The 2018 UK Income Tax Rates and Brackets
The UK government announces changes to the income tax rates and amended tax brackets every Autumn. But the changes only take effect on the 6 April 2018, which is when the new UK tax year starts.
Here’s what changed during the last Autumn budget and what you can expect to pay in taxes in the new financial year.
What income tax rate changes did the government announce in the autumn budget 2017?
The government announced the following important changes to the tax rates in the Autumn Budget 2017:
- Revised “main” rates, which apply to salaries and self-employment income
- A revised dividend allowance, which applies if you take dividend income, for example, because you do business as a limited liability company
- An increase in the marriage allowance, the tax deduction you can claim if you’re married or in a civil partnership
- Unfortunately, approved vehicle allowance payment rates will remain the same for the time being
What are the new UK income tax rates and brackets for 2018/19?
The “main” UK income tax rates and brackets for 2018/19 are:
|Tax Rate (Band)||Taxable Income||Tax Rate|
|Personal allowance||Up to £11,850||0%|
|Basic rate||£11,851 to £46,350||20%|
|Higher rate||£46,351 to £150,000||40%|
|Additional rate||Over £150,000||45%|
These rates only apply if you live in England, Wales or Northern Ireland. The devolved Scottish government sets its own income tax rates, which we’ll deal with separately.
How do the new income tax rates compare to the rates and brackets for 2017/18?
The 2017/18 tax brackets are:
|Tax Rate (Band)||Taxable Income||Percentage|
|Personal Allowance||Up to £11,500||0%|
|Basic Rate||£11,501 - £45,000||20%|
|Higher Rate||£45,001 - £150,000||40%|
|Additional Rate||Over £150,000||45%|
This means your tax situation could change in the following ways in the 2018/19 tax year:
- You’ll get an extra £350 tax-free as part of your personal allowance
- You can apply the lowest tax bracket to an additional £1,000
- If you’re on a low income, you’ll pay less tax overall
- Similarly, if you’re in the basic rate tax bracket, you’ll pay less tax overall
Example: How will the amended tax brackets affect how much tax I’ll pay next year?
Let’s say you earn £46,000 a year. You have no other income.
Under the current tax rates, your first £11,500 is tax-free. You’d pay tax at 20 percent on the next £33,500 and a whopping 40 percent on the remaining £1,000. This means your income tax liability for 2017 / 18 would be £7,100.
In contrast, in the next tax year, your first £11,850 would be tax-free. And you’d pay tax at 20 percent on all your taxable income. This means your tax bill would be £6,830. That’s £270 a year more in your pocket.
What other major changes to the income tax rates did the government announce in the autumn budget?
Aside from changes to the “main” income tax rates, the government also announced a major change to the dividend allowance. If you do business as a limited liability company, you probably take part of your income as a dividend. This means the change could affect your tax bill significantly.
How has the dividend allowance changed?
The tax-free dividend allowance will go down starting on the 6 April 2018. As things stand, you can take a dividend of up to £5,000 a year tax-free. But, as from the 6 April 2018, you’ll only be able to take £2,000 a year as a dividend without paying any tax.
How will the dividend allowance reduction affect me?
This will depend on how much income you make overall.
Let’s say you earn £30,000 in total. In a typical scenario, you’d take a salary of £8,160, so you won’t have to pay income tax or National Insurance but still qualify for National Insurance credits. And you’d take the rest as a dividend, in this case, £21,840.
Under the current system, the first £5,000 would be tax-free. You’d pay dividend tax on the remaining £16,840 at the following rates:
|Band||Taxable Income||Tax Rate|
|Basic Rate||Up to £33,500||7.5%|
|Higher Rate||£33,501 to £150,000||32.5%|
|Additional Rate||Over £150,000||38.1%|
This means you’d pay £1,263 in dividend tax.
As from 6 April 2018, only the first £2,000 will be tax-free Which means you’ll have to pay dividend tax on £19,840. The “main” income tax rates have also changed, so the dividend tax brackets will be:
|Band||Taxable Income||Tax Rate|
|Basic Rate||Up to £34,500||7.5%|
|Higher Rate||£34,501 to £150,000||32.5%|
|Additional Rate||Over £150,000||38.1%|
This means you’d pay £1,488. That’s £225 more.
What about the tax brackets for married couples?
In the UK, you can’t file your taxes jointly if you’re married or in a civil partnership. Each spouse must file their tax return separately. That said, a spouse can transfer part of their tax free personal allowance to the other spouse if they make less than the personal allowance and their spouse only pays tax at the basic rate. This is called the marriage allowance.
The personal allowance and basic tax rate for 2018/19 have increased. So the marriage allowance has also increased.
Marriage allowance calculation: Example 1
Let’s say you earn £42,000 a year. Your spouse earns £10,000 a year.
In 2017 / 18, the personal allowance was £11,500. This means you could deduct a further £1,500 from your taxes. So, instead of paying tax on £31,500 (£43,000 less your £11,500 personal allowance), you’d pay tax on £30,000.
In 2018 / 19, the personal allowance is £11,850. So, using the marriage allowance, you could deduct £1,850 from your taxes — £350 more than last year.
Marriage allowance calculation: Example 2
Let’s say you earn £46,000 a year. Your spouse earns £10,000 a year.
This year, part of your earnings are over the basic rate. This means you can’t use the marriage allowance.
In 2018/19, the basic rate bracket will widen to £46,350. This means you’ll be able to use the marriage allowance and deduct a further £1,500 from your taxes.
What about national insurance? Will the rates change in 2018/19?
Yes. These changes will affect the way you calculate your tax return, so they’re just as important as the changes to the income tax rates and brackets.
The following tables show the new National Insurance thresholds and rates for employees and the self-employed. You can also see how they compare to the current rates.
National Insurance threshold changes for employees:
|Rate||2018/19 Threshold||2017/18 Threshold|
|12%||£8,424 to £46,384||£8,164 to £45,032|
|2%||Over £46,384||Over £45,032|
National Insurance threshold changes for the self-employed:
|Type||2017/18 Rate||2018/19 Rate|
|Class 2||£2.85 per week||£2.95 per week|
|Class 4||9% on profits between £8,164 and £45,000||9% on profits between £8,424 to £46,350|
|Class 4||2% on profits over £45,000||2% on profits over £46,350|
Last year, the government announced it would be removing Class 2 National Insurance and reforming Class 4 National Insurance. This proved very controversial and the government has delayed the law. So, for the time being, the old system remains, albeit with slightly different thresholds.
And that’s it. Those are all the main income tax changes you should know about for the coming tax year.
Did you get everything?
Here’s to hoping you pay less tax in 2018/19.