Advanced Taxation (UK) · Tax advantages and disadvantages of alternative courses of action

ATX Income Tax Rates, Bands and Cap on Reliefs

Updated 11 October 2026 · Fact-checked

UK income tax is charged in a set order: non-savings income, then savings, then dividends. Each type has its own rates, and nil rate bands can make some income tax-free. The cap limits most reliefs to the higher of £50,000 or 25% of income. Use these rules to compare options.

Understand Income Tax Rates, Bands and Cap on Reliefs

UK income tax does not use one rate for all income. It uses three sets of rates: normal rates for non-savings income (20%, 40%, 45%), the same bands for savings income, and lower dividend rates (8.75%, 33.75%, 39.35%). The bands are the same for all three: basic rate up to £37,700 of taxable income, higher rate up to £125,140, and additional rate above that.

Income is stacked in a fixed order. Non-savings income comes first, then savings income, then dividends on top. This matters because dividends sit in the highest slice of your income. Extra dividends are often taxed at a higher rate than the same amount of extra salary would be taxed at the lower end.

Some income is taxed at 0%. The savings nil rate band is £1,000 for a basic rate taxpayer and £500 for a higher rate taxpayer. The dividend nil rate band is £500 for everyone. A starting rate of 0% applies to savings income that falls within the first £5,000 of taxable income. Nil rate band income still uses up your bands. It is taxed at 0%, but it still counts toward the basic rate limit.

The cap on income tax reliefs limits tax planning. Unless a relief is otherwise restricted, the total of capped reliefs you can deduct is the higher of £50,000 or 25% of income. Examples of capped reliefs include sideways trading loss relief and qualifying loan interest. Pension contributions and charitable giving are dealt with under their own rules.

In planning questions, you compare two or more courses of action, such as salary versus dividend or claiming a loss now versus carrying it forward. You work out the tax under each, using the right rates for each type of income, and then recommend the cheaper or more suitable option.

Key rules to remember

Normal rates (non-savings income and savings income): Basic £1 – £37,700 at 20%; Higher £37,701 – £125,140 at 40%; Additional over £125,140 at 45%; Bands apply to taxable income, after the personal allowance. Savings income uses the same rates.
Dividend rates: Basic 8.75%; Higher 33.75%; Additional 39.35%; Dividends are taxed last, on top of non-savings and savings income.
Savings income nil rate band: Basic rate taxpayer £1,000; higher rate taxpayer (taxable income £37,701 – £125,140) £500; additional rate taxpayer (taxable income over £125,140) nil; Your band depends on which rate band your total taxable income reaches. An additional rate taxpayer has no savings nil rate band. Where a band applies, savings income in it is at 0% but still uses up the band.
Dividend nil rate band: £500 for all taxpayers; Taxed at 0%. It uses up basic or higher rate band, so it does not move dividends into a lower band.
Starting rate for savings: 0% on savings income within the first £5,000 of taxable income; It is only available if non-savings taxable income is below £5,000. It is reduced by the amount of non-savings taxable income.
Cap on income tax reliefs: Cap = higher of £50,000 or 25% of income; Applies unless the relief is otherwise restricted. Excess relief is not deducted in that year. Check the rules for each relief for whether it can be carried forward.

How to solve Income Tax Rates, Bands and Cap on Reliefs questions

Use this method for any question that asks you to compute or compare income tax under different options.

1List each type of income separately: non-savings, savings and dividends. Take the personal allowance from the tax tables and set it against non-savings income first, then savings, then dividends.
2Identify the reliefs to be deducted. Test them against the cap: higher of £50,000 or 25% of income. Deduct only the capped amount, and note any excess.
3Calculate taxable income and split it into non-savings, savings and dividends. Stack them in that order.
4Tax the non-savings income using the normal rates and bands. Note how much of the basic rate band is used.
5Work out whether the person is a basic or higher rate taxpayer based on total taxable income. Then apply the savings nil rate band (£1,000 or £500), and the starting rate if non-savings taxable income is below £5,000.
6Tax the dividends using the remaining bands. First the £500 dividend nil rate band, then the dividend rates 8.75%, 33.75% and 39.35% on each slice.
7Add up the tax under each option. Compare the totals and state which option saves tax and by how much.
8Add a short recommendation. Mention any other factors, such as National Insurance, cash flow and the effect on the company's tax.

Quickest way: Slice-by-slice band tracker

When to use it: Use this when time is short and you need to compare the extra tax on a small change, such as taking another £10,000 as salary or dividend.

Work out total taxable income before the change and mark where it sits against £37,700 and £125,140.
Find the slice the extra income would fall in. Salary and savings use 20%, 40%, 45%. Dividends use 8.75%, 33.75%, 39.35%.
Split the extra amount across a band boundary if it crosses one. Tax each part at its own rate.
For reliefs, calculate the cap first: higher of £50,000 or 25% of income. Only the capped amount reduces income.
Compare the tax on each slice and write the difference. Always show your band working so you earn method marks.

