Starting a new business? Get 40% off our accountancy services for 3 months! 😀

x

Read our guide to UK tax rates and thresholds for sole traders, limited companies, partners and partnerships, employers, and other businesses.

The UK tax system is a complex arrangement of tax bands, allowances, and relief schemes. The amount of tax that you pay, and even how you pay it, depends on the way that you earn money.

For instance, there are different tax rules depending on whether you’re a sole trader, a limited company, or another type of business structure. There are also different tax rates which will affect you if you’re an employee or an employer (or even both, which can happen if you’re the owner and director of your own company).

Tax rates and allowances can be confusing, so our guide explains what the tax rules are for different types of business, and what they mean for you. We also explain what the thresholds are, to help you be as tax efficient as possible.

 

The Personal Allowance

Income tax thresholds, rates, and bands

The National Minimum Wage (NMW) and National Living Wage (NLW)

National Insurance for employers, employees, and the self-employed

Employment Allowance

Dividend Tax

Capital Gains Tax

Capital Allowances

Corporation Tax

VAT registration threshold and VAT rates

When do tax rates change?

Tax rates and allowances tend to stay the same throughout the year, and usually only change at the start of a new tax year. This tax year (2022/23) is a bit unusual, because the primary threshold for National Insurance will increase in the middle of the year, in July. This doesn’t change the dates of the UK tax year though, which always runs from 6th April to the following 5th April each year. Any changes to UK tax are normally announced in the government’s Budget announcement before the new tax year starts, though sometimes emergency measures are introduced (such as business support during covid).

Recent budget announcements include updates which will affect National Insurance and dividend tax rates. This is partly because of a new Health and Social Care Levy, which will fund changes to the UK’s healthcare system.

Our guide below explains the different tax allowances, thresholds, rates and relief which might affect your personal income, as well as your business. If you need any help with tax, or need support with another area of your business, chat to one of the team about our online accounting services, or get an instant quote online.

 

Comprehensive tax return services

From only £24.50 per month

Learn more

What is the tax-free Personal Allowance?

The personal tax allowance is how much income you can earn before you start paying income tax on it. It could be income you earn from an employer, from your own business activities, or a mixture of both.

The personal allowance applies to all of your income as a total, so if you’re employed and self-employed, you’ll still only get the allowance once.

2022/23 Personal Allowance

The Personal Allowance tax threshold for 2022/23 is

£12,570

 

The allowance for 2022/23 (6th April 2022 – 5th April 2023) is £12,570, the same as the previous year’s allowance in 2021/22.

You’ll only pay tax on anything above the £12,570 Personal Allowance threshold, so if you earn £18,000 per year the taxable element of your income would be £5,430.

Bar chart example of tax rate deductions

The Personal Allowance for high earners

The tax-free Personal Allowance reduces for higher earners. For every £2 that you earn above £100,000, your Personal Allowance reduces by £1. This means that if you earn £125,000 or more, your Personal Allowance is zero.

 

What are income tax thresholds, tax rates, and tax bands?

These terms are sometimes used interchangeably, but they actually refer to different things. The amount of income tax that you pay depends on how much money you earn, and how you earn it.

Think of the income tax system as a stack of blocks, where each block (or tax band) represents a salary range. If you go above the threshold for that tax band, you’ll move up into the next one. The rate of tax that you pay is a percentage of your earnings within each block (or band).

It’s a common misconception, but if you earn more money and move up into a new tax band, this doesn’t mean that your new tax rate applies to all of your earnings. You only pay tax at the rate which affects the proportion of your earnings within a particular tax band.

2022/23 Income tax rates and thresholds

Our tables show the income tax rates and band thresholds for 2021/22 and 2022/23. The tax bands and thresholds for Scotland are different, and are shown below. We know how confusing tax can be, so take a look at our online tax accounting services, or get an instant quote online.

