Income Tax

 
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If you’re just starting work and are totally new to taxes, or you’re completely confused by codes and jargon, read our simple guide on Income Tax. Find out what it all means, what you need to pay and understand the factors involved in working out your tax bill.
 
 

In this section:

We explain what income is taxable from your earnings, savings and investments.
We look at the various allowances and reliefs that can reduce your tax bill.
You can check the current tax bands and rates to find out how much you pay.
 
Note: This information is for guidance only. Tax issues are complex and we recommend that you get professional advice relevant to your own situation.
Income Tax in Scotland is slightly different from the rest of the UK; click here for full details.
 
 
 

 

The tax year runs from 6 April to 5 April

Tax rates, bands of taxable income and allowances may change each tax year

 

 
 
 

What is Taxable Income?

 
You only pay tax on your taxable income, so you don’t need to declare non-taxable income on your tax returns.

 

Taxable Income

You pay Income Tax on most forms of personal income, over a certain threshold:
 
‘Non-savings income’ – earned income such as salary or wages from employment, certain benefits you get from your job e.g. company car, rent you receive as a landlord, most pensions, and business profits from self-employment.
Some people might be required to pay Inheritance Tax on the estate (property, possessions, money) of someone who has died, or Capital Gains Tax (CGT) on profit from selling an asset that has increased in value e.g. property or certain investments such as shares, jewellery or antiques. (But Capital Gains Tax doesn’t apply to your main home or car sales).
 
‘Savings income’ – interest earned on some savings and dividend payments from some investments.

 

Non-taxable Income

Some types of income are not taxable; this includes tax-free savings and investments like ISAs (Individual Savings Accounts), certain expenses and benefits provided by an employer such as medical cover or accommodation, and various welfare benefits e.g. the Disability Living Allowance (DLA) and Housing Benefit.
 
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Tax Allowances & Tax Reliefs

 
There are various tax allowances and reliefs that enable you to take home more of your income and pay less tax:
Tax allowances enable you to earn a sum of money before paying any tax.
Tax reliefs allow you to deduct certain outgoings from the total income you make, so you are taxed on a lower amount.

 

Tax Allowances

 

Personal Allowance

Most of us (including students) can earn a certain amount without paying any Income Tax – this is our annual tax-free Personal Allowance. For 2019-20, the standard Personal Allowance is £12,500.
You might get a bigger allowance if you have overpaid tax in a previous year, or if you qualify for additional allowances.  High earners (above £100,000) get a smaller allowance.
Your tax code denotes how much tax-free Personal Allowance you receive each tax year.

 

Personal Allowance 2019 – 2020

 

Other tax allowances

Some people qualify for additional allowances, which are added to their Personal Allowance e.g. couples who are married or in a civil partnership are entitled to tax benefits through the Marriage Allowance. There is a Blind Person’s Allowance for people who are registered blind or severely sight impaired, and there are also allowances on income from capital gains and inheritance.

If you have savings, you are entitled to a Personal Savings Allowance, and low earners can benefit from the Starting Savings Rate.  Investors get a tax-free Dividends Allowance.
 
 
 

Tax Reliefs

 
If you spend on certain outgoings, you can deduct the amount from your total income, so you will be liable to pay less tax. You get most types of tax relief automatically, but you have to claim for others e.g. if you are employed and you spend your own money on business expenses.
 
You get tax relief on payments you make into most pension schemes, on charity donations, certain loans and business expenses.

 

Pension contributions

If you are paying into a pension, the Government rewards you for saving towards your future, in the form of tax relief. It effectively means that some of the money you would have paid in tax on your earnings, goes to top up your pension pot instead. The amount you get depends on your Income Tax band, how much you contribute and the type of pension scheme you are in. It‘s complicated, but basically most people will not have to pay tax on the pension contributions they make through an employer’s PAYE scheme. Even if you are not a taxpayer, you will receive a certain amount of pension top ups from the Government.

