Income Tax
What is it?
It's a tax on most types of income you might receive. This includes employee salaries (including bonuses and most benefits), self-employed income, interest from savings and investments, rental income and pension income.
How much do I pay?
The amount of income tax you pay is based on the amount of taxable income you receive, calculated as follows:
- Work out your gross taxable income. For many, this is as simple as the salary they earn (before tax). Some employees might also have to take account of taxable benefits such as a company car and medical insurance, while the self-employed will need to deduct allowable costs and expenses to work out their profits.
- Deduct your 'Personal Allowance'.
- Multiply the balance by the appropriate tax rate(s).
You can use our Salary & Pension Tax Calculator or
Self-Employed Tax Calculator to do all the number crunching for you!
Personal Allowances
All UK residents enjoy a personal income tax allowance. This is the amount of taxable income you can receive each tax year without having to pay any income tax. Current UK
income tax allowances are below:
| Income Tax Allowance |
Amount |
| Personal allowance * |
£12,570 |
| Blind person's additional allowance |
£2,520 |
| * Allowance reduces by £1 for every £2 of income above £100,000. |
Income tax rates
There are currently three rates of income tax, basic rate at 20%, higher rate at 40% and
the top rate at 45% - these apply to taxable income in excess of your personal allowance.
To work out your tax bill you simply multiply your taxable income that falls into the basic band by the basic rate and that in the higher band by the higher rate.
Current UK Income Tax rates are:
| Income Tax Band |
Amount |
Rate |
| Basic Rate |
£0 - £37,700 |
20% |
| Higher Rate |
£37,701 - £125,140 |
40% |
| Top Rate |
over £125,140 |
45% |
What are taxable benefits?
These are non-cash benefits that you might receive from your employer in addition to your normal pay. Not all benefits are taxable, the list below shows which side of the fence the most common fall on.
| Common employee benefits |
| Taxable benefits |
Non-taxable benefits |
- Company car and fuel.
- Loans above £5,000 at preferential rates.
- Medical insurance.
- Free accommodation, unless necessary to perform your duty.
|
- Free/subsidised meals provided they're 'reasonable' and on premises/in a canteen.
- Child nurseries and play schemes provided on premises or employer run off-site.
- Childcare vouchers up to £55 per week.
- Car parking at work.
- One mobile phone.
|
If you earn more than £8,500 a year your employer must inform HMRC of any taxable benefits you receive. Your employer does this using
form 'P11D' and must give you a copy of this form by 6 July following the end of the tax year.
Provided you employer has already deducted any tax owed on benefits from your salary, you don't need to do anything. Otherwise you may need to declare and pay the additional
tax via an annual tax return.
Can I offset expenses against tax?
EmployeesSelf Employed
Maybe, but you need to be very careful that you don't fall foul of the law. HMRC says that employees can offset expenses against their taxable income provided they are
incurred wholly, exclusively and necessarily in the
performance of their employment. In practice this means that you can't claim for a new suit or travelling to the office, but you probably can claim for items such as
professional subscriptions and the proportion of your mobile phone bill used for work if your employer doesn't reimburse you. If in doubt, ask an accountant.
Yes, in general you can deduct from your turnover all costs incurred for the sole purpose of earning business profits. This includes items such as goods
purchased for resale, rental of business premises and electricity/telephone.
If you buy 'capital' items which have a life of several years, e.g. a computer or machinery, you can claim up to £50,000 of expenditure (excluding cars) in the year of purchase under the
Annual Investment Allowance. Otherwise you'll need to deduct a proportion of the cost each year over a period of time using 'capital allowances'. Again, if in any doubt as
to what you can and cannot claim, ask an accountant.
Is some income tax-free?
Yes, income from some sources is totally exempt from tax. Note, this is not the same as income you receive where tax has already been deducted.
The following are the most common sources of tax-free income:
- Interest from Individual Savings Accounts (ISAs).
- Interest from NS&I Certificates.
- NS&I Premium Bond prizes.
- Interest from Save As You Earn (SAYE) schemes.
- Means tested benefits including council tax, housing, income support, pension credit and social fund benefits.
- Non means tested benefits including child benefit, attendance, disability living and maternity allowances.
- Damages awarded for personal injury.
Mr Young, age 67, receives interest from his cash ISAs of £500 a year. This is totally free of tax and because the interest does not need to be declared it doesn't affect his
age-related allowance.
What happens if I work/live abroad?
If you live in the UK permanently you'll pay UK tax on overseas income, although the UK has 'double taxation' treaties with many countries which avoids you being taxed
twice (if the foreign tax is lower than the UK you must 'top-up' to UK levels).
If you spend time overseas, then whether you pay UK tax depends on your tax 'residency'. You'll continue to be treated as a UK tax resident if you're:
- In the UK for 183 days or more in a tax year.
- In the UK for an average of 91 days or more (including travel days) in a tax year (worked out over a maximum of four consecutive tax years).
If you're living overseas in a country with lower tax than the UK, but still spend some time in the UK, then be careful. Breaching the above time limits could land you with
an unwelcome tax bill!
If you retire overseas and become non UK tax resident then, with the exception of civil service pensions, most pensions (including the state pension) can be paid without
deduction of UK tax and then taxed in your new country of residence provided that country has a double taxation treaty with the UK.
Don't throw it away!
You should keep records of your income and allowable expenses if you need to complete a tax return. Personal and non-business records must be kept for 22 months after the
end of the tax year. Business records must be kept for five years.
Income Tax Jargon
Here's some of the more common income tax jargon you might come across:
| Age-Related Allowance | An increased personal allowance available to those aged 65 and over. Increases again at 75. |
| Basic Rate Tax | The tax rate payable on income above the personal allowance but below the higher rate tax threshold. |
| Blind Person's Allowance | An additional personal allowance for those suffering from blindness. |
| Double Taxation Treaty | Agreement between HMRC and an overseas equivalent to avoid you paying income tax twice on overseas earnings. |
| Higher Rate Tax | The tax rate payable on income above the higher rate tax threshold. |
| Income Tax | A tax on most types of income you might receive. |
| Non-Taxable Benefits | Non-cash benefits received from your employer that are not subject to tax, e.g. childcare vouchers. |
| P11D | The form your employer uses to inform HMRC of any taxable benefits you receive. |
| Personal Allowance | The amount of income you can receive each tax year before you must pay income tax. |
| Taxable Benefits | Non-cash benefits received from your employer that are subject to tax, e.g. company car. |