Each year, the UK government outlines its financial and taxation plans in the Autumn Budget. The 2018 Budget introduced several key changes for the 2019/20 tax year, particularly in relation to Income Tax. These included increases to both the tax-free Personal Allowance and the threshold at which the higher rate of Income Tax applies. Adjustments were also made to National Insurance thresholds.
As a result of these updates, many individuals saw a change in the amount of tax they were required to pay, ultimately impacting their take-home income. This guide explains how income was taxed in 2019/20 and what that meant for taxpayers during the period.
Understanding Income Tax and How It Applies
Income Tax is a levy placed on earnings, but not all income is taxed. Generally, tax is paid on income such as employment wages, profits from self-employment, pension income, rental income, income from trusts, and interest earned from savings.
You are not taxed on every pound you earn. The government allows a portion of income to be earned tax-free, known as the Personal Allowance. For the 2019/20 tax year, the standard Personal Allowance was £12,500. Some individuals may have received a higher allowance due to specific claims like Marriage Allowance or Blind Person’s Allowance.
Your taxable income is calculated as your total earnings before tax, minus deductions such as pension contributions, and then reduced by your Personal Allowance.
The Structure of Income Tax Bands
Tax bands determine how much tax is paid on different levels of income. In a progressive tax system, different portions of your income are taxed at increasing rates as you earn more. This approach is designed to ensure that higher earners contribute a larger share of their income to public finances.
2019/20 UK Income Tax Brackets (Excluding Scotland)
For most of the UK, the Income Tax bands for the 2019/20 tax year were as follows:
- Personal Allowance: Up to £12,500 – taxed at 0 percent
- Basic Rate: £12,501 to £50,000 – taxed at 20 percent
- Higher Rate: £50,001 to £150,000 – taxed at 40 percent
- Additional Rate: Over £150,000 – taxed at 45 percent
This meant no Income Tax was payable on the first £12,500 of earnings. The threshold was increased from £11,850 in the previous tax year. The basic rate threshold also rose from £46,350 to £50,000, allowing more income to be taxed at the 20 percent rate before reaching the higher rate band.
Calculating Income Tax Using an Example
To understand how these bands work in practice, consider someone earning £60,000 during the 2019/20 tax year. Their tax would be calculated as follows:
- The first £12,500 is not taxed due to the Personal Allowance.
- The next £37,500 (from £12,501 to £50,000) is taxed at 20 percent.
- The remaining £10,000 (from £50,001 to £60,000) is taxed at 40 percent.
The total tax liability is the sum of tax across these bands. This progressive structure ensures that only income above each threshold is taxed at the corresponding rate.
Reduction of Personal Allowance for High Earners
One important rule to note is the gradual withdrawal of the Personal Allowance for high earners. If your income exceeded £100,000, your Personal Allowance was reduced by £1 for every £2 of income over that amount. This meant individuals earning £125,000 or more would receive no Personal Allowance and would be taxed on their entire income.
This reduction created an effective marginal tax rate higher than the published rates for income between £100,000 and £125,000, as more of the income became taxable while also increasing liability at the 40 percent rate.
Income Tax in Scotland
Unlike the rest of the UK, Scotland uses a different set of income tax bands for non-savings and non-dividend income. These Scottish bands applied to wages, pensions, and rental income, but not to interest or dividends.
The bands for Scotland in 2019/20 were as follows:
- Personal Allowance: Up to £12,500 – 0 percent
- Starter Rate: £12,501 to £14,549 – 19 percent
- Basic Rate: £14,550 to £24,944 – 20 percent
- Intermediate Rate: £24,945 to £43,430 – 21 percent
- Higher Rate: £43,431 to £150,000 – 41 percent
- Top Rate: Over £150,000 – 46 percent
These bands allowed Scotland to apply slightly lower or higher rates to different slices of income. Taxpayers in Scotland had to account for this variation when calculating tax on their employment income.
Savings and Investment Income
Savings income refers to interest earned from bank accounts, building society accounts, corporate bonds, and certain trust distributions. While this type of income can be taxable, specific allowances often prevent most individuals from paying tax on it.
In the 2019/20 tax year, the Personal Savings Allowance continued to apply. The allowance varied depending on the taxpayer’s income band:
- Basic Rate taxpayers could earn up to £1,000 in interest tax-free
- Higher Rate taxpayers were allowed up to £500 tax-free
- Additional Rate taxpayers did not receive a Personal Savings Allowance
In addition to this, a Starting Rate for Savings existed. Taxpayers with low income levels could claim up to £5,000 in savings interest tax-free if their total income was below the threshold. This allowance gradually decreased as earned income increased, disappearing altogether when total income exceeded £17,500.
