It can be frustrating when Income Tax is deducted from your pay, but it is an essential contribution to the way the country is run. 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 free education, it will have been paid for with the help of Income Tax.
In the UK, Income Tax is paid to the government through HMRC (Her Majesty’s Revenue & Customs). The government uses Income Tax to fund public services such as welfare, law enforcement and infrastructure. The rate of Income Tax that you need to pay depends on the country's current political and economic state, as well as your individual salary.
Not everything you earn will be taxed through Income Tax, however. For example, if you sell an asset or gift an item that you've acquired at a profit, you may have to pay Capital Gains Tax instead, which is calculated using different rates and allowances to Income Tax. There are also a number of benefits and allowances that are non-taxable.
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 other financial gains such as state benefits. The amount of tax you have to pay depends on the amount that you earn in each financial year. This means that you'll pay more tax if you earn over a certain threshold, 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. Self-employed individuals will pay Income Tax through a Self Assessment tax return, which must be filled in every year that they're self-employed.
The majority of people are given a Personal Allowance, which is a set amount of income that is tax-free. Eligible income earned over this threshold is subject to Income Tax.
In the UK, the taxation system is based on a progressive tax - it means that the more an individual earns, the more tax they will pay. This is achieved via carefully crafted tax bands. The majority of the UK has the same tax bands, whereas Scotland has different categories.
The Income Tax bands for the current tax year (2022/2023) are shown below*.
For England, Wales and Northern Ireland:
|Band||Taxable income||Tax rate|
|Personal Allowance||Up to £12,570||0%|
|Basic rate||£12,571 to £50,270||20%|
|Higher rate||£50,271 to £150,000||40%|
|Additional rate||over £150,000||45%|
|Band||Taxable income||Scottish tax rate|
|Personal Allowance||Up to £12,570||0%|
|Starter rate||£12,571 to £14,732||19%|
|Basic rate||£14,733 to £25,688||20%|
|Intermediate rate||£25,689 to £43,662||21%|
|Higher rate||£43,663 to £150,000||41%|
|Top rate||over £150,000||46%|
*These tax bands are calculated assuming that the standard Personal Allowance is £12,570. As explained in the tax allowances section of this article, this standard Personal Allowance can vary from tax year to tax year. The tax bands change with each tax year in order to account for inflation and other economic factors.
The rates for Income Tax are set against the CPI (Consumer Prices Index) to account for inflation. There is no need to claim for this allowance as it is calculated and included automatically by HMRC.
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.
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 administration and regulation of things such as the national minimum wage. HMRC also deals with National Insurance contributions.
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
- Enforcement 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 taxpayers. However, you can contact HMRC here if you are unsure about anything concerning your taxes.
You’ll have an annual tax bill if you are a taxpayer in the UK. This means you’ll have to pay tax on all the income you’ve earned in each tax year. However, in the UK, the tax year is not aligned with the calendar year. Instead, it runs from 6 April of one year to 5 April of the next year. So your yearly tax bill is for all the earnings in that period.
The current tax year is 2022/2023, which will end on 5 April 2023. The next tax year, 2023/2024 will start on 6 April 2023.
There is a popular belief that your entire earnings are taxed at the rate of the highest tax band that they fall into. For example, you may think that you'd have to pay 40% in tax on all of your earnings if your annual salary is £50,500. However, in this scenario, you wouldn't pay tax on your £12,570 Personal Allowance and would only be taxed 20% for earnings between £12,570-£50,270 and 40% on the remaining income.
Some people may even think that earning a raise will cause them to lose money because they have to start paying taxes at a higher rate. This is also a myth as there is no situation in the UK where earning a raise will result in you earning less money after a tax deduction, even though the tax band increases the tax rate.
Here is an example to explain how it works:
Say you live in England and earn £49,000, and have the standard Personal Allowance of £12,570. You will pay no tax on the first £12,570 of your income and pay 20% on the earnings between £12,570 and £49,000. So after tax, you would have £41,714.
Now let’s say you get a pay rise to £60,000, putting part of your earnings into the higher tax band. You still pay no tax on your Personal Allowance, which means that you pay 20% on the earnings between £12,570 and £50,270. You will then pay 40% on the earnings between £50,270 and £60,000. So after tax, you will have £48,568.
