Some of us find it frustrating to pay Income Tax, but if you've ever had medical treatment in the UK through the National Health Service, driven on a road without risking your life, or had a free education, it's because of tax.

In the UK, we pay Income Tax to the government and it is collected by HMRC (Her Majesty’s Revenue & Customs). The government uses income tax to fund our public services such welfare, law enforcement and infrastructure. The rate of Income Tax we pay depends on politics and economics, and at the moment, it is 20% at the basic rate.

Not everything you earn will be taxed through Income Tax. For example, if you sell a or gift an item that you've acquired at a profit, you may have to pay Capital Gains Tax instead, which is calculated by different rates and allowances than Income Tax.

In this Income Tax guide, we're going to cover exactly what Income Tax is, how Income Tax is calculated, who has to pay Income tax and whether you're entitled to any tax relief on your income.

Income Tax is the tax you have to pay on your income, and certain other earnings. The amount of tax you have to pay depends on the amount that you earn, so if you earn more, you'll pay more tax, both in value, and as a ratio or percentage of your income.

If you're employed, you will pay Income Tax automatically through your employer, who will deduct the amount you use through PAYE, and if you are self-employed, you will pay Income Tax through a Self-Assessment tax return, which you'll fill in every year that you're self-employed.

How is income tax calculated?

In the UK, the taxation system is based on a progressive tax - this means that the more an individual earns, the more tax they will pay. This is achieved via carefully crafted tax bands

Income Tax Bands

The income tax bands for the current tax year (2019/2020) are shown below*.

For England, Wales and Northern Ireland.

Tax BandEarnings Range Tax Rate
Basic£12,501 - £50,00020%
Higher£50,001 - £150,00040%
AdditionalOver £150,00045%

For Scotland.

Tax BandEarnings Range Tax Rate
Starter£12,500 - £14,54919%
Basic£14,550 - £24,94420%
Intermediate£24,945 - £43,43021%
Higher£43,431 - £150,00041%
AdditionalOver £150,00046%

*These tax bands are calculated assuming the earner has the standard personal allowance of £12,500. As explained in the tax allowances section of this document, this is not always the case.

Be aware that tax bands change with each tax year in order to account for inflation and other economic factors. These tax bands are only relevant for the 2019/2020 tax year.

Can I end up losing money after tax if I get a raise that puts me into a higher tax band?

There is a popular belief that your earnings are taxed entirely at the rate of the highest tax band your earnings fall into. This even results in some people thinking that earning a raise might lose them money, because they pay tax at a higher rate.

This is a myth and completely false. There is no situation in the UK where earning a raise will result in you earning less after tax.

Here is an example to explain how it works:

Say you live in England and earn £49,000, and have only the standard personal allowance of £12,500. Then you will pay no tax on that allowance and pay 20% on the earnings between £12,500 and £49,000. So after tax you would have £41,700. Now let’s say you get a pay rise to £51,000, putting part of your earnings into the higher tax band. Then you still pay no tax on your personal allowance, you pay 20% on the earnings between £12,500 and £50,000 and you pay 40% on the earnings between £50,000 and £51,000. So after tax you will have £43,100.

The amount of income tax people pay depends on politics and economics. The current basic rate of 20% increased from 17.5% on 4th January 2011.

What income is taxable and non-taxable?

Taxable Income 

  • Earnings from employment
  • Profits from self-employment
  • Taxable state benefits:

- Carer’s Allowance

- Bereavement Allowance (widow’s pension).
- Contribution-based Employment and Support Allowance (ESA)

- Incapacity Benefit (after 28 weeks)

- Jobseekers Allowance

- Widowed Parents Allowance

  • Pensions - state, company, personal and those paid by the Industrial Death Benefit Scheme
  • Rental income
  • Savings interest 
  • Employment benefits
  • Income from Trusts
  • Dividends

Some of the types of taxable incomes listed above are only taxable on income exceeding that of relevant allowances; an example being that £1,000 of rental income is non-taxable due to the Property Allowance. If your rental income for the year is £5000 you will only pay income tax on £4000 of those earnings. This can also be reduced further by deducting any allowable expenses such as repairs to the property. More information can be found on these allowances in the Tax Allowances and Reliefs section. 

