Taxation (UK) · The comprehensive computation of taxable income and income tax liability

Income Tax Rates, Bands and Order of Taxation in TX-UK

Updated 11 October 2026 · Fact-checked

Income tax is calculated by taxing non-savings income first, then savings income, then dividends, each stacked on top of the last. Apply the personal allowance, then fill the £37,700 basic rate band and the higher rate band. Use the 20%/40%/45% rates for non-savings and savings income and 8.75%/33.75%/39.35% for dividends. Apply nil rate bands where they are available.

Understand Income Tax Rates, Bands and Order of Taxation

Your taxable income is split into three types: non-savings income (employment, trading, property), savings income (mainly bank and building society interest) and dividend income. The types are taxed in that fixed order. Non-savings income fills the bands first, dividends last.

There are three bands. The basic rate band covers the first £37,700 of taxable income. The higher rate band covers the next slice up to £125,140. The additional rate applies above £125,140. Bands are measured on taxable income, which is income after the personal allowance. The rates are 20%, 40% and 45% for non-savings and savings income. For dividends they are 8.75%, 33.75% and 39.35%.

Three nil rate bands can reduce the tax. A starting rate of 0% applies to savings income that falls within the first £5,000 of taxable income. This only helps if your non-savings taxable income is below £5,000. The personal savings allowance is a 0% band of £1,000 for a basic rate taxpayer and £500 for a higher rate taxpayer. An additional rate taxpayer gets none. The dividend nil rate band is £500 for everyone.

The nil rate bands are not extra bands. The income they cover still uses up the basic or higher rate band. This matters because your tax status (basic, higher or additional) depends on where your income sits in the bands, not on how much tax is charged on it. A person whose taxable income reaches the higher rate band gets a £500 savings allowance, even if the allowance covers part of that income.

The personal allowance is set against income in the same order: non-savings first, then savings, then dividends. Most students lose marks by applying it in the wrong order or by mis-stating the nil rate band available.

Key rules to remember

Order of taxation: Non-savings income → Savings income → Dividend income; Fill the bands in this order. The personal allowance is deducted in the same order.
Income tax bands (taxable income): Basic: £1 – £37,700 | Higher: £37,701 – £125,140 | Additional: over £125,140; Bands apply to taxable income, after the personal allowance.
Rates on non-savings and savings income: Basic 20% | Higher 40% | Additional 45%; Savings income uses the same rates as non-savings income.
Rates on dividend income: Basic 8.75% | Higher 33.75% | Additional 39.35%; Dividends are taxed last, on top of other income.
Starting rate for savings: Starting rate band = £5,000 − non-savings taxable income (minimum nil); Savings in this band are taxed at 0%. It applies only if non-savings taxable income is below £5,000.
Personal savings allowance: Basic rate taxpayer £1,000 | Higher rate taxpayer £500 | Additional rate taxpayer nil; Tax is 0% on this amount of savings income, but it still uses up the band.
Dividend nil rate band: £500 taxed at 0%; Available at all levels of income. It still uses up the band.
Personal allowance: £12,570, reduced where adjusted net income exceeds £100,000, and nil at £125,140 or more; Deducted from non-savings income first, then savings, then dividends.

How to solve Income Tax Rates, Bands and Order of Taxation questions

Use this method for any income tax liability computation involving more than one type of income.

1List each source of income and put it into one of three columns: non-savings, savings or dividends. Use the gross amounts.
2Add the three columns to find total income. Deduct the personal allowance, taking it off non-savings first, then savings, then dividends. This gives taxable income in each column.
3Work out the bands available. The basic rate band is £37,700, plus any extension (for example, from Gift Aid or personal pension payments).
4Tax the non-savings income first. Use the basic rate band at 20%, then the higher rate at 40%, and record how much of each band is used.
5Tax the savings income. Work out any starting rate band (£5,000 less non-savings taxable income). Then decide whether the taxpayer is basic or higher rate and give £1,000 or £500 of savings allowance at 0%. Tax the rest at 20% or 40% depending on the band remaining.
6Tax the dividends. Give the first £500 at 0%. Tax the rest at 8.75% in the remaining basic rate band and 33.75% above it.
7Add the tax on all three types of income. Check that the band totals agree with total taxable income. Then deduct any tax already paid (such as PAYE) if the question asks for tax payable.

Quickest way: Band-ladder shortcut

When to use it: Use it in Section A and Section B objective questions, where you need one figure quickly and there are no marks for workings.

Compute taxable income for each type, remembering that the personal allowance comes off non-savings first.
Draw a ladder from £0 to £37,700 to £125,140 and slot non-savings, then savings, then dividends onto it.
Mark where the taxpayer ends up: if taxable income is over £37,700 they are a higher rate taxpayer, so the savings allowance is £500.
Cross out the 0% slices: the starting rate band, the savings allowance and the first £500 of dividends.
Multiply what is left in each slice by the correct rate and total them.

