What are the different tax rates?
Earnings are taxed at three different rates. The rates differ between Scotland and the rest of the United Kingdom.In England, Wales and Northern Ireland, rates for the 2017/18 year are:
| Tax Band | Tax Rate % | Earnings Taxed £ |
| Basic | 20 | 11,501 - 45,000 |
| Higher | 40 | 45,001 – 150,000 |
| Additional | 45 | Over 150,000 |
In Scotland, rates for the 2017/18 year are:
| Tax Band | Tax Rate % | Earnings Taxed £ |
| Scottish Basic | 20 | 11,501 - 43,000 |
| Higher | 40 | 43,001 – 150,000 |
| Additional | 45 | Over 150,000 |
Tax on Savings Interest
Most people can earn some interest from their savings without paying tax.
Their allowance for earning interest tax-free is made up of the following:
This allowance applies each tax year. The tax year runs from 6 April to 5 April the following year.
Personal Allowance
Members can use their Personal Allowance to earn interest tax-free if they haven’t used it up on their wages, pension or other income.
Starting rate for savings
Members may also get up to £5,000 of interest tax-free. This is their starting rate for savings.
The more they earn from other income (for example wages or pension), the less their starting rate for savings will be.
Example
Sarah earns £15,000 of wages and receives £200 interest on her savings.
Her Personal Allowance is £11,500. It’s used up by the first £11,500 of her wages.
The remaining £3,500 of her wages (£15,000 minus £11,500) reduces her starting rate for savings by £3,500.
Her remaining starting rate for savings is £1,500 (£5,000 minus £3,500). She won’t pay tax on her savings interest.
Personal Savings Allowance
Members may also receive up to £1,000 of interest tax-free depending on which Income Tax band they are in. This is their Personal Savings Allowance.
| Income Tax band | Tax-free savings income |
| Basic rate | £1,000 |
| Higher rate | £500 |
| Additional rate | £0 |
Net Income Example 1
Dave lives in Cardiff. What will Dave’s net income be after tax in the following circumstances?
Would his circumstances be different if he lived in Dundee?
| £ p.a. | |
| Pension | 42,000 |
| Savings Interest | 2,000 |
| Total Income | 44,000 |
Less the Personal Allowance £ 11,500
Taxable Income £ 32,500
Tax on £32,500 @ 20% = £ 6,500
The net income received is therefore £44,000 - £6,500 = £37,500
Net Income Example 2
What if Dave’s total income was £65,000 (including £2,000 savings interest)? What will the net income be after tax?
Total Income £65,000
Income above £16,500 so no starting rate for savings.
Less the Personal Allowance £11,500
Less reduced Personal Savings Allowance £500 (as higher rate tax band)
Taxable Income £53,000Tax on £33,500 @ 20% = £6,700
Tax on £19,500 @ 40% = £7,800
Total Tax £14,500
The net income received is therefore £65,000 - £14,500 = £50,500
Tax Codes
During employment the taxpayer pays tax on earnings and the amount is deducted by the employer in accordance with the tax code, known as PAYE (Pay As You Earn). This method of collecting tax will not change when the member retires, the pension provider will deduct the tax before paying the net amount.
The tax code is calculated from:
1. Total Tax Allowances such as the Personal Allowance
2. Total income which tax has not been paid e.g. untaxed interest or part-time earnings
1–2 = Total tax-free income
The total tax-free amount is then divided by 10 and a letter added that relates to the member’s individual circumstances.If someone has a tax code of 117L it means:
The tax code spreads the tax free amount equally over the year.
If a member has more than one job or more than one pension when they retire they may have more than one tax code.
The Personal Allowance will apply to the main pension or job.
The BR code (Basic Rate) will apply to the second job or pension if basic rate tax is payable on all income from this source. Similarly, if the person is subject to the higher rate tax on the whole of the second income they will have a DO tax code.Different tax codes will apply in other circumstances.
Net Income Example
Income from a Company Pension and the State PensionLet’s look at an example of a net income calculation for someone retiring at age 65 in the 2015/16 tax year.The member will receive:
- a company pension of £6,000 p.a.
plus
- a State pension of £8,296.60 p.a.Work out the tax code
Work out the taxThe company pension is £ 6,000.00
Less the tax free amount £ 3,203.40
The taxable amount is £ 2,796.60
This amount of taxable income is in the basic tax band so the rate to be applied is 20%Tax on £2,796.60 @ 20% £ 559.32
The amount of tax to be deducted is therefore £559.32.
Work out the net incomeThe company pension is £ 6,000.00
Less the tax £ 559.32
The net pension is £ 5,440.68 (This is paid to the member by the pension provider).
PlusThe State Pension £ 8,296.60 (This is paid to the member by the State).
Total income £13,737.28 (£5,440.68 + £8,296.60)
Inheritance
If a member receives an inheritance this may mean that they have disposable capital which they invest. In this circumstance tax may due on the investments or on any assets received which are sold enabling them to invest more.
Income from means tested benefits could also be affected.
Expenditure
The member needs to consider their expenses such as:
How will expenses differ when a member retires?
There will no longer be travel expenses for getting to work but staying at home means higher heating costs. There may still be family to support. What standard of living does the member wish to enjoy in relation to holidays and entertainment.
Retirement checklist
Let’s recap on the information you have seen so far.
Check out each step the member needs to take when retiring.
Income - The member needs to identify where all the sources of income will come from.
Tax – Once the income sources are known, the member needs to check which are taxable and which are not and take into account tax allowances.
Timing – The member needs to know when the income will be received – from what age will the benefits be received, what will the payment dates be and how often will the income be received.
Also will it be paid in fixed amounts or will it increase, if so by how much each year.
Amount – Once the member has all this information he can work out how much the net amount will actually be.
Expenditure – The member should work out all the expected outgoings once retired.
Is the amount of net income sufficient to meet the member needs – Remember retirement could last for 20-30 years.
