UK tax brackets 2024/25: rates and personal allowances

The saying goes that nothing in life is certain except death and taxes. But anyone who pays employees and has wrestled with the UK tax code will tell you that “certain” is a far cry from how they’d describe it.

Income tax rates have been frozen since 2021 in England, Northern Ireland, and Wales, but the UK tax structure has many layers that can impact the taxman’s overall bill. That includes new National Insurance rates, which threw many business owners for a loop earlier this year.

This up-to-date guide will provide you with a breakdown of the current tax brackets for UK employees and sole traders. We’ll also explain where your bill might go up this year; and how to keep it down while remaining legally compliant with HMRC.

Income Tax brackets for FY 2024/25

Income tax is a charge on earnings that’s collected and managed by HMRC. It applies to all income sources, whether wages and salaries, profits from self-employment, or interest on savings.

In the March Spring Budget, Chancellor Jeremy Hunt confirmed that the thresholds for basic rate and higher rate taxpayers in England, Wales, and Northern Ireland will remain frozen until “at least” 2028. For FY 2024/25, the income tax rates are set at:

In the UK, we use a marginal rate of tax to calculate income tax bills. That means earners pay one rate of tax up to a set threshold, and then a higher percentage on each additional pound earned in the next threshold.

Income tax is only payable on earnings above the personal allowance of £12,570. Workers do not pay any tax if their take-home pay is below the personal allowance (more on this below).

Example: An employee earns an annual salary of £53,400. Their monthly payslip will show:

• 0% tax on earnings up to £12,570 
• 20% tax on all earnings between £12,571 and £50,270
• 40% tax on the remaining £3,130

Income Tax brackets for Scotland

The Scottish Parliament sets its own income tax rates and bands, which means that Scottish taxpayers qualify for six income tax bands (although these are still collected by HMRC).

Scottish earners have seen some big changes to their income tax brackets this spring. Most notably, the introduction of a new “advanced” rate tax band of 45%.

According to Deputy First Minister Shona Robison, this advanced tax grade will raise valuable revenue for Scotland’s public services. Since April 6, the new brackets are:

Tax freeze impact on UK earners

A ‘tax freeze’ is often presented as a positive for Brits. But the Tories’ decision to fix income tax brackets actually has negative implications for earners in today’s economy.

Workplaces have seen record pay increases as rising inflation devalues the pound. Startups research shows that, on average, 68.5% of firms would raise employee salaries in 2024, and April’s National Living Wage rise has forced many of the rest to do the same.

If income tax thresholds are not raised to reflect this increase, then workers and sole traders could find themselves qualifying for higher tax brackets even though their purchasing power hasn’t increased. This is called fiscal drag.

Given 2024 is an election year, some UK employers hope that income tax rates will rise if the Conservative party loses power. Labour, which is currently leading the polls, has said it would not raise income tax – although the pledge is yet to appear in a manifesto.

Personal Allowance

The personal allowance is defined as the amount of income you can earn each tax year before you start paying income tax. For the 2024/25 tax year, the current personal allowance is £12,570 for employees across the UK and including Scotland.

That means the first £12,570 that an individual earns in a set financial year will be tax-free, and is also why the basic rate and Scottish starter rate of income tax both start at £12,571.

What is the 60% tax trap?

Nothing is ever simple in the land of HMRC. One ‘quirk’ of the personal allowance is that the standard tax-free allowance begins to shrink when you earn over £100,000.

For every £2 earned above £100,000, the individual loses £1 of their personal allowance, so you won’t get any personal allowance if you earn over £125,140.

Also known as the ‘60% tax trap’, the result means higher-rate taxpayers (those earning between £50,271 and £125,140) could pay up to 60% tax on earnings.

There are ways to avoid this significant tax burden, such as contributing more to a pension or making charitable donations. You can also consult with a payroll service provider for expert advice on how to minimise your tax burden if this affects you as an employee, a business owner, or any higher paid employees of your business.

Other allowances

Besides the personal allowance, there are a few other tax allowances available in the UK, depending on your circumstances. They are:

• Marriage Allowance: married earners or civil partners can transfer part of an unused personal allowance to their spouse/partner
• Trading Allowance: self-employed workers can deduct the first £1,000 of trading profits from their taxable income
• Dividend Tax Allowance: company owners can receive up to £500 of income from shares you own in a company before paying tax on them (which is why many self-employed business owners use dividends to pay themselves as an employer).

Tax brackets for sole traders and self-employed

There is no difference between the amount of tax you pay as a sole trader versus an employee. Business drawings, the most popular method for self-employed workers to pay themselves, are taxed at the same rate as income tax.

How you report tax does differ, however. Income tax levies are usually deducted from small business payroll software through HMRC’s Pay As You Earn (PAYE) system.

Self-employed workers must instead report their income tax bill (and National Insurance contributions) as part of their Self Assessment tax return at the end of the year.

Tax brackets for side hustlers

More of us are starting side hustles than ever before, leading to a big payday for some. Last year, research revealed some side hustlers earn up to £22,900 a year, around £1,600 more than the Living Wage at the time.

Tax regulators have hastened to keep pace with the phenomenon. At the start of this year, everyone from Etsy sellers to babysitters became confused by the introduction of the ‘Side Hustle Tax’, a phrase which instantly conjures up images of bailiffs and tax collectors.

In truth, the new legislation is not an extra charge. Under the changes, side hustlers earning over the trading allowance of £1,000 must register for self-assessment. But they still won’t pay tax if they earn under the personal allowance, which is the same rule for sole traders.

It’s worth noting that you can only get the personal allowance once. Self-employed people must add all their side hustle earnings to the income from their main job and be taxed on the combined total by HMRC – hence the need to register for self-assessment.

UK tax brackets in summary

UK tax is an esoteric subject that feels at times almost deliberately muddled. Remember that the system is designed to fund essential public services – not just to trip you up.

By taking the time to understand tax brackets, side hustlers, self-employed workers, and employees can contribute their fair share while maximising take-home pay via allowable expenses and deductions.