Definition of Higher Rate of Income Tax
The higher rate of income tax refers to the percentage of tax that individuals must pay on their taxable income above a specified limit. Unlike the basic rate of income tax, which applies to a lower range of income, the higher rate targets higher earnings. In the 2016-17 tax year, individuals with taxable income exceeding £32,000 after personal and other allowances were subject to a 40% tax rate. Additionally, an “additional rate” of 45% was imposed on taxable income over £150,000.
Examples
Example 1:
John earns a total of £40,000 annually. After deducting his personal allowance of £11,000, his taxable income reduces to £29,000. Therefore, John does not fall under the higher rate of income tax and continues to pay tax at the basic rate.
Example 2:
Emma earns £70,000 annually. After deducting her personal allowance of £11,000, her taxable income is £59,000. Emma is liable to pay 20% on the first £32,000, and 40% on the remaining £27,000 as it falls into the higher rate tax bracket for the 2016-17 tax year.
Example 3:
Michael earns £200,000 annually. After his personal allowance, his taxable income is £189,000. He will pay 20% up to £32,000, 40% on the next £118,000, and 45% on the remaining £39,000.
Frequently Asked Questions (FAQs)
Q1: What is the higher rate of income tax? A: The higher rate of income tax is a taxation level applied to earnings that exceed a specific threshold. For the 2016-17 tax year, this rate was set at 40% for taxable income over £32,000.
Q2: How does the higher rate of income tax differ from the additional rate? A: The higher rate was 40% in the 2016-17 tax year, applicable to income over £32,000. The additional rate, at 45%, applied to taxable income over £150,000.
Q3: Are personal allowances deducted before applying the higher rate? A: Yes, personal allowances and other applicable deductions are subtracted from total income to determine taxable income. The higher rate applies only to the taxable income exceeding the specified threshold.
Q4: Did the higher tax rates change in subsequent years? A: Yes, the government periodically adjusts income tax rates and thresholds. It’s essential to verify the current year’s rates and limits.
Q5: How does one calculate the tax owed if their income is subject to the higher rate? A: Subtract applicable allowances from the total income to find the taxable income. Apply the basic rate to income within the lower threshold, the higher rate to amounts over the higher threshold, and the additional rate if applicable.
Related Terms
Basic Rate of Income Tax
The basic rate of income tax applies to the initial portion of an individual’s taxable income, typically starting from a lower threshold. For many years, the rate was set at 20%.
Personal Allowances
Personal allowances are the portion of income individuals can earn before they start paying income tax. This allowance is deducted from the gross income to calculate taxable income.
Additional Rate of Income Tax
The additional rate is a higher percentage of tax applied to the highest bracket of taxable income exceeding £150,000. In 2016-17, it was set at 45%.
Online References
- UK Government: Income Tax rates and Personal Allowances
- HMRC: Detailed income tax information
- Citizens Advice: Understanding income tax
Suggested Books
- “UK Tax System” by Malcolm James: This book provides comprehensive information on the UK tax system, including historical changes and practical guidance.
- “Taxation: Finance Act 2016” by Alan Melville: A detailed guide to UK taxation practices including income tax calculations and allowances.
- “Income Tax Fundamentals” by Gerald E. Whittenburg and Steven Gill: This book offers a foundational understanding of income tax principles and calculations.
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