Interaction of Income Bands and Savings Allowances
It’s important to note that savings income is taxed after applying all other income bands. If an individual’s non-savings income uses up their personal allowance and basic rate band, any savings income will be taxed according to the next applicable rate.
For example, if someone’s employment income already places them in the higher rate band, any additional interest income would typically be taxed at 40 percent, subject to the Personal Savings Allowance.
Understanding where your income sits across various tax categories helps ensure accurate reporting and prevents unnecessary taxation. This knowledge becomes even more important if you receive different types of income from multiple sources.
Dividend Income Treatment
Dividend income received from UK companies is also treated separately under specific rules. In 2019/20, all taxpayers could receive £2,000 in dividend income tax-free, known as the Dividend Allowance.
Any dividend income above this allowance was taxed at the following rates:
- Basic Rate taxpayers: 7.5 percent
- Higher Rate taxpayers: 32.5 percent
- Additional Rate taxpayers: 38.1 percent
Dividend income is taxed after applying both the Personal Allowance and any other applicable allowances. The use of different rates and a separate allowance for dividends means taxpayers needed to carefully track all sources of income to ensure they paid the correct amount of tax.
The Impact of Allowances on Tax Planning
Allowances such as the Personal Allowance, Personal Savings Allowance, and Dividend Allowance offered opportunities for effective tax planning. By understanding how these allowances interact with different types of income, individuals could potentially reduce their overall tax liability.
This required careful record-keeping and awareness of income thresholds. In many cases, strategic decisions around pension contributions or charitable donations could bring income levels back into a lower tax bracket, increasing eligibility for savings or dividend tax relief.
Types of Non-Savings Income
Non-savings income is generally considered to be income earned from work, pensions, property, and certain benefits. For many individuals, this type of income makes up the majority of what is assessed for income tax. The main types include employment income, profits from self-employment, income from rental properties, pension payments (state or private), and income from benefits such as jobseeker’s allowance.
Tax Implications of Employment Income
Employment income is taxed at source through the PAYE (Pay As You Earn) system. Employers are responsible for deducting tax and National Insurance contributions before wages are paid out. For employees, this means that income tax is generally settled throughout the year, reducing the chance of a large tax bill at the end of the tax year.
However, it’s still essential to understand your tax code and ensure that it accurately reflects your circumstances. If you have more than one job or receive additional benefits such as a company car, it’s possible that your code needs updating to ensure the correct tax is being paid.
Tax on Self-Employment Income
Self-employed individuals are responsible for reporting and paying their own taxes through the Self Assessment system. Profits are calculated by deducting allowable business expenses from gross income. The remaining profit is then subject to income tax and Class 2 and Class 4 National Insurance contributions.
In 2019/20, sole traders and business owners could also take advantage of capital allowances and the trading allowance to reduce their taxable profit. Accurate record-keeping and timely submission of returns were critical for avoiding penalties and ensuring correct tax calculations.
Rental Income and Its Tax Treatment
Landlords must pay tax on rental income received from letting out property, minus allowable expenses. These expenses might include letting agent fees, repairs and maintenance costs, council tax (if paid by the landlord), and mortgage interest (subject to restrictions introduced in recent years).
Changes to mortgage interest relief continued to affect landlords during the 2019/20 tax year. The government phased in a system where relief was restricted to a 20 percent basic rate tax credit, meaning higher-rate taxpayers could no longer claim full tax relief on their mortgage interest costs.
Tax on Pension Income
Pension income, including state pensions and private pensions, is subject to income tax. The personal allowance still applies, and income exceeding this amount is taxed according to the relevant band. State pension is paid gross, and it is the individual’s responsibility to ensure enough tax is paid if the total income crosses the threshold.
For individuals receiving multiple sources of pension income, it’s important to monitor how these combine to affect overall tax liability. An incorrectly calculated tax code could result in overpayment or underpayment.
Other Sources of Non-Savings Income
Other taxable income may include jobseeker’s allowance, maternity allowance, and certain taxable social security benefits. While some benefits are non-taxable, it’s important to confirm the status of each source to ensure compliance.
Managing Your Tax Band Effectively
The interaction of all income sources determines your total taxable income. Keeping track of changes throughout the year, such as pay increases or new income streams, can help in predicting your tax band and preparing for any tax owed.
For taxpayers close to the thresholds between bands, minor increases in income can lead to significant changes in the tax payable. Understanding the way tax bands apply and how to manage income can result in more efficient tax planning and a clearer view of financial obligations.
