The UK tax system is a complex system. There are a variety of tax bands, allowances, and relief schemes affecting the way that individuals and businesses are taxed.

To help you with your tax, we explain the 2020/21 tax rates and thresholds, and how these affect your personal and business finances.

What is the Personal Allowance tax threshold for 2020/21?

The Personal Allowance tax threshold for 2020/21 is £12,500.

Your personal tax allowance is how much income you’re allowed to earn before you start paying tax on it. So, if you earn £18,000 per year, you’ll only pay tax on anything above £12,500.

 

£18,000 – £12,500 = £5,500. The taxable element of your income would be £5,500.

What are the income tax rates and thresholds for 2020/21?

The amount of income tax that you pay depends on how much money you earn, and from where. Think of the income tax system as a stack of blocks, where each block represents a salary range that you pay a percentage of tax on.

2020/21 Income Tax bands, thresholds and rates 
Tax band name Threshold
Personal allowance – how much you’re allowed to earn before you start to pay income tax £0 – £12,500
Basic rate income tax 2020/21 £12,501 – £50,000
Higher rate income tax 2020/21 £50,001 – £150,000
Additional rate income tax 2020/21 £150,000 upwards

What is National Minimum Wage in 2020/21?

National Minimum Wage (NMW) is paid based on an employee’s age. There are different rates for apprentices.

2020/21 National Minimum Wage
For employees aged National Minimum Wage
21 – 24 £8.20 per hour
18 – 20 £6.45 per hour
Under 18 £4.55 per hour
Apprentices £4.15 per hour

What is National Living Wage in 2020/21?

The National Living Wage (NLW) is paid to employees aged 25 and over. The statutory amount of NLW in 2020/21 is £8.72 per hour.

What are the National Insurance rates for 2020/21?

The rate of NI that you pay depends on whether you are an employee, an employer, or self-employed. Just to make things even more confusing, there are different thresholds within each class, too! We’ve tried to make it as clear as possible with a series of tables below.

Paying the right amount of National Insurance Contributions (NICs) is important, especially as it can count towards being eligible for some benefits, or the state pension.

Employees pay Class 1 National Insurance

Employees who are eligible have NI deducted from their pay by their employer, who then pay it HMRC on their behalf through PAYE. Use our free online salary and tax calculator to work out your take-home pay.

Class 1 National Insurance thresholds and rates for employees 2020/21
Weekly Threshold 2020/21 Annual Threshold 2020/21
Lower Earnings Limit (LEL) Employees earning less than this limit won’t incur NI, but also won’t accrue NI benefits, such as qualifying payments towards their State Pension. £120 £6,240
Primary Threshold This is the point at which employees start paying NI. Earning below this, but above the Lower Earnings Limit still doesn’t incur NI, but employees will earn NI ‘credits’, and accrue NI benefits. £183 £9,500
Upper Earnings Limit (UEL) Earnings above the Primary Threshold and below the Upper Earnings Limit are taxed at 12%. £962 £50,000
Earnings above the Upper Earnings Limit are taxed at 2%
Employers pay Class 1A or 1B National Insurance

These are contributions that employers pay to HMRC on their employees’ expenses and benefits, every time they are paid. Use our free online calculator to work out the cost of hiring someone.

Class 1A and 1B National Insurance thresholds and rates for employers 2020/21
Weekly Threshold 2020/21 Annual Threshold 2020/21
Secondary Threshold Employers pay NICs at a rate of 13.8% on salary payments above this threshold. £169 £8,788
National Insurance and the Employment Allowance

Eligible employers can claim up to £4,000 relief to cover the costs of employers National Insurance, by claiming the Employment Allowance.

To be eligible for the Employment Allowance, employers need to have at least 1 employee or 2 directors on the payroll. The directors can’t already be claiming it through another company.

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Self-employed people pay Class 2 and/or Class 4 National Insurance

Self-employed workers might pay both Class 2 and Class 4 NI, depending on how much they earn from their self-employed work. If you’re a self-employed person, your National Insurance contribution will be worked out as part of your Self Assessment tax return.