Non-taxable Income

  • Earnings from Individual Savings Accounts (ISAs) and National Savings Certificates
  • Non-taxable state benefits:
    - Disability Living Allowance (DLA)
    - Bereavement support payment
    - Lump-sum bereavement payments
    - Attendance Allowance
    - Maternity Allowance
    - Child Benefit (Dependant on income)
    - Child Tax Credit
    - Guardian’s Allowance
    - Housing Benefit
    - Personal Independence Payment (PIP)
    - Severe Disablement Allowance
    - Universal Credit
    - Income Support
    - Income-related Employment and Support Allowance (ESA)
    - Industrial Injuries Benefit
    - Pension Credit
    - War Widow’s Pension
    - Winter Fuel Payments and Christmas Bonus
    - Working Tax Credit
  • Premium bond or National Lottery winnings 
  • Rental income up to £1000
  • Profits from self-employment up to £1000
  • Income from dividends from company shares within the dividends allowance limit
  • Rental income up to the rent a room limit of £7500 if you are a live-in landlord 

Tax Allowances

A Tax Allowance is a subset of your earnings that you are not required to pay any tax on. There are several Tax Allowances available in the UK. Here, we list and describe them.

Personal Allowance

The standard Personal Allowance for all UK citizens is £12,500 in the 2019/2020 tax year. So, you are not required to pay any tax on the first £12,500 of your annual income. Your Personal Allowance decreases by £1 for every £2 you earn over £100,000. So, if you earn over £125,000, then your Personal Allowance will be zero.

If you do earn over £100,000 and your Personal Allowance changes, the additional taxable income will be added into the highest tax band your earnings fall into. In other words, the tax bands do not change size when the personal allowance changes, they simply ‘shift’ down your earnings. Since this can seem a little confusing, here is an example to help with understanding it:

  • You are a taxpayer living in England with an annual income of £120,000.
  • You start with just the standard Personal ALlowance of £12,500.
  • Your Personal Allowance decreases by £10,000 (£1 for every £2 over £100,000). Leaving you with a Personal Allowance of £2,500.
  • You do not pay any tax on that £2,500.
  • You pay 20% in income tax on the earnings between £2,500 and £40,000, since the tax bands have shifted by the difference in your Personal Allowance.
  • You then pay 40% in income on the earnings between £40,000 and £120,000.
  • This is a total of £39,500 in income tax, leaving you with £80,500 after tax.

The size of the standard Personal Allowance can change as a result of changes to the economic climate and is determined by government policy. The Personal Allowance is set at the current rate for 2020 but will change in 2021. From the tax year 2021 to 2022, both the basic rate limit and Personal Allowances will be indexed against the Consumer Price Index (CPI).

CPI is the inflation measure of the average prices of consumer goods and services by analysing the price changes for each item and calculating the averages. The goods and services that are assessed are considered to be a comprehensive collection of items typically purchased by households. These items are allocated to broader groups of related goods, such as transport, furniture and household goods, and recreation and culture.

Setting the rates for income tax against the CPI accounts for inflation, which should offer an improvement for the taxpayer.

There is no need to claim for this allowance as it is calculated and included automatically by HMRC.

Marriage Allowance 

For married couples and civil partners in which one of you has an income lower than £12,500, it is possible to transfer £1,250 of your personal allowance to the higher earning spouse, providing that they earn between £12,500 and £50,000, which is the threshold for basic rate income tax. In Scotland, this differs, with the higher earning partner having to earn between £12,500 and £43,430 to be eligible for marriage allowance. This can provide a saving of up to £250 per tax year.

Example:
Spouse A                                                 Spouse B 

Earns £8,000 per year                             Earns £30,000 per year

Has a personal allowance of £12,500     Has a personal allowance of £12,500

Spouse A is not using all of their personal allowance of £12,500 so they can transfer £1,250 of theirs over to Spouse B. 

So now:

Spouse A                                                 Spouse B 

Earns £8,000 per year                             Earns £30,000 per year

Has a personal allowance of £11,250     Has a personal allowance of £13,750

This means Spouse B now pays less tax per year, saving £250.

If you were not aware of this and did not apply for the marriage allowance for previous years in which you were eligible, then it can be backdated as far as 2015. It can even be backdated if your partner has died and you were eligible before they passed away.

If you or your partner were born prior to 6th April 1935, it may be more beneficial to claim Married Couples Allowance instead. You cannot claim for both - see Married Couples Allowance below to see which allowance would be better for you.

You can claim for this allowance online here on the gov.uk website. If your circumstances change, i.e you divorce or dissolve your civil partnership, then you should inform HMRC and they will stop the transfer of this allowance.