 
The Boss Man

Business expenses

If you are self-employed, you deduct business expenses from your gross income, to work out your taxable profit. Allowable expenses are those relating to running your business e.g. staff, training, travel, raw materials, marketing and financial costs, business premises or facilities for working from home.
 
If you are employed, you can claim for business travel and other expenses associated with your job e.g. uniform and tools.

 

Tax Reliefs – Which?
Tax reliefs, how they work, eligibility to claim

 
 

 
Once your tax reliefs and allowances are added up, anything you earn above this amount will be subject to Income Tax i.e. this is your taxable income.
 

 

Important

It is important to know exactly what part of your income is non-taxable and what must be declared for tax purposes; it is illegal to conceal income and you could be prosecuted for tax evasion.
Equally, you should know what allowances and tax reliefs can be set against your taxable income, to reduce your tax liability.

Get advice relevant to your specific circumstances, from HMRC or a professional adviser.
 
 

For tax information in each part of the UK:

Taxable & Non-taxable Income – Citizens Advice

Tax Allowances & Tax Reliefs – Citizen’s Advice

 
 
 
Scotland

Income Tax in Scotland

 
Note the tax rates and allowances shown in this article apply to England, Wales and Northern Ireland.
If you live in Scotland, you pay Income Tax under a slightly different system from the rest of the UK for non-savings income. Scottish taxpayers pay the same rates as the rest of the UK on their savings and dividends income.
 
This guide explains the Scottish system & includes an Income Tax calculator:

Income tax system in Scotland – Which?

 
 
 

Tax Bands & Rates – How much Income Tax do You Pay?

 
The tax you owe depends on:

  • How much taxable income you have, after your reliefs and allowances have been deducted
  • How much of that income falls within each tax band
    (Tax bands and rates may change each tax year)

 
Most people are basic rate (20%) taxpayers. But for some people with higher income levels, 40% and 45% tax rates may apply.
 
The table shows the tax rate you pay in each band:

Column A – If you have the standard £12,500 Personal Allowance (this applies to most people)

Column B – Taxable income after allowances have been deducted

 

Income Tax Bands & Rates 2019 – 2020


 

 
 
 

Tax on Income from Savings & Investments

 

In this section:

We explain how interest from savings and dividend payments may affect your Income Tax bill. We look at the tax rates and allowances for savings and dividends, and situations when tax adjustments are necessary (if you owe tax or have overpaid).

 
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When you earn interest on your savings (e.g. bank, building society and savings accounts), or if you receive dividend payments (from owning shares in a company), this all counts as income, and will be liable for tax.
 
In addition to your Personal Allowance, most people get a tax-free allowance for savings interest, and also for dividends (if you own shares in a company).
 
 

Tax on Savings

 
Since April 2016, banks and building societies now pay all savings interest gross (i.e. no tax has been deducted from the amount shown in your account).

 

Personal Savings Allowance – How much do you get?

The Personal Savings Allowance (PSA) effectively means that most people won’t have to pay any tax on their savings;  a basic rate taxpayer can earn up to £1,000 interest a year tax-free.
 
Non-savings income (from salary/wages etc.) is normally allocated against tax bands before adding savings and investment income; your tax band then determines how much tax-free Personal Savings Allowance you receive.
 
 

Personal Savings Allowance  2019 – 2020

 

Example for a basic-rate taxpayer:
If your salary is £25,000, you are a basic-rate (20%) taxpayer and therefore you are entitled to £1,000 Personal Savings Allowance.  So say you have £3,000 savings interest, the first £1000 is  tax-free and you pay 20% basic-rate tax on the remaining £2000.

 
 

The Starting Rate for Savings: for incomes up to £18,500

If your total taxable income (non-savings + savings) is £18,500 or less, you won’t pay tax on any savings interest.
 
