Wyatt, Morris, Golland & Co.
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Income tax is a graduated tax comprising of a lower rate, a basic rate and a higher rate that is applicable to all income whether earned or unearned.

It relates to income received in a year of assessment.

A year of assessment (or fiscal year or tax year) runs from 6 April to 5 April (for example the tax year 2004/2005 indicates the year from 6 April 2004 to 5 April 2005).

The rates applicable for 2004/2005 are as follows:
Rate
 On taxable income

Lower rate
10%
 £0 - £2,020

Basic rate
22%
 £2,021 - £31,400

Higher rate
40%
 Over £31,400


Currently savings income is generally treated as the highest part of total income. Interest is taxed at 10% within the lower rate band and 20% within the basic rate band.

Dividend income is taxed at 10% within the lower and basic rate bands and at 32.5% thereafter. Dividend income is the net dividend received grossed up by a tax credit of 1/9th.

Partnerships and income tax

Where an individual is a partner in a business his share of the taxable partnership profits is included in his income tax calculation.

Reliefs available

There are a number of reliefs available against income before it is subject to income tax the most common being an individual’s personal allowance (£4,745 for 2004/2005).

Relief can also be obtained for certain types of payments, for example payments by an individual to a pension fund.

The above gives a very simplified view of the income tax system, unfortunately, as with all the tax systems there are a number of anomalies and pitfalls that may occur and professional advice should be sought for all but the simplest of income streams.