Married Couples Allowance 

If you or your spouse were born before 6th April 1935 you can apply for Married Couples Allowance. If you meet this prerequisite, it is worth checking to see if you meet the other requirements for eligibility regarding earnings and claimable tax amounts, as it may offer more of a tax deduction than Marriage Allowance for some couples. The complete set of requirements for eligibility are as follows:

  • You are currently married or in a civil partnership.
  • You are currently living with your spouse or civil partner
  • Either you or your spouse/civil partner was born before the 6th of April 1935.

You are still eligible to claim for Married Couple’s Allowance if you are unable to live with your spouse or civil partner for any of the following reasons:

  • Illness/old age, for example if one of you is in residential care.
  • Either you or your spouse/civil partner is working away from home.
  • Either you or your spouse/civil partner is in prison.
  • Either you or your spouse/civil partner is a member of the armed forces and has been posted away from home.
  • Either you or your spouse/civil partner is currently undertaking training or education away from home.

The highest earner can receive a tax relief of 10% of income tax due per year. The higher earner does not have to be the partner born before 1935. For the tax year 2019/2020, savings on tax from this allowance could be between £345 and £891.50 for the year. 

If your marriage occurred before 5th December 2005, Married Couples Allowance is calculated based on the husband's income. This has been updated for marriages and civil partnerships since then to be based on the highest earners income. You can apply to change it to the highest earning income for those that default to the husbands, in a situation where the husband earns less.

In order to claim for this allowance you can include it on your self-assessment tax return. If you do not fill in a self-assessment tax return then you can contact HMRC with details of you, your spouse/civil partner and your marriage/civil partnership ceremony.

Blind Person’s Allowance 

An extra allowance is available to those that are registered as blind or severely sight impaired in England and Wales. Documentation from your doctor is also needed to claim for this. In Scotland and Northern Ireland, as well as the documentation, you must be unable to do work in which eyesight is required and be able to provide documentation confirming this, from a doctor. 

This allowance is given in addition to the standard personal allowance.The current Blind Person’s Allowance for this tax year is £2,450, a slight increase on last year, when it was set at £2,390.

If you are married or in a civil partnership with another blind person, you are both entitled to a Blind Person’s Allowance. If married or in a civil partnership and the blind person does not earn enough to pay tax, the Blind Person’s Allowance can be transferred to the higher earner, regardless of whether or not they are also blind. It is not required to have the same address as your partner, in situations such as being in the armed forces, or residing in a care home.

In order to claim this allowance you must contact HMRC 

Dividends Allowance

You may own shares within a company, from which you may get dividend payouts. This is taxable income, but for the current tax year, there is an allowance of £2,000, so tax is only charged on earnings from dividends above this amount. If you received £5000 from dividends this year you would only pay tax on £3,000 of it. The allowance was previously set at £5,000 but this was reduced in 2018. Dividends from an ISA are non-taxable. 

How much tax you must pay on your dividends depends on the income tax band that those earnings fall into. 

Tax BandDividend Tax Rate
Basic7.5%
Higher32.5%
Additional38.1%

You do not have to pay any tax on dividends that fall into your personal allowance. If the dividends do fall into your personal allowance then that does not count towards your dividend allowance.

If you do need to pay tax on your dividends then the method you use will depend on the amount of dividend income you are receiving. If your dividend income does not exceed £10,000 then you can use any of the following methods to inform HMRC:

  • Contact them by phone.
  • Ask HMRC to change your tax code. The tax would then be taken from either your wages or pension. 
  • Include it on your self-assessment tax return.

If your dividend income does exceed £10,000 then you must include it on your self-assessment tax return. If you do not already fill one out, then you will have to start doing so for these dividend payments and you must register by the 5th of October following the tax year you received the income.

Personal Savings Allowance

When people earn interest on savings, this is technically income and therefore taxable. You can use allowances to earn interest tax-free by a number of means. 

Firstly, if you have not used all of your personal allowance through other income, it can be included as part of your Personal Savings Allowance. 

There is also a ‘starting rate for savings’ which is based on income and can be as much as £5,000. Those that have an income higher than £17,500 are not eligible for a starting rate for savings. If you earn less than £17,500 the maximum amount of untaxed interest you can make from savings is £5,000. In order to calculate the exact amount you are entitled to, subtract each £1 you earn above your personal allowance, from the £5000. 