Understanding Marginal Tax Rates
One of the most important aspects of the income tax system is the concept of marginal tax rates. A marginal rate refers to the percentage of tax applied to your next pound of income. Because the UK tax system is progressive, it ensures that higher income is taxed at higher rates, but only on the portion that exceeds the relevant thresholds.
Understanding how marginal rates apply allows you to see how an increase in income can affect your take-home pay. For example, moving from the basic rate into the higher rate band means that any income above the threshold will be taxed at 40 percent, not all of your income. This is a common misconception.
The £100,000 Trap: Personal Allowance Tapering
An especially important planning point in 2019/20 involved the tapering of the Personal Allowance once income exceeded £100,000. For every £2 earned above this limit, £1 of the allowance was removed. This meant that someone earning £125,000 had their entire £12,500 allowance withdrawn, resulting in more of their income being taxed.
This tapering effect effectively created a marginal tax rate of 60 percent for income between £100,000 and £125,000, once you consider the 40 percent tax rate applied to this portion and the loss of £1 in allowance for every £2 earned. Taxpayers in this income range needed to consider options like pension contributions or charitable donations to reduce their taxable income below the £100,000 threshold.
Using Pension Contributions to Reduce Taxable Income
One of the most effective ways to reduce taxable income in 2019/20 was to make pension contributions. Contributions to qualifying pension schemes could be deducted from gross income, lowering the amount of income subjected to tax. For example, if someone earned £110,000 and contributed £10,000 to a pension, their adjusted income would fall to £100,000, preserving their full personal allowance.
This strategy was especially helpful for those close to the higher rate or additional rate thresholds. In addition to income tax benefits, pension contributions also helped boost long-term retirement savings, making it a valuable planning tool.
Salary Sacrifice and Employer Benefits
Another technique to manage taxable income involved salary sacrifice arrangements. Under these agreements, employees could agree to a lower salary in exchange for non-cash benefits such as pension contributions, cycle-to-work schemes, or childcare vouchers. These benefits were often exempt from tax or attracted lower rates of taxation.
Reducing gross salary through salary sacrifice could bring total income down below a tax threshold, helping taxpayers remain within a more favourable bracket. As with pension contributions, this not only improved tax efficiency but could also provide useful benefits in kind.
The Marriage Allowance Strategy
In households where one partner had an income below the personal allowance and the other was a basic rate taxpayer, the Marriage Allowance allowed the lower earner to transfer up to 10 percent of their allowance to their partner. In 2019/20, this could result in a tax saving of up to £250.
This transfer did not affect eligibility for other benefits and could be claimed retrospectively for up to four tax years. It proved useful for couples managing childcare responsibilities or dealing with temporary changes in employment.
Adjusting Income to Maximise Savings and Dividend Allowances
As previously discussed, the 2019/20 tax year included several allowances that applied to savings and dividend income. Basic rate taxpayers had a £1,000 savings allowance, while higher rate taxpayers had £500. The dividend allowance for all taxpayers was £2,000.
Taxpayers could adjust their income using timing strategies. For example, deferring interest withdrawals or dividend payments into a new tax year could preserve tax-free allowances. This was particularly useful for business owners or those managing investment portfolios.
Tax Implications of Side Income and Freelance Work
Many individuals began earning money through side businesses, freelancing, or the gig economy. In 2019/20, the first £1,000 of trading income was covered by the trading allowance, meaning no tax was due. However, if income exceeded this threshold, a full accounting of profits and expenses was required.
If side income pushed someone into a new tax band, it was crucial to account for the impact on overall tax liability. It could also affect entitlements to allowances like the personal savings allowance or child benefit.
National Insurance Contributions and Tax Bands
While income tax is calculated on a yearly basis, National Insurance contributions (NICs) are assessed weekly or monthly depending on the employment type. This can lead to differences in how income is taxed, especially if earnings fluctuate throughout the year.
In 2019/20, employees paid Class 1 NICs on earnings above £166 per week, with the main rate of 12 percent applying up to £962 per week. Earnings above this level were charged at 2 percent. Self-employed individuals paid Class 2 and Class 4 contributions based on annual profits.
NICs do not follow the same bands as income tax, which can create complexities when budgeting. Still, understanding the overlap between NIC thresholds and tax bands helps with planning net income.
Importance of Keeping Records
Accurate recordkeeping was essential for managing income and tax liabilities in 2019/20. Whether employed, self-employed, or earning through property or investments, individuals needed to retain documents related to income and expenses.
Records supported tax returns and could be requested during HMRC reviews. For self-employed workers, receipts for business expenses, mileage logs, and records of income from clients were critical. Landlords needed to document rent received, expenses incurred, and mortgage interest.
