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UK tax is a complex system of tax bands, allowances, and relief schemes, all affecting the way individuals and businesses pay tax. Our guide explains what these tax rules mean for you and your business, including:

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

Dividend tax

Capital Gains Tax

Corporation Tax

VAT registration threshold

These rates and allowances can change on a yearly basis, with updates being announced in the Budget before each new tax year. The 2021 Budget announcement includes support for businesses and employers who are struggling as a result of the coronavirus pandemic, such as the SEISS grant for self-employed workers, or the furlough scheme.

Your personal tax allowance is how much income you’re allowed to earn before you start paying income tax on it.

How much is the Personal Allowance in 2021/22?

In 2020/21 this was £12,500, but has increased for the 2021/22 tax year, which runs from 6th April 2021 to 5th April 2022.
 

The Personal Allowance tax threshold for 2021/22 is £12,570.

 
So, if you earn £18,000 per year, you’ll only pay tax on anything above £12,570. £18,000 – £12,570 = £5,430. The taxable element of your income would be £5,430.

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.

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; each block (or tax band) represents a salary range, and you’ll pay tax as a percentage of what you earn within that block.

Income tax rates and thresholds for 2021/22 and 2020/21

As your earnings increase, the rate of tax that you pay only applies to the proportion of your income which falls within that tax band. Our table below shows what the income tax rates and band thresholds are, with an example beneath that.
 

Tax band name Thresholds for 2021/22 Thresholds for 2020/21
Personal allowance – how much income you can earn before you start to pay income tax. No tax on this income. £0 – £12,570 £0 – £12,500
Basic rate income tax – 20% tax on the proportion of income which falls into this tax bracket. £12,571 – £50,270 £12,501 – £50,000
Higher rate income tax – the part of your income in this tax band is taxed at 40% £50,271 – £150,000 £50,001 – £150,000
Additional rate income tax – 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 2021/22 tax year, you’ll pay:

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

There are rules which cover the basic minimum which employers must pay their staff. The rates change each tax year, but this is the minimum amount hourly rate that most employees should be paid.
 

National Minimum Wage and National Living Wage 2021

How much is National Minimum Wage?

National Minimum Wage is worked out on the basis of the employee’s age, though there are different rates for apprentices. In 2021/22 the age thresholds also changed, as well as the hourly rate.
 

National Minimum Wage in 2021/22 National Minimum Wage in 2020/21
£8.36 per hour (employees aged 21 – 22) £8.20 per hour (employees aged 21 – 24)
£6.56 (aged 18 – 20) £6.45 (aged 18 – 20)
£4.62 per hour (Under 18) £4.55 per hour (Under 18)
£4.30 per hour (Apprentices) £4.15 per hour (Apprentices)

How much is the National Living Wage?

National Living Wage (NLW) in 2021/22 is

£8.91 per hour.

 
The age threshold for the National Living Wage (NLW) is lower for the 2021/22 tax year than in the previous year. Rather than paying NLW to employees aged 25 and older, employers must pay the living wage to staff who are 23 and up. The hourly rate of National Living Wage has also risen from £8.72 in 2020/21, to £8.91 in 2021/22.

The rate of National Insurance (NI) that you pay depends on whether you are an employee, an employer, or self-employed. These different categories are called ‘classes’, and just to make sure things are really confusing, different classes of NI have their own thresholds and rates.

You might also pay more than one type of National Insurance, depending on how you earn money. For instance, you might pay NI on your own income, as well as Employer’s NI for the people that work for you. Or, if you work for yourself as well as being employed, you’ll pay different types (and rates) of NI on the money you earn from your employer and from your own business.

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

Employees pay Class 1 (primary) National Insurance

Where eligible, employees have Class 1 NI deducted from their pay by their employer, who then pays it HMRC on their behalf through PAYE. Use our free online salary and tax calculator to work out your take-home pay.

Class 1 (primary) National Insurance thresholds and rates for employees 2021/22 and 2020/21

Weekly Threshold 2021/22 Annual Threshold 2021/22 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 £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. £184 £9,568 £183 £9,500
Upper Earnings Limit (UEL): Earnings above the Primary Threshold up to (and including) the Upper Earnings Limit incur NI at 12% £967 £50,270 £962 £50,000
Earnings above the Upper Earnings Limit: incur NI at 2% £968 upwards £50,271 upwards £963 upwards £50,001 upwards

Employers pay Class 1 (secondary) National Insurance

As well as deducting and paying NI from employees’ pay on their behalf, employers also make National Insurance Contributions (NICs) towards employees’ NI. Essentially the employee’s NI has two parts; their own contribution, and their employers. This is still Class 1 NI, though the employer’s contribution is known as Class 1 secondary NI (the employee’s contribution is ‘primary’). 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.

