Income Tax is a tax you pay on your income. You do not have to pay taxes on all types of income.
In the United Kingdom (UK), the tax on your personal income is known as income tax. Income tax is a way for the government to collect money from individuals based on the income they earn.
Here’s a simple explanation of how income tax works in the UK:
- Tax-Free Allowance: Everyone in the UK is entitled to a certain amount of their income that is tax-free. This is known as the tax-free allowance or personal allowance. For example, let’s say the tax-free allowance is £12,500. If your income is below this threshold, you won’t have to pay any income tax.
- Tax Bands: If your income exceeds the tax-free allowance, you will start paying income tax. The UK uses a system of tax bands, which means that different portions of your income are taxed at different rates. The rates and thresholds can change from year to year, but I’ll give you an example based on the 2021-2022 tax year:
Basic Rate in Tax in UK
- Basic Rate: The portion of your income between £12,501 and £50,000 is taxed at the basic rate, which was 20% in the 2021-2022 tax year.
- Higher Rate: The portion of your income between £50,001 and £150,000 is taxed at the higher rate, which was 40% in the 2021-2022 tax year.
- Additional Rate: If your income exceeds £150,000, the portion above this threshold is taxed at the additional rate, which was 45% in the 2021-2022 tax year.
- Calculation: To calculate your income tax, you need to apply the appropriate tax rate to each portion of your income within the tax bands. For example, if your income was £35,000 in the 2021-2022 tax year, you would apply the basic rate of 20% to the portion between £12,501 and £35,000.
- Deductions and Allowances: There are certain deductions and allowances you may be eligible for that can reduce your taxable income. These include things like pension contributions, charitable donations, and tax reliefs for specific circumstances.
- Pay As You Earn (PAYE): In the UK, most employees have their income tax automatically deducted from their salary by their employer. This system is known as PAYE, which stands for Pay As You Earn. Your employer will calculate the amount of tax you owe based on your income, tax code, and any other relevant factors.
Remember, this is a simplified explanation, and there may be additional factors and complexities depending on your specific situation. It’s always a good idea to consult a tax professional or refer to official government resources for accurate and up-to-date information on income tax in the UK.
You pay tax on things like:
- the money you earn from employment
- Profits you make if you’re self-employed – including from services you sell through websites or apps
some state benefits
- grants and support payments made to you or your business because of coronavirus, including the Self-Employment Income Support Scheme, the Coronavirus Job Retention Scheme, the Small Business Grant Fund, or the Retail, Hospitality and Leisure Grant Fund
- Most pensions, including state pensions, company, and personal pensions, and retirement annuities
- rental income (unless you’re a live-in landlord and get less than the rent-a-room limit)
- benefits you get from your job
- Income from a trust
- Interest on savings over your savings allowance
You do not pay tax on things like:
- The first £1,000 of income from self-employment is your ‘trading allowance’
- the first £1,000 of income from the property you rent (unless you’re using the Rent a room scheme
- Income from tax-exempt accounts, like Individual Saving Account(ISA) Savings Certificates
- dividends from company shares under your dividend allowance
- some state benefits
- Premium bond or National Lottery wins
- PG rent you get from a lodger in your house that’s below the Rent a room limit
Current rates and allowances
How much Income Tax you pay in each tax year depends on:
- How much of your income is above your Personal Allowance
- How much of your income falls within each tax band
- Some income is tax-free
- The current tax year is from 6 April 2022 to 5 April 2023.
- The standard Personal Allowance is £12,570, which is the amount of income you do not have to pay tax on.
- Your Personal Allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance. It’s smaller if your income is over £100,000.
Income Tax rates and bands
|The table shows the tax rates you pay in each band if you have a standard Personal Allowance of £12,570. Band||Taxable income||Tax rate|
|Personal Allowance||Up to £12,570||0%|
|Basic rate||£12,571 to £50,270||20%|
|Higher rate||£50,271 to £150,000||40%|
|Additional rate||over £150,000||45%|
You can also see the rates and bands without the Personal Allowance. You do not get a Personal Allowance on taxable income over £125,140.
There are more allowances that might be right to consider as and when situations arise.
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