Income Tax

 
 
Totally new to taxes, unsure about National Insurance, or baffled by tax codes and PAYE?
Here’s a basic introduction to the tax system, what you pay and how you pay it, plus where to find more information and help if you need it.
 

Simple guides on what you pay:

Income tax
Find out what you need to pay, check the current tax bands & rates, plus allowances & reliefs that can reduce your tax bill

National Insurance
Why we pay National Insurance, how the system works, plus what to do if you have paid too much or too little

Student Loan Repayments
How repayments are collected through the tax system

Help with Tax
Contacts & online resources to help with tax issues, plus a helpful jargon buster for tax terms

 

Simple guides on how you pay:

How tax is collected via PAYE if you work for an employer
How to check if you’ve paid the right amount, and what to do if not

The self-assessment system for the self-employed, or if you have other types of income
How the system works, plus tips for managing your tax affairs

p24_taxman-white-backgd
 

The UK Tax System

 
Taxes are collected by HMRC (Her Majesty’s Revenue & Customs) to fund public services such as the NHS, education and the welfare system, as well as defence, housing and transport.
 

What taxes you pay

You are required to pay Income Tax and National Insurance if your income is over a certain threshold.
This includes earnings from salary/wages as an employee, or if you are self-employed, you are taxed on your business profits rather than your business income. You also pay tax on other sources of income, such as renting out a property, and interest from some savings and investments.

The tax system is complex, and it includes a wide range of allowances, reliefs and exemptions, plus some different rules for countries within the UK. So our tax sections will give you a basic outline, with links to further information and help.
Do seek advice relevant to your own situation, from HMRC or a professional adviser.
 

 

The tax year runs from 6 April to 5 April

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

 

 
The following payments are collected through the tax system. Check out all those that may apply to you:

Income Tax on non-savings income or on business profits for self-employed

Income Tax on Savings & Investments

National Insurance payable on earned income, or on business profits for self-employed

Student Loan Repayments

 

 

Tax Tool:  Should I pay Income Tax & National Insurance contributions?

 

Use this simple tool to work out whether you need to pay any Income Tax, National Insurance and Student Loan repayments. It gives a guide to how much you will owe, and your remaining take-home pay.

Income Tax Calculator

 

 

How you pay tax

The way you pay tax depends on your circumstances.

If you work for an employer, income tax, National Insurance and any pension contributions or student loan repayments are collected automatically via the PAYE (Pay As You Earn) scheme.

If you are self-employed, or have other sources of income, you make these payments directly to HMRC through the self-assessment system.
 
 

Income Tax

 
This is a tax on most forms of personal income.

In this section, we look at what income is taxable from earnings, savings and investments.  We explain various allowances and reliefs that can reduce your tax bill, and you can check the current tax bands and rates.
 
 

Taxable Income

 
Taxable income includes:

‘Non-savings income’ – earned income such as salary/wages from employment, business profits from self-employment, rental income, most pensions, and certain benefits you get from your job e.g. company car etc.
Some people might pay Capital Gains Tax (CGT) on profit from the sale of property or certain investments such as shares, jewellery or antiques. But it doesn’t apply to your main home or car sales.

‘Savings income’ – interest on some savings and investments.

 
 

Non-taxable Income

 
Some types of income are not taxable, therefore you don’t have to declare them for tax purposes e.g. some welfare benefits and tax-free savings like ISAs.
 
 

Tax Allowances & Tax Reliefs

 
There are various tax allowances and reliefs that can reduce the amount of tax you pay:
Tax allowances enable you to earn a sum of money before paying tax.
Tax reliefs allow you to deduct certain outgoings from the total income you make, so you pay less tax.
 

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 2018-19, the standard Personal Allowance is £11,850. You might get a bigger allowance if you have overpaid tax in a previous year, or if you qualify for additional allowances (see below).  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 2018 – 2019

 

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 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

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.

Tax Relief on Pension Contributions – Which?