If you’re both employed and self-employed;

Class 2 and Class 4 National Insurance thresholds and rates for self-employed workers 2020/21
Self-employed income earned Contribution rate 2020/21
£0 – £6,474 No NI incurred on income earned in this bracket Can make voluntary contributions to fill any gaps in NI record
Small Profits Threshold (SPT) (£6,475) £6,475 – £9,500 Class 2 NICs incurred on income earned in this bracket Class 2 NICs are £3.05 per week in 2020/21
Lower Profits Limit (LPL) (£9,500) £9,501 – £50,000 Class 4 NICs incurred on income earned in this bracket Class 4 NICs incurred at a rate of 9%
Upper Profits Limit (UPL) (£50,000+) Over £50,000 Class 4 NICs incurred on income earned in this bracket Class 4 NICs incurred at a rate of 2%

 

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How much tax will I pay on dividends in 2020/21?

If you’re the director of a limited company, the most tax efficient way to pay yourself is usually through a combination of taking a salary and dividend payments.

Our guide to salaries and dividends explains this in more detail, and we’ve written an article which explains the most tax efficient salary for directors to pay themselves in 2020/21.

You’ll pay tax on any dividends earned over your dividend allowance, so remember to deduct your allowance! Your tax band is worked out by adding your total dividend income to your other income. You may pay tax at more than one rate.

Dividend Tax Rates 2020/21
Total income earned Dividend tax rate 2020/21
Personal Allowance £0 – £12,500 0%
Basic-rate tax payers £12,501 – £50,000 7.5% paid on dividends earned above dividend allowance
Higher-rate taxpayers £50,001 – £150,000 32.5% paid on dividends earned above dividend allowance
Additional-rate taxpayers £150,000 upwards 38.1% paid on dividends earned above dividend allowance

Use our free online tax calculator to compare your take home pay as a sole trader versus as the director of a limited company. It will help you work out the most tax-efficient structure for your business.

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How much is Capital Gains Tax in 2020/21?

Capital Gains Tax (CGT) is payable on any profit you make after ‘disposing’ of an asset that you own. The amount of CGT that you owe is worked out on the gain that you’ve made, not on the total amount of money that you made from disposing of the asset.

Disposing of an asset usually means that you’ve sold it, but also includes giving it away to someone, swapping it for something else, or being compensated for its loss in other ways.

Capital Gains Tax Rates 2020/21
Capital Gains Tax 2020/21
Annual exemption from capital gains £0 – £12,300 0%
As a basic-rate tax payer (£12,501 – £50,000) Gains from other residential property 18% paid on Capital Gains earned above exemption limit
Gains from other chargeable assets 10% paid on Capital Gains earned above exemption limit
As a Higher Rate taxpayer (£50,001 – £150,000) Gains from other residential property 28% paid on Capital Gains earned above exemption limit
Gains from other chargeable assets 20% paid on Capital Gains earned above exemption limit

 

You might also be eligible for Business Asset Disposal Relief on any assets that qualify. This was formerly known as Entrepreneur’s Relief.

How much is Corporation Tax in 2020/21?

Corporation Tax for 2020/21 is 19%. Limited companies pay Corporation Tax on the profits made, such as by doing business, selling assets for more than they cost, or through investments. Watch our video to learn more about Corporation Tax.

What is the VAT registration threshold in 2020/21?

If your revenue reaches the VAT registration threshold then you must register for VAT. It hasn’t changed for 2020/21, and remains at £85,000.

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Have VAT rates changed for 2020/21?

The actual rates for general VAT haven’t changed for 2020/21, but as of 1st December 2020, e-books, online newspapers, magazines, and journals will no longer be subject to VAT. Hurrah!

VAT Rates 2020/21
VAT rate 2020/21
Standard rate The rate of VAT which applies to most goods and services. 20%
Reduced rate A lower rate applicable to certain goods and services, such as electricity and gas. 5%
Zero rate Applied to some goods and services, such as food or children’s clothing. 0%

 

Tax is an incredibly complicated area, and it’s easy to get confused. Our online accountants and bookkeepers are ready to help – find out more about our online accountancy services by calling 020 3355 4047, or using the Live Chat button on screen.

About The Author

Elizabeth Hughes

A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible.

2 Comments
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Anshul Sharma
Anshul Sharma
14th August 2020 2:18 pm

Hi Admin

Self-Employed: How to calculate your tax?This comment is very useful for law purposeuk solicitor qredible

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