Tax Rate 2022/23
Tax Band Thresholds
2021/22
Tax Band Thresholds
Personal allowance: How much income you can earn before you start to pay income tax. No tax on this income. £0 – £12,570 £0 – £12,570
Basic rate income tax: 20% tax on the proportion of income which falls into this tax bracket. £12,571 – £50,270 £12,571 – £50,270
Higher rate income tax: The part of your income which falls into this tax band is taxed at 40% £50,271 – £150,000 £50,271 – £150,000
Additional rate income tax: This is the highest rate. The income you earn above this threshold is subject to tax at 45% £150,000 upwards £150,000 upwards

 

If you earn a self-employed or salaried income of £60,000 in the 2022/23 tax year, you’ll pay:

Use our free online tax calculators to work out your take home pay.

2022/23 Income tax in Scotland

Tax Rate 2022/23
Tax Band Thresholds
2021/22
Tax Band Thresholds
Personal allowance: How much income you can earn before you start to pay income tax. No tax on this income. £0 – £12,570 £0 – £12,570
Starter rate: 19% tax on this part of your income. £12,571 – £14,667 £12,571 – £14,667
Basic rate: 20% tax payable. £14,668 – £25,296 £14,668 – £25,296
Intermediate rate: 21% tax £25,297 – £43,662 £25,297 – £43,662
Higher rate: 41% tax £43,663 – £150,000 £43,663 – £150,000
Top rate: 46% tax rate Over £150,000 Over £150,000

 

Using the same salary of £60,000 from our previous example, a Scottish taxpayer will pay:

 

There are rules which state the basic minimum which employers must pay their staff, depending on the employee’s age.

To help you get past the jargon, our article explains the differences between National Living Wage, National Minimum Wage, and the Living Wage in more detail.

National Minimum Wage and National Living Wage 2022 and 2021

How much is National Minimum Wage in 2022/23?

National Minimum Wage is worked out on the basis of the employee’s age, though there are different rates for apprentices. Our table below shows the rate of NMW for 2021/22 and for 2022/23.

 

Employee Age 2022/23
National Minimum Wage
2021/22
National Minimum Wage
Apprentices £4.81 per hour £4.30 per hour
16 and 17 £4.81 per hour £4.62 per hour
18 – 20 £6.83 per hour £6.56 per hour
21 and 22 £9.18 per hour £8.36 per hour

How much is the National Living Wage?

National Living Wage (NLW) in 2022/23 is

£9.50 per hour

 

The age threshold for the National Living Wage (NLW) changed from 25 and older, to 23 and older for the 2021/22 tax year. The hourly rate of National Living Wage rose from £8.91 in 2021/22 to £9.50 in 2022/23.

 

Does everyone need to pay National Insurance?

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

National Insurance is paid by employees and self-employed workers on their income, and by employers on the wages they pay their staff. The rate of National Insurance that you pay can change because it depends on your employment status, as well as on how much money you earn.

The different types of National Insurance are known as ‘classes’; for instance, self-employed people pay Class 2 National Insurance.

Will I pay different types of NI?

You might pay more than one type (or class) of National Insurance in the same tax year. This can happen if you work for someone as an employee, as well as earning your own self-employed income, for example.

It can also happen if you’re an employer and an employee (such as someone who is a director of their own limited company), but there are other reasons too.

How much National Insurance will I pay?

The rate of NI that you pay depends on which Class you must make contributions for. Just to make sure things are really confusing, different classes of NI each have their own thresholds, and charge NI at different rates. It can be quite confusing, so get an instant quote for our online accounting services if you need more help.

Our tables below show the rates and thresholds for each class of National Insurance for employers, employees, and the self-employed.

 

 

From April 2022 there will be a temporary increase to the rate of Class 1 and Class 4 NI, though these rates will return to normal the following year. This is because of the new Health and Social Care Levy.

 

Learn more about The Health and Social Care Levy and what it means for you.

Class 1 (primary) National Insurance for employees

Employees pay Class 1 (primary) National Insurance as a percentage of the wages that they earn from an employer. Their employer normally deducts the NI from employees’ wages before paying them, and then pays the deducted amount to HMRC on their behalf through PAYE.

Deductions are only made if the employee qualifies for Class 1 NI, which depends on how much money they earn from their employer, and their age.

