Home>What is Tax?>Income Tax

Income Tax

Income tax is paid on money that you earn or receive in the UK. Income tax is paid directly to HMRC and there is no minimum age at which a person becomes eligible to pay income tax.

On this page you will find information about:

What is Income Tax?

  • Income tax is paid on money that you earn or receive in the UK.

  • Income tax is paid directly to HMRC and there is no minimum age at which a person becomes eligible to pay income tax.

  • The amount of income tax you owe depends on the amount you earn.

  • Some earnings are not taxed at all – these are called ‘non-taxable earnings’

A number of the most common sources of income on which tax has to be paid are:

  • PAYE income from normal employment
  • Self employed Income
  • Pension Income
  • Property Rental Income
  • Some but not all Social Security benefits
  • Investment income for example Share dividends
  • Please find a more in depth list of which income has to be taxed and non taxable income in our Tax Glossary.

Income Tax is used to pay for services provided by the UK government for example Education, Transport and Healthcare. National insurance is not classed as a tax and is a contribution deducted to specifically pay for State pensions, the NHS, sickness and disability allowances and unemployment benefit.

It is possible to overpay and underpay income tax and it is recommended that you check your income tax position to ensure that you are paying the correct amount of tax. If you have overpaid income tax it is possible to reclaim any overpaid income tax in the current or previous in date tax years.

back to page contents

How is Income Tax calculated?

When calculating Income Tax, all your income is taken into consideration.

However, you have various allowances, and certain sources of income are tax-free:

  1. To calculate the Income Tax that you owe, you should work out your total taxable income.
    This is the sum of all taxable income including earnings, business profits if you are self-employed, some forms of savings interest, investment returns, income from rental property, and certain benefits.
  2. Income tax is not affected by tax-free income. Tax-free income includes many state benefits, for example, the state pension, disability living allowance, child benefit, child tax credits and working tax credits. Many other sources of income may also be tax-free. These include interest on ISAs or money awarded by courts.
  3. You should then deduct any relevant tax relief from your total income.
    Depending on your circumstances, this figure may include professional fees, business mileage, and money that you have spent on job expenses such as tools or equipment for work purposes.
  4. You should then deduct any relevant tax allowances from the remaining total.
    Your personal tax allowance depends on your age and how much you earn. For example, if you are under 65 you can deduct £8105 from your total taxable income in 2012/2013 tax year. If you are an employee taxed under the PAYE scheme, your tax allowances are normally taken into account when you receive your wages.
back to page contents

How much income tax do I need to pay?

When you know your total taxable income, you can work out the Income Tax due.

The amount of Income Tax payable depends on how much you earn. In 2011-12 tax year the basic Income Tax rates were as follows:

  • 20% on all income up to £34370
  • 40% on all income from £34370 to £150,000
  • 50% on all income after £150,000

In some cases the interest from savings is taxable at only 10%, so if your bank has taxed you at a higher rate, you may be due a tax refund.

Many sources of income, including bank and building society interest, and wages received under the PAYE scheme, have already been taxed. If this is the case the original gross income (the total received before tax) should be considered when calculating your total taxable income.

back to page contents

Income Tax Allowances

It is important to know what the income tax allowances, income tax rates and taxable bands are, to make sure that you are paying the right amount of income tax.

Income Tax allowances show the amount of tax free allowance you are given in any one tax year. If you earn under the tax free allowance you should not pay tax. If you earn over the tax free allowance income tax will be payable.

Tax Year 2009-10 2010-11 2011-12 2012-13
Personal Allowance £6,475 £6,475 £7,475 £8,105
Personal Allowance for people aged 65-74 £9,490 £9,490 £9,940 £10,500
Personal Allowance for people aged 75 and over £9,640 £9,640 £10,090 £10,660
back to page contents

Income Tax Rates and Taxable Bands

Income Tax rates show the percentage of income tax you will pay in each taxable band.

The taxable bands show the level or earnings needed to pay tax.

Income Tax rates & taxable bands 2009-10 2010-11 2011-12 2012-13
Starting rate for savings: 10% £0-£2,440 £0-£2,440 £0-£2,560 £0-£2,710
Basic rate: 20% £0-£37,400 £0-£37,400 £0-£35,000 £0-£34,370
Higher rate: 40% Over £37,400 £37,401 – £150,000 £35,001 – £150,000 £34,371 – £150,000
Additional rate: 50% Not applicable Over £150,000 Over £150,000 Over £150,000
back to page contents

How do I pay income tax?

Most Income Tax is paid when the income is initially received. This includes wages received under the PAYE scheme and interest paid on UK bank and building society accounts.

In some cases, for example you are self-employed, you receive money from overseas, you receive money for rental property or you receive interest from certain types of savings accounts, income may not be taxed when it is initially received. If this is the case, your Income Tax is calculated according to the information on your Self Assessment tax return. HMRC will confirm the amount of tax that you owe.

You can pay your tax bill in various ways including online by debit or credit card, internet or telephone banking, budget payment plan, bank giro, international bank transfer or at the Post Office. Full details of payment methods will be provided with your tax calculation, or are available from HMRC.

The deadline for paying your tax bill varies according to how and when you submit your Self Assessment tax return. The deadline will be stated on your Self Assessment Statement.

back to page contents

For further Tax information, please follow the links below:

  • Tax Codes includes:
    Where do I find my Tax Code?
    New Tax Codes
    What does my tax code mean?
    Different Tax Codes
    More than one job
    Emergency Tax Codes

  • Emergency Tax Codes includes:
    What is an Emergency Tax Code?
    What does an emergency Tax Code look like?
    Why do I have a BR/ Emergency Tax Code?
    Can I get a Tax Refund if I have paid Emergency Tax?

  • Construction Industry Scheme includes:
    CIS For Subcontractors
    CIS For Contractors (Employers)

  • VAT (Value Added Tax) includes:
    What is VAT?
    When do I pay VAT?
    How much VAT do I need to pay?
    Do I need to register for VAT?
    How do I pay VAT?
    Can I claim VAT back?

  • Self Assessment includes:
    What is Self Assessment?
    Do I need to complete a Self Assessment tax return?
    How do I get a Self Assessment tax return form?
    How do I register for Self Assessment?
    Can I register for Self Assessment on behalf of a company or trust?
    What is a Unique Tax Reference number (UTR)?
    How do I get a Unique Tax Reference (UTR) number?
    How do I complete my Self Assessment tax return online?
    Can I complete my Self Assessment tax return on paper?
    Record keeping
    Self Assessment Tax return deadlines
    What if I submit my tax return late?
    What if I submit my tax return incorrectly?
    How is my tax calculated?
    Do I need to check my tax calculation?

  • National Insurance includes:
    What is National Insurance?
    What are the different types of National Insurance?
    Who pays National Insurance?
    What is National Insurance used for?
    Do your National Insurance payments affect your Pension and Benefits?
    How much National Insurance should I pay?

  • Pension Tax includes:
    Do I have to pay tax on my pension?
    Do I have to pay tax on my state pension?

  • Corporation Tax includes:
    Who needs to pay Corporation Tax?
    How much Corporation Tax do I need to pay?
    How do I pay Corporation Tax?

  • Inheritance Tax includes:
    What is Inheritance Tax?

  • Capital Gains Tax includes:
    What is Capital Gains Tax?

More Info

Tax Refunds

To help you find if you are entitled to a tax refund you can use the TaxBanana Tax Refund Calculator.

It is also worth considering if your tax code is correct. If your tax code is incorrect you can pay too much income tax or too little.