The amount of Income Tax that individuals pay depends on the current political and economic situation in the country. The current basic rate of 20% increased from 17.5% on 4th January 2011.
Whilst you are required to pay tax on eligible income, there are also certain types of income that are tax-free.
- Earnings from employment
- Profits from self-employment
Some state benefits are also taxable, including the following:
- 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
Some of the types of taxable incomes listed above are only taxable on income exceeding that of relevant allowances. For example, £1,000 of rental income is non-taxable due to the Property Allowance. This means that if your rental income for the year is £5,000, you will only pay Income Tax on £4,000 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.
- Earnings from Individual Savings Accounts (ISAs) and National Savings Certificates
Some state benefits are exempt from tax and help make up the non-taxable part of your income. These benefits include:
- 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 £1,000
- Profits from self-employment up to £1,000
- Income from dividends from company shares within the dividends allowance limit
- Rental income up to the rent a room limit of £7,500 if you are a live-in landlord
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. They are as follows:
The standard Personal Allowance for all UK citizens is £12,570 in the 2022/2023 tax year. You are not required to pay any tax on the first £12,570 of your annual income. Your Personal Allowance decreases by £1 for every £2 you earn over £100,000. So, if you earn over £125,140, 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 £12,570
- Your Personal Allowance decreases by £10,000 (£1 for every £2 over £100,000). Leaving you with a Personal Allowance of £2,570
- You do not pay any tax on that £2,570
- You pay 20% in Income Tax on the earnings between £2,570 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 £88,000 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).
You may be eligible for Marriage Allowance if you are married or in a civil partnership and you or your partner/spouse has an income lower than £12,570. You may be able to transfer £1,260 of the Personal Allowance from the lower-earning individual to the higher-earning individual, 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 £12,571 and £43,662 to be eligible for Marriage Allowance. This can provide a saving of up to £252 per tax year.
Spouse A - Earns £8,000 per year and has a Personal Allowance of £12,570
Spouse B - Earns £30,000 per year and has a Personal Allowance of £12,570
Spouse A is not using all of their Personal Allowance because they earn less than £12,570, so they can transfer £1,260 of their Allowance to Spouse B.
Spouse A -Earns £8,000 per year and has a Personal Allowance of £11,310
Spouse B - Earns £30,000 per year and has a Personal Allowance of £13,830.
This means Spouse B now pays less tax per year, saving £252.
If you were not aware of this and did not apply for the Marriage Allowance for previous years in which you were eligible, you can still contact HMRC as it can be backdated as far as 5 April 2018. 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 as a guide to find which allowance would be better for you.
You can claim this allowance online here on the gov.uk website. If your circumstances change, i.e you divorce or dissolve your civil partnership, 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 the requirements, it is worth checking the requirements for other allowances to see if you are eligible regarding earnings and claimable tax amounts. For example, this allowance may offer you a higher tax deduction than Marriage Allowance. 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 were born before the 6th of April 1935.
You are still eligible to claim Married Couples Allowance if you are unable to live with your spouse or civil partner for any of the following reasons:
- Illness/old age (if one of you is in residential care, for example)
- Either you or your spouse/civil partner are working away from home
- Either you or your spouse/civil partner are in prison
- Either you or your spouse/civil partner are a member of the armed forces and has been posted away from home
- Either you or your spouse/civil partner are currently undertaking training or education away from home
The highest earner can receive tax relief of 10% of Income Tax due per year. The higher earner does not have to be the partner born before 1935, however. For the tax year 2022/2023, savings on tax from this allowance could be between £364 and £941.50 a year.
Married Couples Allowance is calculated based on the husband's income if your marriage occurred before 5th December 2005. However, from this date onwards, the allowance is based on the highest earner's income in each marriage and civil partnership, no matter their gender. You can apply to change it to the highest-earning income if the husband earns less but the Married Couples Allowance is based on his income by default.
In order to claim this allowance, you can include it on your Self Assessment tax return. If you do not fill in a Self Assessment tax return, 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 required to claim for this. In Scotland and Northern Ireland, as well as the documentation, you must also provide documentation from a doctor that states you are unable to do certain work because it requires good eyesight.
This allowance is given in addition to the standard Personal Allowance. The current Blind Person’s Allowance for this tax year is £2,600, a slight increase from last year when it was set at £2,520.
