When was 40 tax rate introduced

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How much Income Tax someone pays in each tax year from 6 April to the 5 April the following year depends on:. It can go down to zero. Before the to tax year, the bigger Personal Allowance was based on age instead of date of birth. Between —91 and —08, the personal allowance and the higher-rate threshold both grew in real terms that is, adjusting for inflation Inflation is the change in prices for goods and services over time. In its Spring Budget, the government changed direction again — perhaps mindful of the need to raise revenue after the COVID crisis — announcing that all income tax thresholds will be frozen in cash terms at their —22 levels up to and including — On current inflation Inflation is the change in prices for goods and services over time.

Changes in the personal allowance and the higher-rate threshold naturally affect the number of taxpayers and the number of higher-rate taxpayers — although these numbers also reflect other factors such as trends in demographics, employment and income inequality. As shown in the charts below, the proportion of the population paying any income tax rose steadily through most of the s and s but fell from the late s onwards as a result of the big increases in the personal allowance.

Note: Figures for —09 are midpoints between surrounding years as data are not available. Numbers of taxpayers include Scottish taxpayers, who are classified as higher-rate taxpayers if they have total income above the UK higher-rate threshold or if they have non-savings, non-dividend income above the Scottish higher-rate threshold.

The proportion of the adult population paying income tax rose steadily through most of the s and s. Between —08 and —20, however, it fell from This partly reflects an overall rise in the employment rate over that period albeit fluctuating with the economic cycle , particularly among women. The freeze in the personal allowance in the coming years is likely to see the number of taxpayers rise again, though much depends on the path employment takes coming out of the COVID crisis. The proportion of adults paying higher rates of income tax rose much more sharply, from 3.

The rapidity of this increase is partly because income growth was higher towards the top of the income distribution for much of that period. Increases in the higher-rate threshold since then have stemmed the tide, but the freeze in the coming years is likely to see the number of higher-rate taxpayers reach new highs.

Income from savings and investments is taxed differently from other income. Each individual is also allowed to receive certain amounts of interest income and dividends outside ISAs free of tax. And dividends that are still subject to tax are taxed at reduced rates. When calculating which income falls into which tax band, dividends are treated as the top slice of income, followed by interest income.

Savings income — interest earned on deposits with banks or building societies — is subject to standard income tax rates, except that there are two specific provisions which in practice take much of it out of tax:. The chart below not to scale shows another example where both the personal allowance and the starting rate for savings would be relevant.

A specific dividend allowance is available to those who receive income from dividends on shares. Dividend income in excess of the dividend allowance is taxed at lower rates than other forms of income see the table. The chart below provides an example in which dividend income would be taxed at both the higher and additional dividend rates.

Note that, as mentioned above, dividends are treated as the top slice of income when deciding which income falls into which band. These savings can either be held in cash or invested in financial assets such as shares and bonds. Any income made on savings held in an ISA — any interest or dividends — is entirely exempt from income tax and any capital gains are exempt from capital gains tax.

Pension income is treated as deferred earnings for tax purposes. There are annual and lifetime caps on the amount that can be saved in a pension, both of which have been reduced significantly in recent years. These steep reductions have greatly reduced the tax relief available to those with the resources to make large contributions to their pensions. Income and capital gains received from investments within a pension scheme are free of personal tax while the money remains within the pension scheme.

But money withdrawn from a pension — as a regular income or as an ad hoc withdrawal — is taxed like any other form of income. In effect, income tax on earnings paid into a pension is deferred until the earnings and any investment returns earned in the meantime are received from the pension and available to spend. The exception to this is the withdrawal of a lump sum upon retirement. The way pensions are treated for income tax is very different from the way they are treated for National Insurance contributions : employer pension contributions are excluded from income for NICs purposes as for income tax but employee contributions are not, and no NICs are levied on pension income at all.

The Scottish and Welsh parliaments both have the power to make certain changes to the rates of income tax within their jurisdictions.

These powers do not apply to savings and dividend income, which continue to be taxed on a consistent basis across the UK. So far, only the Scottish government has chosen to use these powers, creating a separate system of rates and bands for Scottish taxpayers. The Scotland Act and Scotland Act greatly expanded the powers devolved to the Scottish Parliament to set its own income tax rates and bands though not the tax-free personal allowance for residents of Scotland, except for income from savings and dividends, which continue to be taxed at UK-wide rates.

Scotland has used these powers to set slightly different rates and bands from the rest of the UK. The table below shows the current income tax bands and rates in Scotland, along with the number of people in each band; the chart at the very start of this article shows how the rate schedule compares with that in the rest of the UK.

Taxpayers classified according to the highest band in which they have non-savings, non-dividend income: some will have savings or dividend income in a higher band. The 1,, figure for adults classified as below the personal allowance is calculated as the difference between the total number of taxpayers and the total adult i. Source: Number of taxpayers from table 2 here. The biggest difference from the rest of the UK, however, is in the higher-rate threshold.