Advanced Taxation (UK) · Income tax: the use of exemptions and reliefs in deferring and minimising income tax liabilities

Income Tax Rates, Bands and Allowances for ACCA ATX

Updated 11 October 2026 · Fact-checked

Income tax is computed by splitting income into non-savings, savings and dividends, deducting the personal allowance in that order, then taxing each slice using the bands and nil rate bands. Savings and dividends sit on top of non-savings income. Planning aims to keep income inside lower bands and avoid the personal allowance abatement.

Understand Income Tax Rates, Bands and Allowances

Income tax is not charged at one rate. Your income is split into three types: non-savings income (employment, trading, property), savings income (interest) and dividend income. Each type has its own rates. Non-savings is taxed first, then savings, then dividends. The order matters because each slice sits on top of the one before.

The personal allowance (£12,570) is deducted first from non-savings income, then savings, then dividends. What is left is taxable income. The bands are applied to taxable income: basic rate £1 to £37,700, higher rate £37,701 to £125,140, additional rate above that. Non-savings rates are 20%, 40% and 45%. Dividend rates are 8.75%, 33.75% and 39.35%.

There are three special 0% slices. The starting rate for savings is 0% on savings income that falls within the first £5,000 of taxable income. So non-savings taxable income above £5,000 uses it up completely. The savings nil rate band is £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. Nil rate band income still uses up the basic or higher rate band.

The personal allowance is lost gradually when adjusted net income exceeds £100,000. It falls by £1 for every £2 over the limit and is nil at £125,140 or more. Between £100,000 and £125,140 the effective rate on extra non-savings income is 60%. Planning focuses on cutting adjusted net income, for example with Gift Aid donations or pension contributions.

The marriage allowance lets one spouse or civil partner transfer £1,260 of their personal allowance to the other. It suits couples where one partner pays no income tax above their allowance and the other is a basic rate taxpayer. It is not available if the recipient is a higher or additional rate taxpayer. The recipient's tax is reduced by 20% of £1,260.

Key rules to remember

Income tax bands: Basic £1 – £37,700; Higher £37,701 – £125,140; Additional over £125,140; Applied to taxable income, after the personal allowance. Gross Gift Aid and personal pension payments extend the basic and higher rate bands.
Rates: Non-savings 20% / 40% / 45%; Dividends 8.75% / 33.75% / 39.35%; Savings income uses the non-savings rates (20%, 40%, 45%) after any 0% slices.
Order of taxation: Non-savings, then savings, then dividends; Personal allowance is set against the same order. Tax each slice in its own band position.
Personal allowance: £12,570, reduced by ½ × (adjusted net income – £100,000), minimum nil; Nil when adjusted net income is £125,140 or more. Use adjusted net income, not taxable income.
Starting rate for savings: 0% on savings within the first £5,000 of taxable income; Available band = £5,000 – non-savings taxable income. Nil if that is £5,000 or more.
Savings nil rate band: £1,000 basic rate; £500 higher rate; nil additional rate; Set by the taxpayer's band, which depends on total taxable income.
Dividend nil rate band: £500 for all taxpayers; Taxed at 0% but still uses up the band it falls in.
Marriage allowance: Transfer £1,260; recipient's tax reduced by 20% × £1,260 = £252; Recipient must not be a higher or additional rate taxpayer. Transferor must not pay tax above their reduced allowance.

How to solve Income Tax Rates, Bands and Allowances questions

Use the same layout every time. It earns method marks even if an arithmetic slip occurs.

1List income by type: non-savings, savings and dividends. Add them to get total income.
2Work out adjusted net income if total income may exceed £100,000. Reduce the personal allowance by £1 for every £2 over the limit.
3Deduct the personal allowance against non-savings first, then savings, then dividends. Find taxable income for each type.
4Decide the taxpayer's band from total taxable income. This sets the savings nil rate band (£1,000, £500 or nil).
5Tax non-savings income through the bands. Note how much of the £37,700 basic rate band remains.
6Work out the starting rate band for savings (£5,000 less non-savings taxable income), then the savings nil rate band, then tax the rest of the savings at 20%, 40% or 45%.
7Tax dividends last: £500 at 0%, the rest at 8.75%, 33.75% or 39.35% depending on where they fall. Add up the tax.
8If asked for planning, recalculate with the change (extra pension or Gift Aid, marriage allowance, moving income) and state the saving.

Quickest way: Band-slice method

When to use it: Use it for any full computation or a quick comparison of planning options.

Write a three-line table of taxable income: non-savings, savings, dividends, with the personal allowance already taken off.
Mark where £37,700 falls. Draw the line through whichever type crosses it.
Apply 0% slices first, in order: starting rate, savings nil rate band, dividend nil rate band, each only to the relevant income type.
Multiply each remaining slice by its rate. Check that the slices add up to taxable income.
For planning, calculate only the difference between the two scenarios. Do not redo the whole computation.