High Income Child Benefit Charge
Families claiming child benefit needed to be aware of the High Income Child Benefit Charge. If one partner earned more than £50,000, a portion of the child benefit received had to be repaid through the tax system. At £60,000 or more, the full amount was clawed back.
This charge created another hidden marginal tax rate for some families. It was sometimes beneficial to reduce income below the threshold through pension contributions or other reliefs in order to retain more of the child benefit.
Use of Allowances by Landlords
The 2019/20 tax year continued the phased restriction of mortgage interest relief for landlords. Rather than deducting mortgage interest from rental income, landlords received a basic rate tax credit of 20 percent. This change particularly affected higher-rate taxpayers.
To offset this, landlords were encouraged to claim all allowable expenses, such as letting fees, repairs, and utility bills. Additionally, the £1,000 property allowance provided tax relief for landlords with minimal income.
Impact of Investment Timing
Taxpayers who had flexibility over when to realise capital gains or draw income from investments could use tax band planning to their advantage. If income was expected to be lower in a future year, delaying a gain or dividend could reduce the tax payable.
Likewise, if income was unusually low in 2019/20, it might have been an opportunity to draw down taxable income without exceeding key thresholds. Effective timing of investment activity was a subtle but powerful tax planning strategy.
Managing Tax for the Self-Employed
For self-employed individuals, income levels could vary significantly from year to year. This made it particularly important to plan ahead. Making early payments on account, adjusting for any unexpected changes in profit, and setting aside funds for tax bills were all necessary steps.
The use of capital allowances, flat-rate expenses, and simplified mileage claims helped reduce profits for tax purposes. Where income pushed someone into a new bracket, options like spreading income or accelerating business expenses could be explored.
Transitioning Between Employment Types
Individuals who transitioned from employment to self-employment, or vice versa, had additional challenges in navigating the tax system. Understanding when and how to register for self-assessment, claim allowable expenses, and report income accurately was essential.
Those moving between income types also needed to consider how their income profile affected allowances. Timing payments, adjusting salary, and forecasting year-end totals all played a role in ensuring correct tax treatment.
Comparing Income Tax Thresholds Over Time
To understand the impact of the 2019/20 brackets, it helps to look at them in the context of previous tax years. The rise in the Personal Allowance from £11,850 in 2018/19 to £12,500 represented a meaningful increase in tax-free income. Similarly, expanding the basic rate band from £46,350 to £50,000 allowed a larger share of income to be taxed at 20 percent instead of 40 percent.
These changes were part of a longer-term policy aimed to reduce the tax burden on low- and middle-income earners. They provided more breathing space for those just entering the higher-rate band and helped mitigate fiscal drag, where inflation or rising wages push individuals into higher tax brackets.
Who Benefited Most from the 2019/20 Changes
The main beneficiaries of the 2019/20 income tax changes were those earning just above the previous basic rate threshold. People earning around £50,000 saw their tax bill decrease due to both the higher Personal Allowance and the extended lower rate band.
While additional rate taxpayers saw less relative benefit, they still enjoyed the increased allowance on their first £12,500 of income, assuming their income didn’t exceed £125,000. In contrast, those above that threshold received no Personal Allowance due to tapering rules.
Families where one partner earned between £50,000 and £60,000 needed to watch out for the High Income Child Benefit Charge. This clawed back some of the financial benefits introduced by the higher thresholds.
Adjusting to the Scottish Tax Regime
In Scotland, income tax bands were adjusted to create a more granular and progressive system. With six bands instead of the UK-wide four, Scottish taxpayers experienced smaller marginal increases between brackets.
The introduction of a 19 percent starter rate and a 21 percent intermediate rate meant that those earning moderate incomes saw a more balanced spread of tax liabilities. However, due to differences in thresholds, some Scottish taxpayers ended up paying slightly more tax than those in other parts of the UK on equivalent incomes.
It was essential for individuals in Scotland to verify whether their income fell under the remit of the Scottish tax system. Only non-savings, non-dividend income was subject to the Scottish rates, which made it especially important to categorise income sources correctly.
Financial Planning and Forecasting Tools
A thorough understanding of the 2019/20 brackets helped many taxpayers with financial planning. Whether forecasting business profits, planning pension withdrawals, or determining how much income to draw from a limited company, awareness of the tax structure informed decisions.
Business owners and high earners could take advantage of these insights by adjusting when and how they received income. For example, delaying dividends to fall under a new tax year or accelerating business expenditures helped manage taxable profit.
Financial advisors often guided clients on how to use annual allowances to their full advantage. Strategies included spreading capital gains over multiple tax years, gifting assets to spouses in lower tax bands, or rebalancing portfolios to favour tax-efficient investment wrappers.