Use our free online salary and tax calculator to work out your take-home pay.

The Spring Statement 2022 announced that the National Insurance Primary Threshold will increase again, taking effect from July 2022.

2022/23 Class 1 (primary) National Insurance thresholds and rates for employees

2022/23
Weekly Threshold
2022/23
Annual Threshold
2021/22
Weekly Threshold
2021/22
Annual Threshold
Lower Earnings Limit (LEL): Employees earning less than this limit won’t incur NI, but they also won’t accrue NI benefits such as qualifying payments towards their State Pension. £123 £6,396 £120 £6,240
Primary Threshold: This is the point at which employees start paying NI on any earnings above the threshold. Earning below this, but above the Lower Earnings Limit still doesn’t incur NI, but employees will earn NI ‘credits’, and accrue NI benefits.

In 2022/23 the National Insurance Primary Threshold will increase during the tax year.

£184 £9,568

6th April – 5th July 2022

£190 £9,880

6th July 2022 onwards

£241.73 £12,570
Upper Earnings Limit (UEL): Earnings above the Primary Threshold up to (and including) the Upper Earnings Limit incur NI at the following rates:

2021/22 – 12%
2022/23 – 13.25%
2023/24 – 12%, plus a 1.25% Health Care Levy
£967 £50,270 £967 £50,270
Earnings above the Upper Earnings Limit: incur NI at:

2021/22 – 2%
2022/23 – 3.25%
2023/24 – 2%, plus a 1.25% Health Care Levy
£968 and above £50,271 and above £968 and above £50,271 and above

Class 1 (secondary) National Insurance for employers

An employee’s NI contribution actually has two parts; their own contribution (which comes out of their pay), and their employer’s contribution (which the employer pays). If you’re an employer you’ll deduct your worker’s contribution from their wages each time you pay them.

When you pay this on to HMRC using PAYE, you’ll add on your NI contribution as their employer. The information that you send to HMRC will show how much you’re paying as the employer, and the amount which you’ve taken from the employee on their behalf.

Because employers also make NI contributions, it means that working out the cost of hiring someone involves more than just how much their wages will be (and that’s before we get into pension contributions). Use our free online calculator to work out the cost of hiring someone.

If you’re brand new to all this, don’t worry! Our guide for new employers explains what you need to do if you’re taking on staff.

2022/23 Class 1 (secondary) National Insurance thresholds and rates for employers

2022/23
Weekly Threshold
2022/23
Annual Threshold
2021/22
Weekly Threshold
2021/22
Annual Threshold
Secondary Threshold: On salary payments above this threshold employers pay NICs at a rate of:

2021/22 – 13.8%
2022/23 – 15.05%
2023/24 – 13.8%, plus a 1.25% Health Care Levy
£175 £9,100 £170 £8,840

Eligible employers can claim relief on the cost of their National Insurance bill using the Employment Allowance.

Employers must have at least 1 employee (or 2 directors) on the payroll to be eligible for the Employment Allowance. The directors can’t already be claiming the allowance through another company.

 

Complete managed payroll service

From just £4 per payslip

Learn more

Class 1A or 1B National Insurance for employers

As well as making NI contributions on the wages that they pay their staff, employers must also make Class 1A and 1B National Insurance contributions on the equivalent financial value of any work benefits (known as Benefits in Kind, or BiKs) which they provide to employees. The rate of Class 1A and 1B National Insurance is the same as Class 1 (secondary) NI.

Class 2 and Class 4 National Insurance for self-employed people

Your self-employed National Insurance contributions are worked out as part of your Self Assessment tax return. There are two types of self-employed National Insurance and, like self-employed Income Tax, you pay them on your profits, not your income.

What happens to NI if I’m self-employed and employed?

Some people work for an employer as well as being self-employed during the same tax year. Unlike income tax which looks at all of your income during a tax year, National Insurance is broken down into how you earn the money.

2022/23 Class 2 and Class 4 National Insurance thresholds and rates for self-employed people

There are several changes to self-employed National Insurance for the 2022/23 tax year, including an increase to the Lower Profits Limit taking effect from July 2022. The changes basically mean that the point at which you start paying self-employed NI is now higher.

