Income tax is charged at graduated rates, with higher rates of income tax applying to higher bands of income. Tax is charged on total income (from all earned and investment sources) less certain deductions and allowances. This net amount is usually referred to as an individual's taxable income. The graduated rates of income tax vary slightly depending on whether the income is from earnings or investments.

Income tax bands and rates are as follows:

* The 0% starting rate is for savings income only. If non-savings income (which takes up the first ‘slice’ of income) is above this limit, then the 0% starting rate will not apply.

Note that dividends are always treated as the top slice of income and will be taxed at an individual's highest marginal tax rate (see Dividend income in the Income determination section for rates specifically applicable to dividends). ‘Savings income’ is the next slice down, and other income (such as earnings) will be the lowest slice. The most common form of ‘savings income’ is interest, but certain other forms of income are also included.

A dividend allowance applies to the first GBP 5,000 of an individual’s dividend income. The allowance operates as a 0% tax rate. The new rate applied for the tax year 2016/17 and subsequent tax years.

The dividend allowance does not reduce total income for tax purposes. Dividend income that is within the ‘allowance’ still counts towards an individual’s basic and higher rate limits.

From April 2018, the dividends allowance will fall from GBP 5,000 to GBP 2,000.

Source: http://taxsummaries.pwc.com/ID/United-Kingdom-Individual-Taxes-on-personal-income

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