For instance, if you earnt £14,000 this year, then you subtract your personal allowance for your yearly income, which in this case, would leave £1,500. So your starting rate for savings would be £3,500. This means you can earn £3,500 through savings interest without having to pay any tax.

In addition to using your personal allowance and any starting rate for savings you may be entitled to, there is also a Personal Savings Allowance available which is dependent on the highest tax band your earnings fall into. 

Tax BandTax-free savings amount
Basic£1,000
Higher£500
Additional£0

If your earnings from savings interest is exceeding your savings allowance then you’ll pay tax on it at your usual rate of income tax. You should report the interest to HMRC in your self-assessment tax return. If you do not complete a self-assessment tax return and your income from savings interest is below £10,000 then your bank or building society will report it to HMRC and they will instruct you on whether or not you need to pay tax and how to pay it. If the earnings are above £10,000 then you have to complete a self-assessment tax return.

For the 2019-20 tax year, you can deposit up to £20,000 into ISA accounts and any interest earnt is non taxable. 

Interest earnt on joint accounts will be split equally between both people, but this is changeable by contacting HMRC.

Trading Allowance

A tax exemption of £1,000 is available for those in receipt of trading income. This includes income from self-employment and also casual services such as babysitting, dog walking and gardening. It also includes the hire of personal equipment such as power tools or specialised vehicles.

Ordinarily you do not need to inform HMRC of this income if it is below £1,000. You will need to inform them in some circumstances: 

  • If you are self employed and want to register for self assessment for tax relief purposes.
  • If you are not entitled to use the allowance due to having trade income from a company, partnership or your employer you or a relation is owner of. 

In the following cases, you must inform HMRC:

  • You have gross trading income over £1,000. In this case register for self-assessment.
  • You have other gross income over £1,000 up to £2,500. In this case contact HMRC.
  • You have other income over £2,500. In this case register for self-assessment.

If your trading income comes from a partnership, then this allowance does not apply.

Property Allowance

The Property Allowance is available for individuals who earn income through the rental of land or property. The allowance amounts to £1,000 per year. Shared property owners can also receive £1,000 allowance each on their share of the income.

If your gross annual income from property is £1,000 or less then this does not need to be declared to HMRC unless you are not entitled to the allowance. If you make more than £1,000 property income per annum this must be declared to HMRC and those earning over £2,500 must register for Self Assessment.


Be advised that Property Allowance is not available to people that let a room in their own home under the rent a room scheme. The Rent a Room Scheme provides a larger allowance than that of Property Allowance. You can earn upto £7,500 from the let of rooms within your home tax-free. Unlike property allowance, if the income is shared, you do not each get this allowance, but rather it is split between you. As well as people letting out rooms in their homes, you can also be a part of the scheme and receive the tax-exemption if you have a guest house or Bed and Breakfast.

Tax relief

The term tax relief refers to the process of claiming tax back, having it repaid or paying less tax initially by deductions such as a business expense for those that are self employed.

Some forms of tax relief are automatically applied, but you have to apply for some yourself. You could be eligible for tax relief if you:

  • Donate any earnings to charity
  • Pay spousal maintenance to an ex-partner
  • Work aboard a ship outside of the UK
  • Make pension contributions
  • Are employed and incur work related expenses
  • Are self-employed and spend any money on the running of your business

Charitable Donations

Charitable donations from individuals are tax free in the UK. Depending on how you make that donation, the money saved by the tax relief will go either to you or to the charity.

Gift Aid

You can make charitable donations through Gift Aid. For every £1 given through Gift Aid, the charity will receive an extra 25p, at no extra cost to yourself. In order to do this you’ll need to make a Gift Aid declaration for the charity to claim.

You can also donate to a community amateur sports club (CASC) through Gift Aid. 

Note:

If you donate to more than one charity or CASC, then you’ll need to make separate declarations for each one.

In order for your donations to qualify for Gift Aid, they cannot be more than four times what you paid in tax during that year. That includes both income and capital gains tax.

The tax relief you receive when donating through Gift Aid will be at the basic income tax rate. If you are a higher rate earner then you can claim the difference, either on your self-assessment tax return or by asking HMRC to change your tax code.

Payroll Giving

Another way to make charitable donations is through a Payroll Giving scheme. If your employer, company or pension provider runs a Payroll Giving scheme then you can make the donation directly from your wages or pension before any tax is deducted.