2022/23
Annual Threshold
2021/22
Annual Threshold
You won’t pay NI on profits you make from self-employment, but you can make voluntary contributions to fill any gaps in your NI record. £0 – £6,724 £0 – £6,514
Small Profits Threshold (SPT): From April 2022 you will no longer pay Class 2 NI on any self-employed profits you earn between this and the Lower Profits Limit (LPL), but you will continue to build up National Insurance credits.
In 2021/22 this was payable at a rate of £3.05 per week.
£6,725 £6,515
Lower Profits Limit (LPL): The threshold changes in July 2022, so this year it is an ‘annualised’ amount.

6th April – 5th July 2022: £9,880
6th July onwards: £12,570
£11,908
This is the point at which you’ll start paying Class 2 and Class 4 NI.

Class 2 NI: £3.15 per week
Class 4 NI: 10.25%
£9,568
Pay Class 4 NI at a rate of 9%
Upper Profits Limit (UPL): The profits you make from self-employment incur Class 4 NI at a slightly different rate above this threshold. £50,270
Class 4 NI at 3.25%
£50,270
Class 4 NI at 2%

 

When will I pay dividend tax?

You’ll normally pay dividend tax as part of your Self Assessment tax return, where you report any untaxed income received in a tax year.

Dividend tax is charged at a different rate to income tax. This means that the most tax efficient way to pay yourself if you’re the director of a limited company is usually with a combination of dividends and a salary.

You’ll pay income tax on the salary part of your income, and dividend tax on the dividends.

Read our Guide to Salaries and Dividends to learn more.

 

The Dividend Allowance

The dividend allowance for 2021/22 and 2022/23 remains at £2,000

Can I claim the dividend allowance as well as the Personal Allowance?

Yes! The good news is that you can use the dividend allowance as well as your personal tax allowance. In practice, in the 2022/23 tax year you could earn a salary of £12,570, plus take a dividend of £2,000, without incurring tax. But, you would incur NI on part of the salary – sorry! We know it can be confusing, so get an instant quote for our online accounting services if you need more help.

How much tax will I pay on dividends?

The rate of dividend tax that you pay depends on which rate of income tax you pay. You can work out which tax band you’re in by adding the total amount of your dividend income to your other income in the same tax year. (We mention the current tax bands and thresholds earlier on in the article). Don’t forget to deduct your personal allowance and dividend allowance!

2022/23 Dividend tax rates

2022/23
Dividend Tax Rate
2021/22
Dividend Tax Rate
Basic rate taxpayers pay the dividend ordinary rate 8.75% 7.5%
Higher-rate taxpayers pay the dividend upper rate 33.75% 32.5%
Additional-rate taxpayers pay the dividend additional rate 39.35% 38.10%

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.
 

Limited company accountancy services

From only £39.50 per month

Learn more

What is Capital Gains Tax?

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.

2022/23 Capital Gains Tax annual exempt amount

You won’t pay Capital Gains Tax (CGT) on gains that you make under the annual exemption threshold (and after the personal allowance). The threshold is different for individuals and trusts.

The annual exempt amount for Capital Gains Tax is the same for 2021/22 and for 2022/23:

You’ll start paying CGT on gains that you make above those thresholds. The rate of Capital Gains Tax payable depends on what the gain results from (in other words, what you disposed of), and what rate of income tax you pay.

2022/23 Capital Gains Tax for basic rate taxpayers

2022/23
Capital Gains Tax
2021/22
Capital Gains Tax
Gains from other residential property 18% 18%
Gains from other chargeable assets 10% 10%

2022/23 Capital Gains Tax for higher rate taxpayers

2022/23
Capital Gains Tax
2021/22
Capital Gains Tax
Gains from other residential property 28% 28%
Gains from other chargeable assets 20% 20%

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

What’s the difference between the Capital Gains Tax allowance and Capital Allowances?

Even though they sound similar enough to be confusing, the CGT allowance and Capital Allowances are different parts of the same process.

