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Click here to look up Tax Rates
Application of the Lower Rate band
Taxable income is banded and taxed at lower, basic and higher rates of tax. In 1999-2000, the lower rate is renamed as the starting rate.
The band widths are increased each year and the rates may change.
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|
Lower/Starting rate band |
Basic rate band |
Higher rate band |
Additional rate |
|
2012-13 |
£2,710 @ 10% on savings income |
£34,370 @ 20% |
£34,371 - £150,000@ 40% |
then @ 50% |
|
2011-12 |
£2,560 @ 10% on savings income |
£35,000 @ 20% |
£35,001 – £150,000 @ 40% |
then @ 50% |
|
2010-11 |
£2,440 @ 10% on savings income |
£37,400 @ 20% |
£37,401 - £150,000 @ 40% |
then @ 50% |
|
2009-10 |
£2,440 @ 10% on savings income |
£37,400 @ 20% |
then @ 40% |
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2008-09 |
£2,320 @ 10% on savings income * |
£34,800 @ 20% |
then @ 40% |
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2007-08 |
£2,230 @ 10% |
£32,370 @ 22% |
then @ 40% |
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2006-07 |
£2,150 @ 10% |
£31,150 @ 22% |
then @ 40% |
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2005-06 |
£2,090 @ 10% |
£30,310 @ 22% |
then @ 40% |
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2004-05 |
£2.020 @ 10% |
£29,380 @ 22% |
then @ 40% |
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2003-04 |
£1,960 @ 10% |
£28,540 @ 22% |
then @ 40% |
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2002-03 |
£1,920 @ 10% |
£27,980 @ 22% |
then @ 40% |
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2001-02 |
£1,880 @ 10% |
£27,520 @ 22% |
then @ 40% |
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2000-01 |
£1,520 @ 10% |
£26,880 @ 22% |
then @ 40% |
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1999-2000 |
£1,500 @ 10% |
£26,500 @ 23% |
then @ 40% |
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1998-99 |
£4,300 @ 20% |
£22,800 @ 23% |
then @ 40% |
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1997-98 |
£4,100 @ 20% |
£22,000 @ 23% |
then @ 40% |
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1996-97 |
£3,900 @ 20% |
£21,600 @ 24% |
then @ 40% |
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*From 2008-09 onwards the starting rate band is abolished. A new starting rate for savings for individuals is introduced. For 2008-09 the band is £2,320. Where an individual's non-savings income is less than the starting rate limit for savings, the savings income is taxable at the 10% starting rate for savings up to the limit.
Where non-savings income exceeds the limit, the starting rate for savings does not apply.
This table shows the amount of taxable income taxed at the lower rate, the amount that will next be taxed at the basic rate and finally the higher tax rate that applies.
For example, a taxpayer with £40,000 of taxable income in 2003-04 will pay:
|
1,960 @ 10% = |
196.00 |
|
28,540 @ 22% = |
6,278.80 |
|
9,500 @ 40% = ----------- |
3,800.00 ------------- |
|
40,000 |
10,274.80 |
The basic rate band may be extended by certain reliefs:
Pension contribution paid net.
Free-standing additional voluntary contributions paid net.
Fees for vocational training paid net.
For example, a net pension contribution of £3,120 will extend the basic rate band by £4,000 (3,120 / 78 x 100), which means that up to £32,540 of income would be taxed at 22% in 2003-04 and that no higher rate tax will be paid unless the taxable income exceeds £34,500.
Most interest is taxed at the lower rate of tax subject to certain rules. Interest is treated as the highest part of a person's income with the exceptions of dividends, life assurance gains and lump sums from termination of employment. This means that 'normal' income is taxed first, then interest, dividends, life assurance gains and lump sums.
For example, a taxpayer with £25,000 taxable income in 2000-01 made up to £15,000 'normal' income and £5,000 interest.
|
1,960 @ 10% = |
196.00 |
|
18,040 @ 22% = |
3,968.80 |
|
5,000 @ 20% = ----------- |
1,000.00 ------------ |
|
20,000 |
5,164.80 |
The same example with £35,000 taxable income made up of £25,000 'normal' and £5,000 interest:
|
1,960 @ 10% = |
196.00 |
|
28,540 @ 22% = |
6,278.80 |
|
500 @ 20% = |
100.00 |
|
4,500 @ 40% = ----------- |
1,800.00 ------------ |
|
35,000 |
8,374.80 |
If there is no other income, the first £1,960 (2003-04) of savings income is taxed at the 10% starting rate.
Dividends are taxed at the lower rate of tax (20%) for 1996-97 to 1998-99 and at a rate of 10% for 1999-2000 and later years, with a special higher rate of 32.5%. Dividends are taxed as the highest part of the person’s income with the exceptions of life assurance gains and lump sums.
In 1996-97 to 1998-99 the dividends are not actually separated from the interest as they are taxed at the same rate. However, stock dividends and foreign income dividends were grouped separately because the notional tax thereon could not be refunded.
Top-slicing relief may be available if the life assurance gain pushes the taxpayer into the higher rate tax band.
The lower rate band is allocated in a strange way up to 1998-99 inclusive. From 1999-2000 the new starting rate band has a more logical allocation.
The lower rate band is allocated as follows:
'Normal' income; then
Capital Gains; then
Interest and Dividends
The oddity is the insertion of capital gains ahead of interest and dividends. This sequence does not apply to the basic rate band or to 1999-2000 and later computations. The effect of this is to give some of the lower rate band to capital gains in some cases. Life assurance gains may have an impact on the application of capital gains to the lower rate for, even though the life assurance gain is normally taxed at 23% (basic rate), it is deemed to use the equivalent amount from the lower rate band, possibly preventing the allocation to capital gains.
For example if a person has taxable income of £10,000 made up of £2,000 'Normal' Income and £8,000 interest in 1998-99 and they also have capital gains of £10,000 (after annual exemption), the income will be banded as follows:
|
Income Tax |
Capital Gains Tax |
|
2,000 @ 20% = |
400.00 |
2,300 @ 20% = |
460.00 |
|
8,000 @ 20% = ---------- 10,000 |
1,600.00 ------------ 2,000.00 |
7,700 @ 23% = ---------- 10,000 |
1,771.00 ------------ 2,231.00 |
However, if the same person also had £1,000 of life assurance gains, the lower rate band available to capital gains tax would have been reduced to just £1,300 even though the life assurance gain itself is actually taxed at 23%:
|
Income Tax |
Capital Gains Tax |
|
2,000 @ 20% = |
400.00 |
1,300 @ 20% = |
260.00 |
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1,000 @ 23% = |
230.00 |
8,700 @ 23% = |
2,001.00 |
|
8,000 @ 20% = ---------- 11,000 |
1,600.00 ------------ 2,230.00 |
----------- 10,000 |
------------ 2,261.00 |