Monitoring the Interaction of Income Sources
As seen throughout the 2019/20 tax year, income rarely comes from a single source. Employed individuals may have received dividends, landlords collected rent, and retirees often drew income from both pensions and investments.
Because each type of income interacts differently with the Personal Allowance and tax bands, careful tracking and planning were essential. Those receiving savings interest needed to confirm whether they remained within the bounds of their savings allowance. Similarly, those earning dividends had to ensure they stayed within the dividend tax-free threshold or prepare to pay the appropriate rates.
HMRC assessed total taxable income from all sources, including foreign earnings, benefits in kind, and trust income. An unexpected spike in any one source could push a taxpayer into a new bracket or reduce their eligibility for tax relief.
The Continuing Importance of the Personal Allowance
Throughout all levels of income, the Personal Allowance remained a foundational component of tax calculations. Losing access to it created a sharp rise in tax liability, especially for high earners, as discussed earlier.
Even for modest earners, maintaining eligibility for the full Personal Allowance meant keeping gross income below certain thresholds. Whether through salary negotiations, reducing working hours, or deferring income, many individuals structured earnings to preserve access to the allowance.
Additionally, transferring unused Personal Allowance between spouses (through the Marriage Allowance) created new options for lower-income households to benefit from more tax-free income.
Looking Ahead from 2019/20
Although this guide focuses on the 2019/20 tax year, many of the principles discussed remain relevant for future planning. Tax thresholds, allowances, and band rates change annually, but understanding the foundational structure helps in adapting to new rates.
Monitoring annual Budget announcements and reviewing individual income profiles remain important habits. With inflation, shifting government priorities, and new reliefs or restrictions introduced each year, remaining informed allows for proactive tax management.
Using the 2019/20 year as a reference point, taxpayers can compare how changes in policy affect them over time. It also serves as a useful benchmark for evaluating whether certain planning actions had the desired outcome, especially for those who tracked net income and tax liabilities year over year.
The Broader Impact on Households and Businesses
While the technical details of tax bands can seem abstract, their effects were very real for households and business owners. A small change in tax threshold might mean more disposable income, higher eligibility for government support, or increased capacity to invest.
Conversely, missing out on allowances or entering a new bracket without preparation could result in unexpected bills. For this reason, many people opted to seek advice, use digital tracking tools, or spend more time understanding how tax works.
For small business owners and freelancers, the 2019/20 tax framework helped identify when it might be time to incorporate, hire additional help, or reinvest profits. Every financial decision had the potential to shift the tax outcome, making planning an integral part of operations.
With well-structured planning, a clear grasp of the income tax bands, and timely review of personal finances, the 2019/20 tax year offered many opportunities to improve financial efficiency. Whether adjusting income levels, taking advantage of allowances, or refining recordkeeping practices, informed taxpayers found ways to reduce liability and enhance financial outcomes.
A strong understanding of how tax thresholds operate—not just for one year but in the broader context—is a valuable asset. As the UK tax landscape evolves, this knowledge becomes the foundation for smarter decisions in every tax year ahead.
Conclusion
The 2019/20 income tax year brought meaningful changes to how individuals across the UK managed their tax obligations. With an increased Personal Allowance, a widened basic rate band, and specific rules in Scotland differing from the rest of the UK, taxpayers were required to remain vigilant about their earnings and entitlements.
Understanding the tiered structure of the UK’s progressive tax system was essential for accurate planning and compliance. Whether employed, self-employed, or earning through investments and property, individuals needed to track their total income, apply the correct allowances, and stay informed about how different types of income interacted with various thresholds.
The tapering of the Personal Allowance for higher earners, the separate treatment of savings and dividend income, and the specific implications for Scottish taxpayers highlighted the importance of a tailored approach to tax planning. Strategic use of pension contributions, salary sacrifice, and careful timing of income proved effective in reducing tax liability and preserving eligibility for allowances and credits.
For families, managing the impact of the High Income Child Benefit Charge added another layer of complexity. Meanwhile, landlords and investors had to adapt to phased reforms and shifting tax credits, particularly in areas like mortgage interest relief.
In summary, the 2019/20 tax year underscored that even small changes in thresholds or policy can have significant effects on take-home pay and financial planning. By keeping thorough records, understanding the structure of tax bands, and responding proactively to fiscal adjustments, individuals were better equipped to make informed decisions and minimise avoidable tax burdens.
Going forward, the lessons learned from 2019/20 continue to apply. As tax bands evolve annually, staying informed and adjusting strategies accordingly will remain essential for anyone aiming to navigate the UK tax system efficiently and confidently.