Personal tax - tax and financial strategies 2020/21

personal tax essentials

Our tax and financial planning strategies 2020/21 website pages are designed to help you to make the most of your business and your personal finances by highlighting the main tax allowances and incentives and suggesting strategies that you might wish to incorporate into your own financial planning. 

For further information, please take a look at our other Tax and financial strategies 2020/21 website pages.
Tax and financial strategies 2020/21 - an overview
Business tax strategies - Tax and financial strategies 2020/21
Tax and employment - Tax and financial strategies 2020/21
Personal and family financial strategies - Tax and financial strategies 2020/21
Retirement planning strategies - Tax and financial strategies 2020/21
Savings and Investment strategies - Tax and financial strategies 2020/21
Tax efficient estate planning - Tax and financial strategies 2020/21

Personal allowance

Each individual is entitled to his or her own personal allowance (PA) of £12,500 for 2020/21. The PA reduces an individual’s taxable income. For those with income in excess of £100,000, the allowance is restricted.

After reducing income by the PA a series of rate bands are assigned first to your non-savings (this may include income from wages, self-employment, property income and pensions), then to your savings income, and finally to any dividend income.

Income tax rates for 2020/21 

Non-savings income for English and Northern Irish taxpayers is taxable as follows:

Band £


Rate %

0 - 37,500

Basic rate (BR)


37,501 - 150,000

Higher rate (HR)


Over 150,000

Additional rate (AR)


Welsh taxpayers

The National Assembly for Wales has the right to vary the rates of income tax payable by Welsh taxpayers. The Welsh rate of income tax has been set at 10% and is added to the UK rates, which are each reduced by 10%. This means that for 2020/21, the tax payable by Welsh taxpayers continues to be the same as English and Northern Irish taxpayers. 

Scottish taxpayers

However, the following rates and bands apply for Scottish taxpayers (on non-savings and non-dividend income):

Band £

Band Name 

Rate %

0 - 2085



2,086 - 12,658



12,659 - 30,930



30,931 - 150,000



Over 150,000



Rates that apply across the UK

Savings income

The Personal Savings Allowance (PSA) applies to income such as bank and building society interest. The allowance applies for up to £1,000 of a basic rate taxpayer’s savings income, and up to £500 of a higher rate taxpayer’s savings income each year. The allowance is not available to additional rate taxpayers.

In addition to the PSA, some taxpayers benefit from the starting rate for savings, which taxes £5,000 of savings income at 0%. This is not available if the taxable non-savings income exceeds the starting rate band.

Dividend income 

The Dividend Tax Allowance (DTA) is £2,000. The DTA does not change the amount of income that is brought into the income tax computation. Instead, it charges £2,000 of the dividend income at 0% tax – the dividend nil rate. Like the PSA, the DTA does not reduce total income for tax purposes, and dividends within the allowance still count towards the appropriate basic or higher rate bands. Dividends in excess of the DTA are taxed at 7.5% (BR); 32.5% (HR); and 38.1% (AR).

Case Study

Sara has gross income of £56,000 (made up of £26,000 earnings, £5,000 of interest and UK dividends of £25,000). Her tax liability is £6,825.





Income and gains




Deduct: PA



Deduct: AE






Tax at:

0% on PSA / DTA




20% on




7.5% on



32.5% on



Total tax




Total tax liability £6,825.00

The ‘hidden’ 45% and 60% tax rates

The top rate of income tax, for those with taxable income in excess of £150,000, is 45% (38.1% for dividends). The PA is scaled back if ‘adjusted net income’ exceeds £100,000, being reduced by £1 for every £2 of income in excess of that limit. This means that an individual with total taxable income of £125,000 or more will not be entitled to any PA. This gives an effective tax rate on this slice of income of 60% – higher if you are a Scottish taxpayer paying the Scottish Top rate of tax of 46%. It may be possible to reduce your taxable income and retain your allowances if approached with due consideration, e.g. by making pension contributions or Gift Aid donations. Contact us now for advice on minimising the impact of the top tax rates.

If you would like to discuss personal taxation and other issues relating to your personal and business tax, please get in touch with our tax specialists at DRG Chartered Accountants.

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