This guide covers income tax thresholds, the personal allowance, national insurance and more for the tax year 2021/22, starting 6 April 2021.
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.
What is the tax-free Personal Allowance?
Your personal tax allowance is how much income you’re allowed to earn before you start paying income tax on it.
For employees, the Personal Allowance will be taken into account automatically when the employer runs their payroll through a scheme called Pay As You Earn (PAYE).
| Allowances | 2021 – 2022 | 2020 – 2021 | 2019 – 2020 | 2018 – 2019 |
| Personal Allowance | £12,570 | £12,500 | £12,500 | £11,850 |
| Income limit for Personal Allowance | £100,000 | 100,000 | £100,000 | 100,000 |
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 goes down by £1 for every £2 of income above the £100,000 limit. This means that if you earn £125,000 or more, your Personal Allowance is zero.
How does the Personal Allowance affect the self-employed?
For sole traders, your Personal Allowance will be taken into account when HMRC calculates your tax liability when you file your annual Self Assessment.
Limited company directors will have to take their Personal Allowance into account when running their own payroll or – more likely – use a piece of payroll software that does it automatically just like Xero Payroll software which Libabun Accountancy uses.
Usually, limited company directors pay themselves through a combination of a salary and dividends, making the most of their tax allowances. We explain all this in our article How to Pay Yourself as a Director of a Limited Company
The Personal Allowance is just one of many allowances and thresholds that might affect you. There are also annual tax allowances for individuals amounting to £1,000 each: one for self-employment trading income (sole trade) and known as the ‘trading allowance’, and one for income from a property business. The allowances aren’t available if you have such income from a private limited company.
Personal Savings Allowance
Since April 2016, your savings interest has been paid to you tax-free, and the personal savings allowance (PSA) has come into play. The PSA means every basic-rate taxpayer can earn £1,000 interest a year without paying tax on it. Higher-rate payers get a £500 allowance, and additional-raters don’t get an allowance.
There’s no change to savings allowances in 2021/22.
If you’re a low earner, there’s another tax-free allowance you get called the starting rate for savings income. This allows you to earn another £5,000/year in savings interest tax-free if you earn less than £12,570/year this tax year. For every pound you earn above this threshold, you lose a pound of savings allowance
Married or in Civil Partnership?
If you and your partner were born on or after 6 April 1935, then you may be entitled to the marriage tax allowance. This allows couples to transfer a proportion of their personal allowance between them.
For the 2021/22 tax year, the marriage tax allowance is £1,260. This means a potential tax saving of £252.
Alternatively, if one of you was born before 6 April 1935, you can get a different married couple’s allowance, which is also available to civil partners. See the Government’s married couple’s allowance calculator to see exactly what you’ll get.
Ten per cent of the married couple’s allowance is subtracted from your annual income tax bill. If you were married before 5 December 2005, it is automatically worked out using the husband’s salary. For couples married on or after 5 December 2005, it uses the highest earner’s salary.
Dividend tax rates for 2021/22
There is no change to dividend tax rates or to the Dividend Tax Allowance for dividend income in the 2021/22 tax year, they are the same as for the 2020/21 tax year:
Tax-free dividend allowance is £2,000
| Dividend tax rate 2021/22 | |
| Basic rate taxpayers pay the dividend ordinary rate. | 7.50% |
| Higher-rate taxpayers pay the dividend upper rate. | 32.50% |
| Additional-rate taxpayers pay the dividend additional rate. | 38.10% |
National Insurance rates
National Insurance bands and rates are some of the most confusing around – not least because things are different for employees, sole traders and limited company directors.
Employee National Insurance contributions (Class 1)
You should only make National Insurance deductions on earnings above the lower earnings limit
| 2021/22 Tax Year | 2020/21 Tax Year | |||
| Weekly | Annually | Weekly | Annually | |
| Lower Earnings Limit – Earnings below this limit will incur no NICs | £120 | £6,240 | £120 | £6,240 |
| Primary Threshold – Earnings below this limit will incur no NICs | £184 | £9,568 | £183 | £9,500 |
| Upper Earnings Limit – Earnings above the Primary Threshold and below the Upper Earnings Limit will be taxed at 12%. | £967 | £50,270 | £962 | £50,000 |
| Any earnings above the Upper Earnings Limit are taxed at 2% | ||||
Employer National Insurance contributions
| 2021/22 Tax Year | 2020/21 Tax Year | |||
| Weekly | Annually | Weekly | Annually | |
| Secondary Threshold – Salary payments above this threshold will incur Employer NICs at 13.8%. | £170 | £8,840 | £169 | £8,788 |
As an employer, you may be eligible to claim Employment Allowance to reduce the Employer’s National Insurance bill
Self-employed National Insurance contributions
| 2021/22 Tax Year | 2020/21 Tax Year | |
| Small profits threshold Earnings below this threshold incur no National Insurance Contributions (NICs), but Class 2 NICs can be paid voluntarily. | £6,515 | £6,475 |
| Class 2 For those earning above the Small profits threshold | £3.05 per week | £3.05 per week |
| ower Profits Limit Earnings up to this limit incur only Class 2. Over this limit incurs Class 4. | £9,568 | £9,500 |
| Upper Profits Limit Any earnings up to this limit incur: Cs 2 NICs Class 4 at 9% of the profit between the Lower Profits Limit and Upper Profits Limit. | £50,270 | £50,000 |
| Earnings above the Upper Profits Limit Any earnings above this limit incur: Class 2 NICs Cs 4 at 9% of the profit between the Lower Profits Limit and Upper Profits Limit Class 4 NICs at 2% of the profit above the Upper Profits Limit. | Over £50,270 | Over £50,000 |
You may refer to HMRC NIC’s calculator for an easier calculation of your NIC’s due.
Capital Gains Tax in 2021/22
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% |
Corporation Tax
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.
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.
- Companies with profits of £50,000 or less will continue to pay Corporation Tax at 19%
- The rate will increase in bands, with businesses whose profits are greater than £250,000 paying a maximum of 25% Corporation Tax. More information about the profit bands and which rate of tax is payable should be available soon.
VAT
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:
- The end of the Brexit transition period means changes to VAT on imports and exports to and from Europe. Our series of VAT after Brexit articles explains everything you need to know in more detail.
- The restrictions to social contact as a result of COVID-19 lockdowns meant that businesses in the hospitality and tourism sector particularly suffered. As a result, the government temporarily reduced VAT for those businesses.
VAT rates
| 2021/22 | 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:
- From 15th July 2020 to 30th September 2021 this is 5%
- From 1st October 2021 to 31st March 2022 this is 12.5%
Tax Benefits Of Electric Vehicles
There are significant tax benefits of electric vehicles which is the subject of a whole blog in itself.
If you have questions about this topic, please give us a call on +44 01234 712840.
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