This means that the rate of tax relief you’ll receive depends on the tax band your income falls into. Essentially, in order to donate £1, you have to pay:

  • 80p if you’re a basic rate taxpayer.
  • 60p if you’re a higher rate taxpayer.
  • 55p if you’re an additional rate taxpayer.

This applies in England, Wales and Northern Ireland. If you are a Scottish taxpayer then how much you pay is adjusted for the Scottish tax bands. So to donate £1 in Scotland, you have to pay:

  • 81p if you’re a starter rate taxpayer.
  • 80p if you’re a basic rate taxpayer.
  • 79p if you’re an intermediate rate taxpayer.
  • 59p if you’re a higher rate taxpayer.
  • 54p if you’re an additional rate taxpayer.

Donating shares, property or land

If you donate shares, property or land to a charity then you won’t have to pay any tax. That includes if you sell them to the charity for less than their market value. The tax relief includes both income and capital gains tax.

Note:

It’s very important if you want to claim this tax relief that you keep a record of the sale or donation, in order to show that you made it and that the charity accepted it.

In order to claim this tax relief, include it in your self-assessment tax return under the charitable giving section. If you do not complete self-assessment then you can also claim the tax relief by contacting HMRC directly with details of the gift or sale.

If you sell shares, property or land for less than their market value but more than you paid for them, then you still might be due to pay capital gains tax.

For donations made through Payroll Giving, the tax relief is obtained by the automatic deduction of the donation from your gross salary, before tax is applied to your other earnings.

Charities are able to register through HMRC for the Gift Aid scheme in order to claim back the tax paid on donations when made through Gift Aid. If you choose to do this you will be asked to sign a form and will be asked for the charity’s HMRC reference number - you will have to ask the charity to provide you with this.

Maintenance payments

Under some circumstances it is possible to claim tax relief on maintenance payments you make to an ex-spouse or former civil partner.

The tax relief is at a rate of 10% and is deducted from the tax that you pay, hence if you do not pay any tax, then this relief does not offer you any benefit.

There are some criteria that must be met on order to qualify for tax relief on maintenance payments, they are:

  • Either you or your former spouse/civil partner must have been born before the 6th of April 1935.
  • You and your former spouse/civil partner must be divorced, separated or have had the civil partnership dissolved.
  • The maintenance payments must be made to the former spouse/civil partner or your children, if they are aged 21 or under.
  • The former spouse/civil partner must not have remarried or be in a new civil partnership.

The cap for the amount you can claim the relief on is £3,260. Since the deduction is 10%, this means the maximum tax relief from maintenance payments is £326 per year.

Seafarers Earnings Deduction

The Seafarers Earnings Deduction is possibly the least commonly known about tax relief in the UK. It offers seafarers the right to claim 100% tax exemption on all foreign earnings, as long as they meet the requirements.

There are three qualifying criteria that must be met in order to qualify for the Seafarers Earnings Deduction, and they are:

  1. A valid claim period - This is a period of at least 365 days that begins and ends outside the UK. This might be a holiday, period of employment or period of unemployment. If a 365 day period is reached, it is continued until either of the following occurs:
    1. You spend 183 days or more continuously within the UK
    2. More than half of the days since the start of the claim were spent in the UK

The claim period is then considered to have ended on the most recent return date to the UK. You must then leave the UK again in order to start another claim period.

  1. A valid foreign port - Every employment in each tax year must include at least one voyage that begins or ends at a port outside of the UK. For the purpose of this legislation, an oil or gas rig located outside of the UK or UK continental shelf is also considered a valid foreign port.
  1. Valid employment - In order to qualify as a seafarer your employment must be aboard a ship. There is no legal definition of a ship, however HMRC help sheet 205 does go into greater detail regarding what is, and is not, considered a ship for these purposes.

Crown employees are unfortunately not currently eligible for the Seafarers Earnings deduction, although employees of the Royal Auxiliary Fleet are eligible.

A large proportion of seafarers do not currently use the exemption, despite the fact that they qualify for it. This may be because they are unaware of it or because they believe they are not eligible for it.

The Seafarers Earnings Deduction does not exempt you from filing a tax return. If you want to claim your right to the exemption you must still declare your income to HMRC. In fact, not doing so can lead to fines, even if you were not due to pay any tax.

Pension Contributions

You can also get tax relief on Pension Contributions that are worth up to a yearly limit of £40,000 or 100% of your annual income, whichever is lower.