Capital gains deal with the ‘gain’ that you make when you dispose of an asset which has increased in value. You’ll pay Capital Gains Tax on the gain, but you can get a bit of tax relief on this, called the CGT allowance (or the annual exempt amount). It’s a bit like the Personal Allowance, or the Dividend Allowance, in that respect. Only individuals and trusts get the allowance, not businesses.

Capital allowances enable businesses to offset the cost of big-ticket purchases (known as capital items) against their tax bill.

 

What are capital allowances for?

Capital allowances enable a company to claim tax relief (and therefore reduce their tax bill) against assets they keep and use in the business.

Enhanced capital allowances: the super-deduction

The super-deduction is a temporary measure which increases the relief available on plant and machinery for qualifying expenditure.

From 1 April 2021 until 31 March 2023, companies can claim:

Read our article about the The Super-Deduction Tax Rules to learn more.

An extension to the increased Annual Investment Allowance

The Annual Investment Allowance is normally £200,000 in a year. This has been temporarily increased to £1 million, until 31 March 2023.

 

Who pays Corporation Tax?

Limited companies pay Corporation Tax on the profits that they make, which might be as a result of doing business, selling assets for more than they cost, or through investments. The director(s) must submit a Company Tax Return to declare the business’ profits, claim any tax relief, and pay the right amount of Corporation Tax.

Watch our video below to learn more about the basics of Corporation Tax.

 

 

2022/23 Corporation Tax Rate

Corporation Tax in 2021/22 and 2022/23 is 19%.

In 2021 the government announced their plan to increase the rate of Corporation Tax, though the changes won’t take effect until 2023. The changes also won’t apply to everyone, and instead depend on how much profit the company makes.

 

Comprehensive VAT return service

From only £25.00 per month

Learn more

2022/23 VAT registration threshold

The VAT registration threshold for 2021/22 and 2022/23 is £85,000. This means you must register for VAT once your turnover reaches the threshold in any 12 month period. Some businesses also find it tax efficient to voluntarily register for VAT before their turnover reaches the threshold (our article explains this in a bit more detail!)

Read our VAT Guide to learn more about registering, charging for, and reporting VAT.

2022/23 VAT Rates

2022/23
VAT Rate
2021/22
VAT Rate
Standard rate: The rate of VAT which applies to most goods and services. 20% 20%
Reduced rate: A lower rate applicable to certain goods and services, such as electricity and gas. 5% 5%
Zero rate: Applied to some goods and services, such as food or children’s clothing. 0% 0%

The temporary VAT-rate reduction for the hospitality and tourism industry:

There are some other VAT changes to be aware of, such as:

Tax is an incredibly complicated area, and it’s easy to get confused. Learn more about our online accountancy services and call 020 3355 4047, or get an instant online quote.

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. Learn more about Elizabeth.

More posts by this author
guest
2 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
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

Read more posts...

Umbrella Companies for Self-Employed Contractors

When you set up in business as a contractor you might either work as a sole trader or as a limited company….

Read More

Get Ready for Small Business Saturday UK 2022

Small Business Saturday started in the US in 2010, on the first Saturday following Thanksgiving. It aims to encourage shoppers to consider…

Read More

Architects and Tax

Architecture is a highly diverse sector when it comes to tax. It’s partly down to the type of businesses that carry out…

Read More
Back to Blog...

Confirm Transactions

The number of monthly transactions you have entered based on your turnover seem high. A transaction is one bookkeeping entry such as a sale, purchase, payment or receipt. Are you sure this is correct?

Yes, submit my quote
No, let me change it

Please contact our sales team if you’re unsure

VAT Returns

It is unlikely you will need this service, unless you are voluntarily registered for VAT.

Are you sure this is correct?

Yes, the business is VAT registered
No, let me change it

Call us on 020 3355 4047 if you’re not sure.

Bookkeeping

You only need this service if you want us to complete the bookkeeping on your behalf.

Would you prefer to complete your own bookkeeping?

Yes
No

Call us on 020 3355 4047 if you’re not sure.