Taxes are an integral part of any nation’s economy, serving as a vital mechanism to fund essential government services and programs. There are different ways in which taxes operate. One form of tax is taking a percentage of the sales of goods and services. Another is collecting a portion of the income people earn. In the UK, collecting taxes from a person’s income is called Income Tax. In this article, we will discuss income tax in depth so that you can understand how the taxation system works and what you must do to comply with the law.
What Is Income Tax?
Income Tax refers to the portion of your income that the government keeps to fund public services. In the UK, you will need to pay income tax for most of your earned income. You can check what part of you income is taxable in the chart below:
| Earned income will include all of the following: | There is no need to pay income taxes on any of the following: |
| • Money earnt through employment • Profits made through self-employment • Some government benefits • Pension schemes, including company and personal pensions, retirement annuities, and state pensions • Rental income (except live-in landlords who are eligible for rent a room limit) • Benefits from a job • Income obtained from a trust • Interest from savings | • Some state benefits • Winning on the National Lottery or premium bonds • Rent from a lodger (as long as it is below the rent-a-room limit) • The 1st £1000 gained from self-employment (known as the “trading allowance”) • The 1st £1000 earned from rental property (unless the Rent a Room Scheme is used) |
What Are Tax Bands?
A tax band refers to a specific range of income on which different tax rates are applied. The first £12,570 of a person’s income is not taxed. The remainder is taxable income at different bands depending on income levels. The table below outlines the different banding, taxable income, and tax rates.
| Band | Taxable Income Amounts | Tax Rate |
| Basic Rate | £12,571 – £50,270 | 20% |
| High Rate | £50,271 – £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
This means if someone earns £25,000, they will pay 20% tax on all income after £12,571 (up to £12,571 is tax-free). Someone who earns £60,000 will pay 20% tax on all their income from £12,571 to £50,271, with the remainder taxed at 40%. Those earning in excess of £125,140 do not enjoy a personal tax allowance. The first £50,270 is taxed at 20%, and their income from £50,271 to £125,140 is taxed at 40%, with the remainder taxable at 45%.
How Income Tax Is Collected
For most people, Income tax is collected through the Pay As You Earn (PAYE) scheme. In the PAYE scheme, the employer or the pension provider will deduct the required taxes and make payments to the UK government before paying the wages or the pension.
As you’ll learn below, some benefits are taxable and taxes are collected before benefits are paid.
Those who are self-employed or high earners with multiple income sources will need to fill in a self-assessment return each year. Self-assessment is necessary for those who earn more than £1000 through self-employment or more than £2500 through other sources (for example, rental property or tips).
Taxable and Tax-Free Benefits
Some benefits are taxable, while others are tax-free. Some taxable benefits are:
- Jobseeker’s Allowance (JSA)
- The State Pension
- Pensions paid by the Industrial Death Benefit Scheme
- Widowed Parent’s Allowance
- Bereavement Allowance
- Carer’s Allowance
- Employment and Support Allowance (ESA) that is contribution based
- Incapacity Benefit
Non-taxable benefits include:
- Working Tax Credit
- Universal Credit
- Winter Fuel Payments
- Personal Independence Payment (PIP)
- War Widow’s Pension
- Severe Disablement Allowance
- Maternity Allowance
- Pension Credit
- Industrial Injuries Benefit
- Lump-sum bereavement payments
- Bereavement support payment
- Attendance Allowance
- Child Tax Credit
- Child Benefit
- Free TV licence for over-75s
- Disability Living Allowance (DLA)
- Housing Benefit
- Income-related Employment and Support Allowance (ESA)
- Guardian’s Allowance
- Income Support
Tax-Free Allowance
In the realm of UK taxation, a tax-free allowance known as the Personal Allowance) plays a pivotal role. This allowance, currently set at £12,570, implies that an individual only becomes liable to pay taxes once their income surpasses this threshold.
Notably, certain circumstances grant access to even more substantial allowances. The Blind Person’s Allowance, for instance, offers an additional £2,870, while the Married Couple’s Allowance allows for the transfer of £1,260 of the Personal Allowance to a partner. However, it’s essential to be aware that individuals earning over £100k will witness a gradual reduction of their Personal Allowance by £1 for every £2 earned, ultimately rendering it non-existent for those earning above £125,140.
Calculating Income that Is Subject to Income Tax
To calculate your income that is subject to income tax, follow these steps:
- Tally up all your income (this needs to include taxable benefits, pensions, and savings).
- Simply subtract your personal Allowance of £12,571 (if you are entitled to a personal allowance) from the income. This figure is the income for which you need to pay income tax.
Paying the Correct Income Tax
Taxes can be a complicated business. Failing to pay the correct income tax could lead to fines. What’s more, in instances where there is a deliberate attempt to defraud and manipulate, the HMRC can seek imprisonment.
Luckily, the government and the tax authorities provide a great deal of assistance to ensure people are able to deal with their tax affairs without much hindrance. However, if feel you need further assistance to fulfil your tax duties, you can always seek out the help of an accountant.
We hope this article has helped to clarify all you need to know about paying your income taxes in the UK.
