The UK follows a progressive taxation system which means as your income increases, so does your tax liability.

Additional rate tax is the rate tax payable by people who have an annual income above £1,50,000.

Income applies to job earnings and rental income, any share dividends you can own, your pension income, and any interest you gain on investments.

How much income tax an individual pays in a year depends on:

  • How much of his/her does income exceed their allowance?
  • How much of their income or revenue falls into each tax band?

The tax year officially runs from 6 April 2020 to 5 April 2021.

From the tax year 2018/19 the Scottish Government has run a separate income tax structure comparison with the rest of the UK.

It means that Scotland residents pay varying income tax rates, using more tax bands and tax levels than the rest of the UK. Scottish Government renamed the additional rate band as the top rate band.

Scottish Income tax rates

                                 Tax Band                             Tax Rate
                            Up to £12,500  0% {Personal Allowance}
                            £12,501 – £14,58510% {Starter Rate}
                            £14,586 – £25,15820% {Basic Rate}
                            £25,159 – £43,43021% {Intermediate Rate}
                            £43,431 – £150,00041% {Higher Rate}
                            over £150,00046% {Top Rate}

The above-mentioned table shows the 2020 to 2021 Scottish Income Tax rates an individual pays in each band if an individual has a basic Personal Allowance of £ 12,500.

If he/she earns above £ 125,000, they are not eligible for a Personal allowance.

Rest of the UK

                                 Tax Band                             Tax Rate
Up to £12,500  0% {Personal Allowance}
                            £12,501 – £50,00020% {Basic Rate}
                            £50,001 – £1,50,00040% {Higher Rate}
                            Above£1,50,00045% {Additional rate}

In the rest of the UK, residents have to pay taxes at an additional rate of 45 per cent (amount above £1,50,000.)

Paying dividends as an additional rate tax-payer

At 38.1 per cent, dividend falling into the additional rate tax band (taxable income above £ 150,000) is payable. The dividend allowance again lowers the taxable value of the dividend.

For example

In 2019/20, Jenny gets a salary of £ 155,000, ensuring that all her other income falls into the additional rate band. She also gets £ 35,000 in dividends.

The annual allowance includes the first £2,000 of the dividend profits. Thus, the dividends’ total tax payable is £ 12,573 based on a tax rate of 38.1 per cent.