Tax relief also applies to business expenses: if you are self-employed, you deduct business expenses from your gross income, which reduces the amount of tax you pay.  If you are employed, you can claim for business travel and other expenses associated with your job e.g. uniform and tools.

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 you are entitled to.

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

 
 

Income Tax in Scotland

 
Scotland

Note the tax rates and allowances in this article apply to people in England, Wales and Northern Ireland. If you live in Scotland, you pay income tax under a slightly different system to the rest of the UK.

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)

 

The table shows the tax rate you pay in each band:

Column A – If you have the standard £11,850 Personal Allowance (this applies to most people)

Column B – Taxable income after allowances have been deducted

 

Income Tax Bands and Rates   2018 – 2019Income Tax Bands and Rates Table

 

Income tax bands and rates

 
 

Tax on Income from Savings & Investments

Purple pig coin & £ - cropped - wbIn 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).
 

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

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

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).

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 £1,000 interest a year tax-free.
 

Personal Savings Allowance – How much do you get?

Non-savings income (see above) 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  2018 – 2019Personal Savings Allowance Table

If your total taxable income is £17,850 or less, you won’t pay tax on any savings interest.

Example for a basic-rate taxpayer:
If your salary is £25,000, you are a basic-rate 20% taxpayer and therefore 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.

 

If your savings income takes you into a higher tax band

E.g. £40,000 salary plus over £6,350 savings interest would take your income above £46,350, into the higher-rate tax band.
As your total income puts you into the higher-rate band, you are therefore a higher-rate (40%) taxpayer and would get only £500 Personal Savings Allowance. Any taxable income over £46,350 would be taxed at the higher rate of 40%.
 

Starting Rate for Savings: If your total taxable income (non-savings + savings) is £17,850 or less

Low earners have an additional tax-free allowance, called the Starting Rate for Savings. If your income is below the Personal Allowance (£11,850), you can have an extra £5000 savings interest tax-free. Added to the standard Personal Savings Allowance, this would give you £17,850 tax-free income. (The Starting Rate savings allowance decreases as you earn more from other income e.g. salary).

Example starting rate for savings - Tax-Free Savings & the Starting Savings Rate

 

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 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  2018 – 2019

Dividends Tax Rates 2018
 

Find out more about tax on dividends:

Dividend Allowance & Tax Rates – Money Saving Expert

 
 

Rough Guide to Tax Calculation

 
Here’s a simplified guide to the steps involved in 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. 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. Deduct tax reliefs e.g. business expenses
  3. Deduct Personal Allowance and any other allowances
    This is your non-savings taxable income
  4. Non-savings taxable income is normally allocated against tax bands before adding savings and investments income. This determines how much tax-free Personal Savings Allowance you get.
    Add savings and investments income (excluding tax-free e.g. ISAs).
  5. Deduct the relevant Personal Savings Allowance and Dividends Allowance
    This is your total taxable income
  6. Work out how much income is taxed within each tax band, to calculate your total tax bill.

 

Example:

Examples - Rough guide to tax calculations

 

Where to get Help with Tax Issues

HMRC Helplines:

Taxes (for individuals & employees): 0300 200 3300
Get help with your PAYE tax code, overpayments/underpayments

Newly Self-Employed: 0300 200 3504

Self Assessment:  0300 200 3310

 

HMRC online help:

Personal Tax Account: Set up or sign in
Check your tax information & manage your details with HMRC 

Tell HMRC about a change of name or address

Tell HMRC your tax code is wrong

Tax overpayments & underpayments

How to claim a tax refund

Register as self-employed

Self-assessment tax returns

 

Help with tax problems – Citizens Advice
Common sources of help & advice for all parts of the UK, including HMRC, tax charities, other useful sites & fee-charging advisers
 

Tax tools & further information:

Income Tax Calculator – Go Compare
Tool to estimate your Income Tax bill, National Insurance, Student Loan repayments & take-home pay

How to Calculate Your Tax Bill – Which?

Income Tax – GOV.UK
The full details!

 
 

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