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Income tax on earned income is charged at three rates: the basic rate, the higher rate and the additional rate. 

For 2021/22 these three rates are 20%, 40% and 45% respectively.  Tax is charged on taxable income at the basic rate up to the basic rate limit, set at £37,700. ‘Taxable income’ excludes personal allowances, which represent the amount of money someone may receive free of tax. Tax is charged at the higher rate on taxable income between the basic rate limit and the higher rate limit, set at £150,000. The additional rate is charged on taxable income over £150,000. All three tax rates are unchanged from 2020/21.

The personal allowance is set at £12,570 for 2021/22. Both the allowance and the basic rate limit have been increased in line with inflation from 2020/21. As a result the higher rate threshold – the point at which individuals become liable to pay tax at the higher rate – is £50,270 for 2021/22.

Married couples and civil partners may be entitled to claim the marriage allowance which was introduced from 2015/16. Individuals whose income is insufficient to make full use of their personal allowance may transfer this unused fraction to their spouse or civil partner, up to a set amount. Individuals cannot make use of this provision if their spouse or partner pays more than the basic rate of tax. For 2021/22 the maximum that can be transferred is £1,260.

The rates of National Insurance contributions (NICs) for both employees and employers are unchanged for 2021/22.  For employees, the rate of NICs is set at 12% on all earnings between the primary threshold and the upper earnings limit, and at 2% on earnings above the upper earnings limit.  For employers, the rate of NICs is set at 13.8% on earnings above the secondary threshold.  The primary threshold is set at £184 per week, and the secondary threshold is set at £170 per week for 2021/22.  The upper earnings limit is set at £967 per week for 2021/22, so that it remains aligned with the income tax higher rate threshold.

In his 2021 Budget the Chancellor also announced that the personal allowance and the basic rate limit would be frozen for the four-year period 2022/23 to 2025/26. The NICs upper earnings limit would also be frozen for this period. An annex to this paper gives more details.

This paper deals with tax allowances, but not with cash benefits provided under the social security system, or child tax credit and working tax credit. Details of these credits, along with other tax rates and allowances for the 2021/22 year are set out in Annex A to HM Treasury, Overview of Tax Legislation and Rates, March 2021 published alongside the 2021 Budget report.


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