Common mistakes in Income Tax Rates, Bands and Order of Taxation

Taxing dividends or savings before non-savings income.
Students tax income in the order it appears in the question.
Fix: Always sort the income into three columns and tax them in the fixed order: non-savings, savings, dividends.
Using the non-savings rates of 20%/40% on dividends.
The rates look similar and students forget that dividends have their own rates.
Fix: Write the dividend rates, 8.75%, 33.75% and 39.35%, at the top of your workings before you start.
Giving a higher rate taxpayer a £1,000 savings allowance, or giving the allowance to someone who is only basic rate.
Status is judged before the personal allowance is deducted or without looking at where the income sits in the bands.
Fix: Judge status from taxable income after the personal allowance. If taxable income exceeds £37,700, the allowance is £500. If it is £37,700 or less, it is £1,000. Remember that an additional rate taxpayer gets none.
Treating nil rate bands as additional bands that stretch the basic rate band.
Students think 0% income does not count when the bands are used up.
Fix: Income taxed at 0% under a nil rate band still takes up the basic or higher rate band. Count it when you work out how much band is left for later income.
Applying the starting rate for savings when non-savings taxable income is £5,000 or more.
Students remember the £5,000 figure but forget it is reduced by non-savings taxable income.
Fix: Calculate £5,000 less non-savings taxable income. If the answer is nil or negative, there is no starting rate band.
Deducting the personal allowance from dividends or savings before non-savings income.
Students want to use the allowance against the income that would otherwise be taxed at the highest rate.
Fix: The personal allowance goes against non-savings income first, then savings, then dividends. This is the order ACCA expects.

Worked examples

Example 1

In 2026/27 Priya has employment income of £62,000, bank interest of £2,000 and dividends of £4,000, all received gross. Calculate her income tax liability before any tax paid at source.

Show the solution

Total income is £62,000 + £2,000 + £4,000 = £68,000, which is below £100,000, so the personal allowance is the full £12,570.
Non-savings taxable income is £62,000 − £12,570 = £49,430. Savings income is £2,000 and dividends are £4,000. Taxable income is £55,430, which is above £37,700, so Priya is a higher rate taxpayer.
Non-savings: £37,700 × 20% = £7,540. The remaining £11,730 (£49,430 − £37,700) × 40% = £4,692.
Savings: there is no starting rate band, because non-savings taxable income is over £5,000. Higher rate taxpayer, so savings allowance is £500 at 0%. The remaining £1,500 × 40% = £600.
Dividends: £500 at 0%. The remaining £3,500 × 33.75% = £1,181.25. All of this income is in the higher rate band.
Total tax = £7,540 + £4,692 + £600 + £1,181.25 = £14,013.25.

Answer: Income tax liability is £14,013.25.

Example 2

In 2026/27 Tom has trading profit of £14,000, bank interest of £3,000 and dividends of £6,000, all received gross. He has no other income. Calculate his income tax liability.

Show the solution

Total income is £14,000 + £3,000 + £6,000 = £23,000. The personal allowance is the full £12,570.
Non-savings taxable income is £14,000 − £12,570 = £1,430. Savings are £3,000 and dividends £6,000. Total taxable income is £10,430, so Tom is a basic rate taxpayer.
Non-savings: £1,430 × 20% = £286.
Savings: the starting rate band is £5,000 − £1,430 = £3,570. All £3,000 of savings income falls within it, so the tax is nil. The savings allowance is not needed.
Dividends: the first £500 is taxed at 0%. The remaining £5,500 × 8.75% = £481.25. All of it falls within the basic rate band because total taxable income is below £37,700.
Total tax = £286 + £0 + £481.25 = £767.25.

Answer: Income tax liability is £767.25.

Exam tips

Set out three columns (non-savings, savings, dividends) on your scratch pad before you start any computation question. It stops order-of-taxation errors.
Write down the personal allowance position first. Check total income against £100,000 in case the allowance is reduced.
For savings income, always ask two questions: is there a starting rate band, and is the taxpayer basic or higher rate? Then decide whether the allowance is £1,000 or £500.
In constructed response questions, show each slice of income with its rate and tax as a separate line so you collect the method marks. In objective questions, the answer is marked all or nothing, so check your arithmetic and the rate of each slice.
Use the rates and allowances table provided in the exam, but know the order of taxation and the nil rate band rules, because the table does not tell you how to apply them.

Practice questions from The comprehensive computation of taxable income and income tax liability

Income Tax Rates, Bands and Order of Taxation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Strategic ProfessionalIncome Tax Rates, Bands and Nil Rate Bands

Income Tax Rates, Bands and Order of Taxation: frequently asked questions

What is the order of taxation for income tax in TX-UK?

Non-savings income is taxed first, then savings income, then dividend income. The personal allowance is also deducted in that order. This matters because each type has its own rates and nil rate bands.

How does the personal savings allowance differ from the starting rate for savings?

The starting rate is a 0% band of up to £5,000 that only exists if non-savings taxable income is below £5,000. The personal savings allowance is £1,000 for a basic rate taxpayer and £500 for a higher rate taxpayer. If the starting rate does not cover all the savings income, you can use the allowance on what is left.

Do nil rate bands use up the basic rate band?

Yes. Income covered by the savings allowance, the starting rate band or the dividend nil rate band is taxed at 0%, but it still counts towards the basic or higher rate band. This affects the rate on any later income and the taxpayer's status.

What are the dividend tax rates in TX-UK?

They are 8.75% in the basic rate band, 33.75% in the higher rate band and 39.35% in the additional rate band. The first £500 of dividends is taxed at 0% under the dividend nil rate band.