If you are married or in a civil partnership with another blind person, you are both entitled to a Blind Person’s Allowance. If you are 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, such as in situations where you or your spouse is in the armed forces, or residing in a care home.
In order to claim this allowance, you must contact HMRC.
You may own shares within a company from which you get dividend payouts. This is part of your taxable income, although there is a tax-free allowance of £2,000 for the current tax year. Tax is only charged on earnings from dividends above £2,000. For example, if you received £5,000 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.
The amount of tax you must pay on your dividends depends on the Income Tax band that those earnings fall into. The dividends tax rates for each tax band are listed below:
|Tax band||Tax rate on dividends over the allowance|
You do not have to pay any tax on dividends that fall into your Personal Allowance. Any dividends that fall into the band for your Personal Allowance won't count towards your Dividend Allowance.
If you do need to pay tax on your dividends, the method you use will depend on the amount of dividend income you are receiving. You can use any of the following methods to inform HMRC if your dividend income does not exceed £10,000:
- 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.
A dividend income that exceeds £10,000 must be included on your Self Assessment tax return. You will have to register for Self Assessment by 5 October of the following tax year that you received the dividends income.
Personal Savings Allowance
When people earn interest on savings, it is technically counted as income and therefore taxable. However, there are allowances that mean you can earn tax-free interest on savings, depending on which tax band you fall into.
Firstly, if you have not used all of your Personal Allowance through other income, the remaining amount can be included as part of your Personal Savings Allowance.
This allowance covers interest earnt from accounts such as:
- bank and building society accounts
- savings and credit union accounts
- unit trusts, investment trusts and open-ended investment companies
- peer-to-peer lending
- trust funds
- payment protection insurance (PPI)
- government or company bonds
- life annuity payments
- some life insurance contracts
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 £17,570 are not eligible for this starting rate for savings. If you earn less than £17,570, 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 £5,000.
For instance, if you earn £14,000 this year, you can subtract your Personal Allowance from your yearly income, which would leave £1,430. This would mean that your starting rate for savings would be £3,500, which is the amount of savings interest that you can earn before you have to start paying 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. These rates are shown in the table below:
|Income Tax band||Personal Savings Allowance|
You will have to pay tax on your earnings from savings interest at your usual rate of Income Tax if it exceeds your Personal Savings Allowance. You should report the interest to HMRC in your Self Assessment tax return.
Your bank or building society will file a report with HMRC if you do not complete a Self Assessment tax return because your income from savings interest is below £10,000. HMRC will instruct you on whether or not you need to pay tax and how to pay it. However, if the earnings are above £10,000, you are legally required to complete a Self Assessment tax return.
For the 2022/2023 tax year, you can deposit up to £20,000 into ISA accounts and any interest earnt is non-taxable. This is the same limit that was implemented in the previous tax year.
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.
You do not need to inform HMRC of this income if it is below £1,000. However, you will need to inform them in some circumstances, such as the following:
- 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 employer
In the following cases, you must inform HMRC that:
- You have a gross trading income of over £1,000, which requires you to 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, which requires you to register for Self Assessment.
If your trading income comes from a partnership, then this allowance does not apply.
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 a £1,000 allowance each on their share of the income.
Your gross annual income from property does not need to be declared to HMRC if it is £1,000 or lower unless you are not entitled to the allowance. You must declare the income per annum to HMRC if you make more than £1,000. You must also register for Self Assessment if you earn over £2,500.
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 up to £7,500 as your tax-free allowance from the money you make letting rooms within your home. Unlike Property Allowance, the Rent A Room scheme won't give you and your spouse or civil partner individual allowances, even if the income is shared. Instead, the amount would be split between you. YYou can also be a part of the scheme and receive the tax exemption if you have a guest house or Bed and Breakfast.
The term tax relief refers to the process of claiming tax back, having it repaid or paying less tax initially. This could be through deductions such as business expenses for those that are self-employed.
Some forms of tax relief are automatically applied, but you also 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 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.
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.
It's worth noting that if you donate to more than one charity or CASC, 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 pay in tax during that tax 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. You can claim the difference if you are a higher rate earner, either on your self-assessment tax return or by asking HMRC to change your tax code.