For example, if you earn £100,000 and contribute £60,000 to your pension, you only get tax relief on the first £40,000. Alternatively, if you earn £20,000 and contribute £25,000 to your pension (using savings to top up the contribution) then you’ll only get tax relief on the first £20,000. This tax relief is designed to reward people who are saving for their future.

Up to your limit, you will automatically (as long as your pension scheme is set up for automatic tax relief) receive tax relief of 20% on your entire Pension Contribution. This tax relief is added directly into your pension pot.

If you have earnings in the higher or additional tax bands then you can claim for additional tax relief. You can do this on your self-assessment tax return. You’ll receive an extra 20% tax relief on earnings in the higher tax band and an extra 25% tax relief on earnings in the additional tax band. If you do not fill in a self-assessment tax return then you can also call or write to HMRC to make your claim.

Tax relief on Pension Contributions work slightly differently in Scotland due to the slightly different income tax bands. If you live in Scotland and your income tax rate is 19% you will still receive the 20% tax relief. You are not required to pay back the difference. You can also make additional claims for any of the following:

  • 1% of any earnings you paid 21% tax on
  • 21% of any earnings you paid 41% tax on
  • 26% of any earnings you paid 46% tax on

You can do this on your self-assessment tax return. If you do not fill in a self-assessment tax return then you can also call or write to HMRC to make your claim.

How to Pay Your Income Tax: PAYE or Self-Assessment

So, we’ve discussed how to calculate the amount of income tax you are due to pay and which allowances and tax reliefs you are entitled to, but how do you actually go about paying that tax. For most people, it’s actually very straightforward. In fact it may be done without any input from you at all.

If you’re an employee at a company or organisation, there’s a good chance your income tax is going to be paid through the Pay As You Earn (PAYE) system.

Through this method your employer will deduct the income tax and national insurance contributions from your wages or occupational pension before paying your wages or pension.

The amount your employer deducts from your wages is determined by your tax code. You can read more about tax codes **here**.

When the tax year ends, you will receive a P60 form that outlines how much you’ve been paid and the deductions in your wages from that year. If you believe there is a mistake on the form and too much has been deducted then get in contact with HMRC.

PAYE can also be used to pay debts that you owe to HMRC. If your salary is less than £30,000 then HMRC can collect up to £3,000 each year. If your salary is higher, then they can collect more.

So that’s the easy part. PAYE basically does all the work for you if your employer uses it. Things get a bit more complicated for people that have taxed earnings that PAYE does not automatically deduct from. If this is the case, you’ll need to complete a self-assessment tax return.

Incomes that will not be covered by PAYE can include:

  • Income from trading
  • Income from renting property
  • Income from self-employment
  • Other forms of untaxed incomes

If you are concerned about completing your own self-assessment then you can hire an accountant to do it for you. HMRC also have their own self-assessment helpline to offer assistance.

Self-Assessment Tax Returns

At first glance a Self-Assessment tax return can appear extremely complicated and the thought of filing one can seem scary. Hopefully, after reading this short guide, you’ll feel much more confident about doing your own.

Self-Assessment is a method HMRC uses in order to collect income tax. Lots of people will have their income tax automatically deducted from their wages, savings or pension. It can be done either online or by completing a paper form and returning it.

The first thing that’s important to work out is whether or not you even need to file one. You will need to file a Self-Assessment tax return if any of the following is true:

  • You are self-employed and your income is above £1,000
  • You earn more than £2,500 in untaxed income, eg tips or commissions
  • You earn more than £2,500 in income from renting out a property
  • You earn £10,000 or more from savings and/or investments before tax
  • You need to pay Capital Gains Tax
  • You are the director of a company, not including non-profit organisations such as charities
  • Either you or your partner earns more than £50,000 and you are claiming child benefits
  • You earn income abroad that you need to pay tax on or you have a UK income but live abroad
  • You have a taxable income that is more than £100,000
  • You earn more than £50,000 and make pension contributions and wish to claim for the extra tax reliefs you are entitled to on those contributions
  • You have a state pension that is your only source of income and it is more than your personal allowance
  • You received a P800 from HMRC stating that the amount of tax you paid the previous year was not enough
  • You are a trustee of either a trust or registered pension scheme
  • You wish to make voluntary National Insurance Contributions

There are some other, more niche situations in which you will be required to file a Self-Assessment tax return. It’s worth making absolutely sure you do not need to, since failure to do so when necessary may lead to additional costs.

