If you live in the UK, you pay income tax on money that you earn or receive. Income tax is paid directly to HMRC and, unlike other taxes, there is no minimum age at which a person becomes eligible to pay income tax.
On this page you will find information about:
Common taxable income sources:
- 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 and some state benefits.
It is possible to overpay and underpay income tax and it is up to you to check your income tax position to make sure that you are paying the correct amount of tax. If you have overpaid income tax, you can submit a claim for an income tax rebate. This applies to the current tax year and can be backdated for four tax years.
How is Income Tax calculated?
When calculating income tax, all your income is taken into consideration. However, there are various allowances and certain sources of income are tax-free
We have broken it down into four simple steps:
1.Work out your total taxable income
Add together all taxable income you get, including: earnings, business profits if you are self-employed, some forms of savings interest, investment returns, income from rental property and certain benefits.
2. Take off any 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. So takeaway any of these amounts from your income total.
3. 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.
4. Deduct any relevant tax allowances from the remaining total
There are a range of different tax allowances that apply to taxpayers in a variety of situations. One that everyone is entitled to is the Personal Allowance. This is how much you are allowed to earn before you pay any income tax at all. For the 2018-19 tax year, your Personal Allowance is £11,850. This means you can earn up to £11,850 in a tax year without owing any income tax. You should take this amount away from your total income figure before working out how much income tax you should be paying. If you are an employee taxed under the PAYE scheme, your tax allowances are normally already taken into account before you receive your wages.
How much income tax do I need to pay?
When you know your total taxable income, you can work out how much income tax you owe HMRC.
The amount of income tax payable depends on how much you earn. In 2018-19 tax year the income tax rates are as follows:
- 20% basic rate, on all annual income up to £46,350
- 40% higher rate, on all annual income from £46,351 to £150,000
- 45% additional rate, on all annual income over £150,000
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.
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 personal allowance you should not pay income tax. If you earn over the tax free allowance income tax will be payable.
Income Tax Rates and Taxable Bands
Income Tax rates show the percentage of income tax you will pay in each taxable band.
Find which tax band your annual income is in to work out what level of income tax you pay.
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 income may not be taxed at the source. Common examples include: if 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. If this is the case, your income tax is calculated according to the information on your Self Assessment tax return. HMRC will then 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.
For further Tax information, please follow the links below: