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Income Tax

1. Full time work 2. Part time work 3. Understanding payslips
4. National Insurance 5. P45 and P60 explained 6. Income tax
7. Tax codes - what are they? 8. Pension 9. Getting a job

6. What is Income Tax?

Income Tax is a tax levied on any money you earn. 

You pay tax on things like:

  • 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;
  • Most pensions;
  • 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

You don’t pay tax on things like:

 

Income Tax allowances and reliefs

Most people in the UK get a Personal Allowance of tax-free income.  This is the amount of income you can have before you pay tax.

The amount of tax you pay can also be reduced by tax reliefs if you qualify for them.

 

How much will I have to pay?

How much Income Tax you pay in each tax year depends on:

  • How much of your income is above your Personal Allowance (in England it is £11,850 in the tax year 2018/19);
  • How much of your income falls within each tax band

 

Tax rate Earnings bracket Tax paid
Personal allowance Up to £11,850 0%
basic rate £11,851 to £46,350 20%
Higher rate £46,351 to £150,000 40%
Additional rate Over £150,000 45%

 


How to work out how much you will pay?

You can use the GOV.uk calculator, but you can also work it out for yourself by using the example below:


For example

If you earn £20,000 a year, you will pay:

£20,000 - £11,850 (personal allowance) = £8,150 (this is the amount that can be taxed).

Because your full pay is less than £45,000 for the year you are charged 20% so:

20% of £8,150 = £1,630 a year tax

You can then divide this answer by how many times you are paid a year.  For example, if you are paid monthly:

£1,630 / 12 = £135.83 a month Income Tax

Please be aware that Income tax is not your only deduction and this example does not include Pensions, National Insurance, etc.


 

What does my Income tax money go to?

Income Tax is collected by HMRC on behalf of the government.  It’s used to help provide funding for public services, such as the NHS, education, and the welfare system, as well as investment in public projects, such as roads, rail and housing.

 

Do I have to do anything?

No.  Income tax is taken direct from your pay.  The only thing you have to do is make sure your tax band is correct, and double check you are paying the right amount.

 

What happens if I think I am paying too much?

If you think you might have had Income Tax wrongly taken from your earnings, fill in the form from Her Majesty’s Revenue and Customs (HMRC) to have it paid back to you.

Get the R38 form to reclaim tax on GOV.UK, or contact HMRC.


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