So, if you know that you do need to fill in a Self-Assessment tax return, what is the next step. Well, if you’ve never done it before then the first thing to do is to register online. 

You can do so here.

Once you’ve done this, you’ll be sent your Unique Taxpayer Reference (UTR). This is a 10-digit reference that will be unique to you. You will need this for filling in the Self-Assessment.

If you wish to do the submission online, then you’ll also have to set up a Government Gateway account. You can only do this once you have your UTR, so make sure you don’t leave it until the last minute.

As well as your UTR, there is some other information that you’ll need to have ready when filling in a Self-Assessment tax return. Make sure you have:

  • Your National Insurance number
  • Records of self-employment expenses
  • Details of any untaxed income from the tax year, whether they are income from self-employment, dividends or interest on shares
  • Details on charitable donations or pension contributions that may be eligible for tax relief
  • A P60 or other record detailing the amount of income that you’ve already paid tax on

Once you have these details at hand, you should be able to complete the Self-Assessment. You’ll find it to be very thorough, as there are sections to cover all aspects of the income tax system. For most people, only a few of those sections will be relevant, and you’ll need to find, and fill out those particular bits.

So, now you know how to go about filing a Self-Assessment tax return, the next question is when to do it. There are several deadlines that need to be met when submitting your Self-Assessment. Failure to do so can result in penalties and fines.

For the tax year that started on 6 April 2018 and ended on 5 April 2019, these are the relevant deadlines.

Self-AssessmentDate of Deadline
Register for Self-Assessment5 October 2019
Submit paper tax returnMidnight 31 October 2019
Submit online tax returnMidnight 31 January 2020
Pay the tax bill you oweMIdnight 31 January 2020

If you are up to 3 months late in submitting your tax return then you’ll receive a penalty of £100. If you are later than that, or a late in paying your tax bill then the penalty will be higher.

If you miss a deadline but believe you had a reasonable excuse for doing so then you can appeal against any penalty you receive. In general, only exceptional circumstances, such as a serious health issue or the death of a relative, would be enough to have the penalty overturned. 

Now you’ve finished this guide, and you should be feeling a bit more confident about completing your own Self-Assessment tax return. However, if there are still things that you’re unsure about then HMRC does have resources available to help. You can either contact their helpline or look through their Self-Assessment helpsheets.

It’s also possible you would rather avoid the potential stress involved will completing your own tax return. If this is the case then it’s possible to employ an accountant to do it for you. There are many people that choose to do this simply to gain the peace of mind that the tax return will be submitted correctly and on time.

What happens if I have paid the incorrect amount of Income Tax?

Whether you’re an employee or get a pension, HMRC will check if you're paying the correct amount of tax during the year. If they believe that you’ve not paid the right amount at the end of the financial year then HMRC will send you a tax calculation. This will either be a P800 or a Simple Assessment letter.

Note:

You will not receive a P800 if you’re registered for self-assessment. Instead your bill will be adjusted automatically if you’ve underpaid or overpaid your taxes.

There are a couple of reasons you might receive a Simple Assessment letter. They include:

  • If you owe tax that cannot be deducted automatically from your income.
  • If you owe HMRC more than £3,000.
  • If you have to pay tax on the state pension.

It’s possible to pay your Simple Assessment bill online here, on the gov.uk website.

If you receive a P800 that says you owe tax, then HMRC will usually collect what you owe in installments throughout the next year. This can be done automatically, as long as you:

  • Pay your income tax through an employer or pension provider.
  • Earn enough income above your personal allowance to cover the underpayment.
  • Owe less than £3000.

If you do not meet these conditions then HMRC will write to you about how to pay the tax you owe. It will probably be either online or by cheque through the post.

If your P800 tells you that you’ve overpaid your taxes then it will also tell you how you will be refunded. Usually the method will be by making a claim online, after which you’ll receive the payment within 5 working days. Alternatively they may send you a cheque, in which case you do not need to make a claim.

If you believe that you’ve overpaid your tax but did not receive a P800, then you should contact HMRC as soon as possible. If they agree then they’ll send you a P800.

What is income tax used for?

All the taxes and national insurance contributions you pay will go towards government spending. This covers a whole multitude of different areas. Below is a breakdown of government spending in tax year 2017/18 (spending figures for later years have not yet been released).

