Personal Allowance

The tax free personal allowance has increased rapidly in recent years up to the Government’s original target of £12,500 which has been in force since 2019/20.  For 2021/22, the personal allowance will be increased marginally to £12,570, but thereafter will be frozen at this level until the end of 2025/26.

For taxpayers who have income over £100,000 in a tax year, the personal allowance will continue to be withdrawn.  £1 of the personal allowance is lost for every £2 of income over the £100,000 threshold, creating the infamous “60% tax band”.  In 2021/22 people with income over £125,140 will therefore not receive any personal allowance.

Income Tax Rates

The basic rate of income tax remains at 20% for most income and 7.5% for dividend income.  These rates apply to the next £37,700 of income after the personal allowance.

The higher rate of tax remains at 40% for most income and 32.5% for dividend income.  These rates apply to income in excess of £50,270.

The additional rate of tax which applies to income over £150,000, remains at 45% for most income and 38.1% for dividend income.

Scottish Tax Rates

Taxpayers north of the border will be subject to Scottish tax rates on their earned income which are slightly different to those in the rest of the UK.

The main 20%/40%/45% bands are increased across the board by 1% to 21%/41%/46% accordingly in Scotland.  There are also small 19% and 20% bands in Scotland before the 21% band kicks in at £25,296 of income.

The main difference however, is the level at which the higher rate tax begins.  In Scotland this starts to be levied on income over £43,662 from April 2021 whereas those in the rest of the UK will not pay higher rate tax until they hit £50,270.  This band of income between £43,662 and £50,270 is therefore taxed at 41% in Scotland but only 20% in the rest of the UK, meaning those north of the border will pay nearly £1,400 extra tax in this band.

Temporary Extension To Carry Back Of Trading Losses

As many businesses will have struggled in 2020/21 and many will continue to struggle as we enter 2021/22, a very welcome extension to the loss carry back rules has been announced.

Trading losses incurred in either 2020/21 or 2021/22 will be eligible to be carried back up to three years (from the current one year carry back allowed currently) and offset against previous years’ trading profits.

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