Common mistakes in Income Tax Rates, Bands and Cap on Reliefs

Using the wrong savings nil rate band, for example £1,000 for a higher rate taxpayer, or £500 for an additional rate taxpayer.
Students decide the taxpayer's status from non-savings income only.
Fix: Work out total taxable income including savings and dividends first. If it is within £37,700, the band is £1,000. If it is £37,701 to £125,140, the band is £500. If it is above £125,140, there is no savings nil rate band.
Treating nil rate band income as if it does not use up the basic rate band.
The income is taxed at 0%, so it seems to disappear.
Fix: Nil rate band income still counts towards the band limits. Include it when you track how much of £37,700 is used.
Taxing dividends before salary or applying normal rates to dividends.
Students tax income in the order it appears in the question.
Fix: Use the order non-savings, savings, dividends. Apply dividend rates of 8.75%, 33.75% and 39.35% to dividends.
Deducting all reliefs without testing the cap.
Students only think of the cap when the question mentions it.
Fix: Always test sideways loss relief and similar reliefs against the higher of £50,000 or 25% of income, and say what happens to any excess.
Using 25% of the relief rather than 25% of income when calculating the cap.
Mixing up the base of the percentage.
Fix: Cap = higher of £50,000 or 25% of income. Compare the two figures and take the larger.
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 income.
Fix: Subtract non-savings taxable income from £5,000. If the result is zero or negative, no starting rate is available.

Worked examples

Example 1

Mia has salary of £30,000, savings interest of £2,500 and dividends of £20,000. Assume her personal allowance is £12,570 and use the 2025/26 rates. Calculate her income tax liability.

Show the solution

Total income = 30,000 + 2,500 + 20,000 = £52,500. Taxable income = 52,500 – 12,570 = £39,930.
Personal allowance is set against salary first. Taxable salary = 30,000 – 12,570 = £17,430. Savings £2,500 and dividends £20,000 are fully taxable.
Non-savings tax: 17,430 × 20% = £3,486.
Mia's taxable income of £39,930 exceeds £37,700, so she is a higher rate taxpayer. Her savings nil rate band is £500. The starting rate is not available because non-savings taxable income of £17,430 is above £5,000.
Savings tax: £500 at 0%, then 2,000 × 20% = £400. The savings fall within the basic rate band. Band used so far = 17,430 + 2,500 = £19,930.
Remaining basic rate band = 37,700 – 19,930 = £17,770.
Dividend tax: first £500 at 0% (nil rate band). Next 17,270 (17,770 – 500) × 8.75% = £1,511.13. Remaining dividends = 20,000 – 17,770 = £2,230 × 33.75% = £752.63. Dividend tax = £2,263.75 (unrounded).
Total tax = 3,486 + 400 + 2,263.75 = £6,149.75.

Answer: Mia's income tax liability is £6,149.75. Her savings nil rate band is £500 because her total taxable income is above the basic rate limit.

Example 2

Sam has total income of £180,000 before reliefs. He has a trading loss of £60,000 that he wants to relieve against general income and qualifying loan interest of £10,000. Calculate how much relief he can deduct this year under the cap and the tax saved on that relief. Assume the whole of his taxable income remains above the additional rate threshold of £125,140 after his claim. Ignore the personal allowance.

Show the solution

Reliefs claimed = 60,000 + 10,000 = £70,000.
Cap = higher of £50,000 and 25% × 180,000 = £45,000. The higher figure is £50,000.
Relief allowed this year = £50,000. Excess = 70,000 – 50,000 = £20,000, which is not deducted this year.
Income after relief = 180,000 – 50,000 = £130,000. This is above £125,140, so the whole £50,000 deducted comes off income that would be taxed at 45%.
Tax saved = 50,000 × 45% = £22,500.
The unrelieved £20,000 is not lost automatically. Check how each relief is treated: a trading loss restricted by the cap can usually be carried forward against future profits of the same trade.

Answer: Sam can deduct £50,000 this year, saving £22,500 in tax. £20,000 of relief is restricted by the cap.

Exam tips

Write out the bands (£37,700 and £125,140) next to your computation and tick off each slice as you use it. It shows method even if you slip on arithmetic.
In salary versus dividend questions, tax each option fully. Then add other effects that the question points to, such as National Insurance and the company's deduction.
State the cap calculation every time: higher of £50,000 or 25% of income. Show both figures and say which applies.
Use the tax tables provided in the exam for rates and nil rate bands. Do not rely on memory. Check which rate set (normal, savings or dividend) you are applying.
End with a clear recommendation and a number, such as the saving from one option. These are professional skills marks.

Practice questions from Tax advantages and disadvantages of alternative courses of action

Income Tax Rates, Bands and Cap on Reliefs 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 Cap on Reliefs: frequently asked questions

What are the income tax rates for dividends in the ATX exam?

The dividend rates are 8.75% for basic rate, 33.75% for higher rate and 39.35% for additional rate. The first £500 of dividends is in the dividend nil rate band at 0%. Dividends are taxed after non-savings and savings income.

How do I know if the savings nil rate band is £1,000, £500 or nil?

Look at total taxable income, including savings and dividends. If it is within the basic rate band of £37,700, the band is £1,000. If it is between £37,701 and £125,140, you are a higher rate taxpayer and the band is £500. If it is above £125,140, you are an additional rate taxpayer and there is no savings nil rate band. The £500 dividend nil rate band applies to all taxpayers.

How does the cap on income tax reliefs work?

Unless otherwise restricted, reliefs are capped at the higher of £50,000 or 25% of income. You work out both figures and use the higher. Any relief above that is not deducted in that year, so check what the rules for that relief allow for the excess.

Is a dividend always more tax-efficient than salary?

No. Dividend rates are lower than normal rates at each level, but dividends are not a deductible expense for the company. The result depends on the person's bands, National Insurance and the company's tax position, so you must compute both options.