Tax Brackets

The phrase "tax bracket" is used to describe the band you fall in so that HMRC can calculate your income tax rate and overall taxes due depending on your yearly income.

There are 3 main brackets you pay tax upon once you have used your personal allowances for those who pay 20% tax, those paying 40% tax and the new 50% tax rate introduced in the budget of 2009 (it was previously advised at 45%)

Calculating Your Tax Bracket

Every person receives some for of tax allowance that is deducted from gross income from salaries, dividends and other income such as interest on bank accounts. It's that net amount after all allowances are taken into account that is used to calculate your tax liability.

Tax Brackets 2008-2009

For the year 2008-2009 (ending April 5th) the following brackets are used by HMRC to calcuate taxes due:

• Starting rate for savings only 10% - £0 - £2,320
• Basic tax rate 20% - £0 - £34,800
• Higher Rate 40% - Over £34,800

From tax year 2008 - 2009 there is a 10% starting rate for savings income only. If your non-savings income is above this limit then the 10% starting rate for savings does not apply

Tax Brackets 2009-2010

For the year 2009-2010 (ending April 5th) the following brackets are used by HMRC to calcuate taxes due:

• Starting rate for savings only 10% - £0 - £2,440
• Basic tax rate 20% - £0 - £37,400
• Higher Rate 40% - Over £37,400
• Increased Higher Rate - Over £150,000 from April 2010 (increased from 45% in April 2009 budget speech by Alistair Darling.

From tax year 2008 - 2009 there is a 10% starting rate for savings income only. If your non-savings income is above this limit then the 10% starting rate for savings does not apply

Reduction in Personal Allowances for High Earners

The 2009 budget also introduced the reduction in personal allowances for higher earners. Personal allowances will be reduced for income over £100,000 from April 2010, and this will be reduced at a rate of £1 in every £2, going down to Zero.

This effectively means a tax rate of 60% for some. For incomes from £100,000 to £l106,475 the rate will increase to 60% because of the reduction in personal allowances. Yet for those on incomes of between £106,475 and £140,000 the rate drops back again to 40%.

The same is true when comparing the £140,001 to £146,475 income bracket with the over £150,000 where the respective tax rates are 60% against 45%.

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