Higher Rate of Income Tax

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.

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

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.

Accounting Basics: Higher Rate of Income Tax Fundamentals Quiz

### What is the higher rate of income tax applied to? - [ ] All taxable income - [ ] Income under £32,000 - [x] Income over a specified threshold - [ ] Non-taxable income > **Explanation:** The higher rate of income tax applies to income exceeding a specified threshold, set at £32,000 for the 2016-17 tax year. ### What was the higher rate of tax set at in the 2016-17 tax year? - [ ] 30% - [x] 40% - [ ] 50% - [ ] 45% > **Explanation:** The higher rate of income tax for the 2016-17 tax year was set at 40% on taxable income over £32,000. ### Is personal allowance considered before computing the higher rate of income tax? - [x] Yes - [ ] No - [ ] Only for individuals under 65 - [ ] Only for married individuals > **Explanation:** Personal allowances are subtracted from the total income before calculating the taxable income to determine which portions are subject to the higher rate. ### What additional rate applies to income exceeding £150,000? - [x] 45% - [ ] 40% - [ ] 35% - [ ] 50% > **Explanation:** For income exceeding £150,000, an additional rate of 45% applies. ### What is the role of the basic rate of income tax? - [x] It applies to the initial portion of taxable income. - [ ] It applies to all types of income. - [ ] It applies exclusively to incomes over £150,000. - [ ] It determines the total tax liability. > **Explanation:** The basic rate of income tax applies to the initial portion of an individual's taxable income, typically starting from the lowest threshold set by tax policies. ### Would an individual with an annual income of £31,000 be subject to a higher rate of tax? - [ ] Yes - [x] No - [ ] Only if married - [ ] Only in some regions > **Explanation:** An individual with a taxable income of £31,000 is not subject to the higher rate of income tax as it is below the £32,000 threshold. ### How do you calculate taxable income for higher rate tax purposes? - [x] Subtract personal allowances from total income - [ ] Add personal allowances to total income - [ ] Multiply net income by tax rate - [ ] Divide personal allowances by annual earnings > **Explanation:** Taxable income is calculated by subtracting personal allowances and applicable deductions from the total income. ### What principle is the additional rate of 45% based on? - [ ] Increasing wealth disparity - [ ] Simplifying taxation - [x] Progressive taxation - [ ] Global taxation norms > **Explanation:** The additional rate of 45% is based on the principle of progressive taxation, where higher earnings are subject to higher tax rates. ### Which portion of income does the basic rate of tax apply to? - [ ] Income over £150,000 - [x] Initial portion of taxable income - [ ] Non-taxable allowances - [ ] Income over £32,000 > **Explanation:** The basic rate of tax applies to the initial portion of an individual's taxable income before reaching the thresholds for higher rates. ### Who sets the thresholds and rates for income taxation? - [ ] Local municipalities - [ ] Individual taxpayers - [x] Government authorities - [ ] Financial institutions > **Explanation:** Tax thresholds and rates are set by government authorities and are subject to legislative changes.

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