This means that the cost of hiring someone is more than just paying their wages, there’s employer NI to think about too (and that’s before we get into pension contributions). Use our free online calculator to work out the cost of hiring someone.

Class 1 (secondary) National Insurance thresholds and rates for employers 2021/22 and 2020/21

Weekly Threshold 2021/22 Annual Threshold 2021/22 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. £170 £8,840 £169 £8,788

Employers might also pay Class 1A or 1B National Insurance

Class 1A and 1B NI are contributions that employers might also pay to HMRC in other instances, such as equivalent financial value of any expenses or work benefits (sometimes known as Benefits in Kind, or BiKs) to employees.

In 2021/22 employers pay Class 1A and 1B NICs at a rate of

13.8%

National Insurance and the Employment Allowance

Eligible employers can receive relief to cover the costs of employers National Insurance, by claiming the Employment Allowance. For 2021/22 the allowance is £4,000.

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;

2021/22 and 2020/21 Class 2 and Class 4 National Insurance thresholds and rates for the self-employed

The rate of Class 2 and Class 4 NI in 2021/22 is the same as it was in 2020/21, but the thresholds (the point at which you start paying) have changed.

NI threshold limit 2021/22 NI threshold limit 2020/21
No NI incurred on self-employed income in this bracket, but you can make voluntary contributions to fill any gaps in your NI record. £0 – £6,514 £0 – £6,474
Small Profits Threshold (SPT): You’ll pay Class 2 NI at a rate of £3.05 per week on any self-employed income above this threshold, up to the Lower Profits Limit (LPL). £6,515 £6,475
Lower Profits Limit (LPL): Self-employed income above this threshold and up to the Upper Profits Limit incurs Class 4 NI at a rate of 9% £9,568 £9,500
Upper Profits Limit (UPL): Self-employed income above this threshold incurs Class 4 NI at a rate of 2% £50,270 £50,000

 

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

So for example, in 2021/22 you could earn a salary of £12,570, plus a £1,500 dividend, without incurring tax. But, you would incur NI on part of the salary – sorry!

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 for 2021/22 and 2020/21

Dividend tax rate 2021/22 Dividend tax rate 2020/21
Basic rate taxpayers pay the dividend ordinary rate. 7.5% 7.5%
Higher-rate taxpayers pay the dividend upper rate. 32.5% 32.5%
Additional-rate taxpayers pay the dividend additional rate. 38.1% 38.1%

 
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.

 
accounting services for limited companies

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.

The annual exemption from Capital Gains Tax in 2021/22 and 2020/21

You won’t pay Capital Gains Tax (CGT) on gains that you make under the annual exemption threshold. In 2021/22 this remains unchanged from the previous year, at £12,300.

You’ll start paying CGT on gains that you make above this threshold; the rate that you pay depends on what the gain results from (in other words, what you disposed of) and what rate of income tax you pay.

CGT if you pay the basic rate of income tax

Capital Gains Tax 2021/22 Capital Gains Tax 2020/21
Gains from other residential property 18% 18%
Gains from other chargeable assets 10% 10%

CGT if you pay the higher rate of income tax

Capital Gains Tax 2021/22 Capital Gains Tax 2020/21
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.

In 2020/21 Corporation Tax was 19%, and this has not changed for the 2021/22 tax year. Limited companies pay Corporation Tax on the profits that they make by doing business, selling assets for more than they cost, or through investments. Watch our video below to learn more about the basics of Corporation Tax.
 

 

 
The government announced in their 2021 Budget that they plan to increase Corporation Tax, though this won’t take effect until 2023. The changes also won’t apply to everyone, and instead will depends on how much profit the company makes.

 
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If your revenue reaches the VAT registration threshold then you must register for VAT. It hasn’t changed for 2021/22, and remains at £85,000.

How much is VAT?

The actual rate of VAT that you pay or charge in 2021/22 is (in most cases) the same as it was for 2020/21. There are some changes to be aware of though:

VAT rates in 2021/22 and 2020/21

VAT rate 2021/22 VAT rate 2020/21
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 temporarily reduced rate of VAT for the hospitality and tourism industry:

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.

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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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