Low earners have an additional tax-free allowance, called the Starting Rate for Savings. If your income is below the Personal Allowance (£12,500), you can have an extra £5000 savings interest tax-free. Added to the standard Personal Savings Allowance, this would give you £18,500 tax-free income. (The Starting Rate savings allowance decreases as you earn more from other income e.g. salary).


 

What if your savings income pushes you into a higher tax band?

If adding your savings interest to your earnings, pushes you into a higher tax band, you qualify for the savings allowance for that higher band.
 
Example:
If your £45,000 salary puts you in the basic-rate 20% tax band, but you have over £6000 savings interest, this would take your total income above £50,000, into the higher-rate tax band. As a higher-rate (40%) taxpayer, you would get only £500 Personal Savings Allowance. All taxable income over £50,000 would be taxed at the higher rate of 40%.
 

 

Interest from tax-free savings

ISA piggy bank - wbIncome from tax-free savings, such as ISAs (Individual Savings Accounts) does not count towards your Personal Savings Allowance, because it is already tax-free.  These savings accounts therefore enable you to earn additional tax-free interest above your allowance.
 

 

Find out more about tax on savings:

Tax-Free Savings & the Starting Savings Rate – Money Saving Expert

Personal Savings Allowance – GOV.UK

 
 
 

Tax on Dividends

 
If you own shares in a company, you may receive dividend payments.

The Dividends Allowance means that your first £2,000 earnings from investments will be tax-free. (This allowance has decreased from £5000 since the 2017-18 tax year). If your dividend income exceeds the annual allowance (apart from tax-free Stocks & Shares ISAs), you need to inform HMRC. The amount of tax you pay depends on your Income Tax band.
 
 

 Dividends Tax Rates  2019 – 2020

 

Find out more about tax on dividends:

Dividend Allowance & Tax Rates – Money Saving Expert

Dividend tax calculator – Which?
Work out how much dividend tax you’ll pay on the dividends you earn 

 
 
 

When Tax Adjustments are Necessary

 

If your savings/dividend income exceeds your allowance

Any savings and investment income above your allowances will be taxed at your normal tax rate.
HMRC will reduce your Personal Allowance so you end up paying the correct amount of tax – either via an adjustment to your PAYE tax code, or through the Self Assessment system.

 

If you have paid too much tax on savings/investments

If you think you have overpaid tax on your savings or investments, you can claim it back by filling in GOV.UK form R40.
 
 
 

Rough Guide to Tax Calculation

 
Here’s a simplified guide to the steps involved in Income Tax calculation, with an example below.
For further explanation and a handy tax calculator tool, see the links at the end of this section.
 

  1. Work out all non-savings income e.g. gross earnings from employment, freelancing, rental etc.
    (At this stage, don’t include any income from savings and investments).
    Exclude non-taxable income e.g. certain welfare benefits
  2.  

  3. Deduct tax reliefs e.g. business expenses
  4.  

  5. Deduct Personal Allowance and any other allowances
    This is your non-savings taxable income
  6.  

  7. Find out what tax rates apply. Non-savings taxable income is normally allocated against tax bands before adding savings and investments income. Your tax band determines how much tax-free Personal Savings Allowance you get.
  8.  

  9. Add savings and investments income (excluding tax-free e.g. ISAs).
  10.  

  11. Deduct the relevant Personal Savings Allowance and Dividends Allowance
    This is your total taxable income
  12.  

  13. Work out how much income is taxed within each tax band to calculate your total tax bill.

 
 
Example:

 

Tax tools

Income Tax Calculator – Money Saving Expert

Simple tool to estimate your Income Tax bill, National Insurance, pension contributions & Student Loan repayments. (If you have a Student Loan, check ‘Advanced Options’). It estimates how much you will owe and your remaining take-home pay.

 

How to Calculate Your Tax Bill – Which?

 
 

Find out more:

Help with Tax

Consolidated list of useful contacts & online resources to help with tax issues. Plus a jargon buster for tax terms!

 
 
 

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