Tax Summary DescriptionPublic Sector Expenditure (£bn)Percentage (%)
Welfare174.423.8
Health145.819.9
State Pensions93.812.8
Education87.812.0
National Debt Interest44.56.1
Defence38.75.3
Public Order and Safety31.64.3
Transport31.24.3
Business and Industry21.42.9
Government Administration15.22.1
Housing and Utilities12.11.6
Culture11.81.6
Environment11.41.6
Overseas Aid8.61.2
EU Contributions5.40.7

Of the total £754 billion total receipts for 2017/18, £183 billion came from income tax, and £133 billion from national insurance. This means that combined, they made up over 40% of total spending.

Do I need to pay tax on foreign income? 

Foreign income is considered to be income earned in countries other than England, Wales, Scotland and Northern Ireland. Income from the Isle of Man and The Channel Islands are also considered as foreign. 

Applicable income includes:

  • Wages earned outside of the UK
  • Rental income on property held abroad
  • Overseas pensions
  • Investments and interest earned on savings overseas

UK residents are usually required to pay UK Income Tax on foreign income.

You may not have to pay UK income tax on foreign income if you are a UK resident if your permanent home is not within the UK (if you are non-domiciled). 

Your domicile depends on the country that was the permanent home of your father at the time of your birth. If you have since moved to the UK and do not intend to return then your domicile may have changed. 

Non-domiciled UK residents still have to pay UK tax on foreign income if:

  • The income exceeds £2,000
  • The income is brought into the UK i.e. transfer to UK bank account

Foreign income exceeding £2,000 per year must be declared in a Self Assessment tax return. 

You must either pay tax on the income or claim the ‘Remittance Basis’. If you do claim the remittance basis it means that only foreign income that it brought into the UK is taxable. Downsides of this include the loss of tax free allowances and a potential annual charge if residing in the UK for a specified number of years. 

People that are considered dual residents may keep tax-free allowances when claiming remittance basis.

The annual charge for those that have been a UK resident for 7 of the previous 9 tax years is £30,000. This charge increases to £60,000 if residing in the UK for 12 of the previous 14 years.

When claiming the remittance basis, it is advised that you contact HMRC for help, or employ the help of a tax professional, as it can be a fairly complicated process.

For those people that work in both the UK and abroad, different rules apply. You can qualify for a ‘foreign workers’ exemption’ which would mean you do not have to pay

tax on foreign income.

To be able to qualify for foreign workers’ exemption:

  • The foreign income must not exceed £10,000
  • Other foreign income like savings interest must not exceed £100
  • When combined, the foreign and UK income falls within the band for basic rate income tax
  • Your foreign income has been subject to foreign tax ***

HMRC stands for Her Majesty's Revenue and Customs. It is part of the UK government and has several functions. The primary responsibility is the collection of taxes, but they also pay some state benefits and deal with some administration and regulation of things such as the national minimum wage. National Insurance contributions are also dealt with by HMRC.

Tax Codes

link to tax codes page

Tax Years

If you are a taxpayer in the UK then you’ll have a tax bill for each year. This means you’ll have to pay tax on all the income you’ve earned in that period of time.

However, in the UK, the tax year is not aligned with the calendar year. Instead, it runs from April 6th of one year to April 5th of the next year. So your yearly tax bill bill is for all the earnings in that period, which is split between two years.

The current tax year is 2019/20 and it will end on April 5th. The next tax year, 2020/21 will then start on April 6th.

Her Majesty’s Revenue and Customs (HMRC)

Her Majesty’s Revenue and Customs, usually referred to by its abbreviation HMRC, is the tax, payments and customs authority in the UK. They are responsible for the administration and collection of the money that funds the UK’s public services.

Their responsibilities include, but are not necessarily limited to:

  • Administration and collection of Income Tax, Corporation Tax, Capital Gains Tax, Inheritance Tax, Insurance Premium Tax, Stamp Duty Land Tax and Petroleum Revenue Taxes
  • Environmental Taxes
  • Value Added Tax (VAT)
  • Customs duty
  • Excise duties
  • Trade Statistics
  • National Insurance
  • Tax Credits
  • Child Benefits
  • Enforcements of the National Minimum Wage
  • Recovery of Student Loan repayments
  • Administering anti-money laundering registrations for Money Service Businesses

HMRC always tries to make things as easy as possible for honest taxpayers, although this doesn’t always work out. If you need to make an enquiry about anything they are responsible for, you can find where to contact them here.