Common mistakes in Income Tax Rates, Bands and Allowances

Tapering the personal allowance using taxable income or total income instead of adjusted net income.
Students take the number from the nearest line of the computation.
Fix: Take total income, deduct gross Gift Aid and gross personal pension payments, then compare with £100,000.
Using the £1,000 savings nil rate band for a higher rate taxpayer.
Students decide the band from earnings alone, or forget it depends on taxable income.
Fix: Decide the band from total taxable income. Above £37,700 it is £500. Above £125,140 it is nil.
Giving the starting rate for savings when non-savings taxable income is already £5,000 or more.
Students remember '£5,000 at 0%' without the reduction.
Fix: Compute £5,000 less non-savings taxable income. If negative, the starting rate is nil.
Taxing dividends at 20% or 40% instead of the dividend rates.
Students copy the non-savings rates across.
Fix: Use 8.75%, 33.75% and 39.35%. Dividends are always taxed after savings.
Forgetting that nil rate band income still uses up the band.
Students treat 0% income as outside the computation.
Fix: Include nil rate band income in the band position, then tax only the excess at the rate for the band it lands in.
Claiming marriage allowance when the recipient is a higher rate taxpayer, or failing to reduce tax by £252.
Students remember the £1,260 transfer but not the conditions or the 20% effect.
Fix: Check the recipient is a basic rate taxpayer first. Then deduct £252 from their tax. Do not add £1,260 to their allowance in the computation.

Worked examples

Example 1

Priya has employment income of £48,000, bank interest of £6,000 and dividends of £4,000 in 2025/26. All amounts are gross. Calculate her income tax liability.

Show the solution

Total income = £48,000 + £6,000 + £4,000 = £58,000. This is below £100,000, so she gets the full personal allowance of £12,570.
Non-savings taxable income = £48,000 – £12,570 = £35,430. Total taxable income = £58,000 – £12,570 = £45,430. This exceeds £37,700, so she is a higher rate taxpayer with a savings nil rate band of £500.
Non-savings tax: £35,430 × 20% = £7,086. Basic rate band left = £37,700 – £35,430 = £2,270.
Starting rate band for savings = £5,000 – £35,430, which is nil.
Savings £6,000: the first £2,270 is in the basic rate band. Of this, £500 is at 0% (nil rate band) and £1,770 at 20% = £354. The remaining £3,730 is in the higher rate band at 40% = £1,492.
Dividends £4,000: the basic rate band is used up, so all fall in the higher rate band. £500 at 0%. £3,500 × 33.75% = £1,181.25.
Total tax = £7,086 + £354 + £1,492 + £1,181.25 = £10,113.25.

Answer: Priya's income tax liability is £10,113 (to the nearest £).

Example 2

Tom has employment income of £110,000 in 2025/26 and no other income. He is considering a personal pension contribution of £16,000 paid net of basic rate relief, a gross contribution of £20,000. Assume he has enough annual allowance. Calculate the income tax saving.

Show the solution

Without the contribution: adjusted net income is £110,000. Excess over £100,000 is £10,000, so the personal allowance falls by £5,000 to £7,570.
Taxable income = £110,000 – £7,570 = £102,430. Tax: £37,700 × 20% = £7,540. £64,730 × 40% = £25,892. Total £33,432.
With the contribution: the gross payment of £20,000 reduces adjusted net income to £90,000. This is below £100,000, so the full personal allowance of £12,570 is restored.
The basic rate band is extended by £20,000 to £57,700. Taxable income = £110,000 – £12,570 = £97,430.
Tax: £57,700 × 20% = £11,540. £39,730 × 40% = £15,892. Total £27,432.
Saving = £33,432 – £27,432 = £6,000. Check: £20,000 × 20% extra relief (40% – 20%) = £4,000, plus the £5,000 allowance restored × 40% = £2,000. Total £6,000.
Tom also receives £4,000 basic rate relief at source in the pension. His net £16,000 payment therefore costs £10,000 after the saving: an effective relief of 50% of the gross contribution.

Answer: The income tax saving is £6,000 in addition to the £4,000 basic rate relief added to the pension. The effective net cost of a £20,000 pension contribution is £10,000.

Exam tips

Always lay out the computation in columns for non-savings, savings and dividends. Marks are given for each slice, and a clear layout lets the marker follow through errors.
Whenever income is near £100,000, check adjusted net income. This is a favourite planning point, and the answer is usually Gift Aid or a pension contribution.
State your assumptions clearly, such as 'assuming sufficient annual allowance' or 'amounts are gross'. The rates and bands are in the tax tables, so do not waste time memorising anything else.
For marriage allowance, state the conditions and the £252 reduction in one or two lines, then show the saving. Do not recompute the whole liability.
In planning questions, give a short recommendation after the numbers. Professional skills marks reward a clear conclusion for the client.

Practice questions from Income tax: the use of exemptions and reliefs in deferring and minimising income tax liabilities

Income Tax Rates, Bands and Allowances in other exams

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

ACCA Applied SkillsIncome Tax Rates, Bands and Order of Taxation

Income Tax Rates, Bands and Allowances: frequently asked questions

How do I avoid losing the personal allowance above £100,000?

Reduce adjusted net income to £100,000 or less. Gross Gift Aid donations and gross personal pension contributions both do this. Between £100,000 and £125,140 the effective rate on extra non-savings income is 60%, so these payments are very efficient.

Do savings and dividends use the basic rate band?

Yes. They sit on top of non-savings income, so whatever remains of the £37,700 band is used by savings first, then dividends. Nil rate band income uses up the band too.

When does the starting rate for savings apply?

It applies to savings income that falls within the first £5,000 of taxable income. Non-savings taxable income is taxed first and uses up that band. Once non-savings taxable income reaches £5,000, no starting rate is left.

Who can claim the marriage allowance?

The partner receiving the allowance must be a basic rate taxpayer. The partner giving it up must not pay income tax above their reduced allowance. The recipient's tax bill falls by £252, which is 20% of £1,260.