg. bank interest)
- Dividend income
The rates of tax on these various different sources of income are as follows:
| Non-savings income | Savings income | Dividend income | |
| Up to £12,500 (PA) | 0% | 0% | 0% |
| Over £12,500 – £50,000 | 20% | 20% | 7.5% |
| Over £12,500 – £50,000 | 40% | 40% | 32.5% |
| Over £150,000 | 45% | 45% | 38.1% |
Savings income benefits from a Personal Savings Allowance (PSA). Thus, the first £1,000 of taxable savings income is taxed at 0% for a basic rate taxpayer, with this reduced to £500 for a higher rate taxpayer. Additional rate taxpayers do not get a PSA.
Dividend income benefits from the Dividend Allowance (DA), whereby the first £2,000 of dividends is taxed at 0%. This is irrespective of the level of other income.
Let’s take a look at how this may work in action.
Say someone has a salary of £40,000, interest of £750 and dividends from some shares they hold of £1,500. In this example, they would pay income tax of £5,500 on their salaried income (via the PAYE system) and no tax on the interest (covered by the PSA) and no tax on their dividends (covered by the DA).
Now let’s look at a more common case for some of our clients – say a Director of a Limited Company has a salary of £8,784 (set at this level to ensure that no national insurance is payable by a national insurance credit is still received) and dividend income of £35,000. That’s total income of £43,784. They would be faced with a tax bill of £2,196.30 (payable through self-assessment), calculated as follows:
- First £12,500 – £NIL (covered by the personal allowance)
- Next – £2,000 – £NIL (covered by the dividend allowance)
- Remaining £29,284 – £2,196.30 (taxed at the basic dividend rate of 7.5%)
You will note that this Director has received income of £43,784, whilst paying tax of just over £2,000 – a tax rate of just 5%.
It is interesting (well, in a way), the way in which the tax rates interact and with careful planning, individuals can take advantage of the lower rates of tax that are offered, as well as ensuring that they are fully utilising all of the tax free allowances that are available to them.
Lastly, a final point to mention for you self-employed people – DON’T FORGOT YOUR NATIONAL INSURANCE (NICs).
As a self-employed individuals, as well as paying tax, you are required to pay Class 2 NICs (around £160 per annum) and Class 4 NICs, at the applicable rates. These rates are as follows:
Up to £8,788 – 0%
From £8,789 to £50,000 – 9%
Over £50,000 – 2%
It is key that you factor the NICs that you will pay into any budget as these can be overlooked and can add significant costs.