Another way to make charitable donations is through a Payroll Giving scheme. If your employer, company or pension provider runs a Payroll Giving scheme, 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, the amount 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.
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. You can also claim the tax relief by contacting HMRC directly with details of the gift or sale if you do not complete a Self Assessment tax return.
You still might be due to pay capital gains tax, even if you sell shares, property or land for less than their market value but more than you paid for them.
The tax relief for donations made through Payroll Giving 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. You will be asked to sign a form and include the charity’s HMRC reference number — you will have to ask the charity to provide you with the reference number if you don't already have it.
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, which means that this relief does not offer any of your benefits if you do not pay tax.
There are some criteria that must be met in 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 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:
- 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:
- You spend 183 days or more continuously within the UK
- 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.
- 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.
- 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.
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.
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 can 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.
This method means that 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 tax deductions made to your wages from that year. If you believe there is a mistake on the form and too much has been deducted, you will need to 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, HMRC can collect up to £3,000 each year. If your salary is higher, they can collect more.
So that’s the easy part. PAYE basically does all the work for you if your employer uses it. However, things get a bit more complicated for people that have taxed earnings that PAYE does not automatically deduct from. In this case, you’ll need to complete a Self Assessment tax return.
Incomes that will not be covered by PAYE include:
- Income from trading
- Income from renting properties
- Income from self-employment
- Other forms of untaxed incomes
You can hire an accountant to complete your Self Assessment on your behalf. HMRC also have their own Self Assessment helpline to offer assistance.
At first glance, Self Assessment tax returns can appear extremely complicated. However, it's important to get it right as it will HMRC to make sure that you are paying the correct amount of tax.
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 are true:
- You are self-employed and your income is above £1,000 (before deducting items that are eligible for tax relief)
- You earn more than £2,500 in untaxed income, e.g. 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 that you do not need to, otherwise you may be faced with financial penalties.
The first thing to do when you need to file a Self Assessment tax return for the first time is to register online. 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 your Self Assessment.
You will also have to set up a Government Gateway account if you haven't already got one. However, you can only do this once you have your UTR.
As well as your UTR, you will also need various other information when filling in a Self-Assessment tax return. These include:
- 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
You will need to complete a variety of sections to cover all aspects of the Income Tax system. There may only be a few of those sections that are relevant to your personal circumstances, so you will need to find and fill out those particular sections.
There are several deadlines that need to be met when submitting your Self Assessment. Failure to do so can result in penalties and fines. The relevant deadlines for the tax year that started on 6 April 2022 and ended on 5 April 2023 are as follows:
|Register for Self Assessment if you’re self-employed or a sole trader, not self-employed, or registering a partner or partnership||5 October 2022|
|Paper tax returns||Midnight 31 October 2022|
|Online tax returns||Midnight 31 January 2023|
|Payment deadline||Midnight 31 January 2023|
You’ll receive a penalty of £100 if you submit your Self Assessment more than three months after the deadline. The penalty will be higher if you submit the form more than three months after the original deadline or are late paying your tax bill.
It's possible to make an appeal if you missed the deadline but believe you had a reasonable excuse for doing so. However, your appeal will only be accepted if you couldn't file the Self Assessment because of exceptional circumstances, such as a serious health issue or the death of a relative.
It’s possible to employ an accountant to do your Self Assessment for you if you are still unsure about the process or don't have time to do it yourself. 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.
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, HMRC will send you a tax calculation. This will either be a P800 or a Simple Assessment letter.
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 on the gov.uk website here.
HMRC will usually collect what you owe in instalments throughout the next year if you receive a P800 that says you owe tax. 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 £3,000.
You will receive a letter from HMRC that states how to pay the tax you owe if you do not meet these conditions. The method will either be online or by cheque through the post.
If your P800 tells you that you’ve overpaid your taxes, it will also tell you how you will be refunded. You may be able make a claim online, after which you’ll receive the payment within five working days. Alternatively, HMRC 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, you should contact HMRC as soon as possible. HMRC will send you a P800 in this event.
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 the tax year 2020/2021:
|Tax summary description||Description of PESA source (See PESA Table 5.2)||Public Sector Expenditure (£bn)||%|
|Welfare||‘Social Protection’ excluding state pensions||196.0||19.6|
|Business & Industry||Economic Affairs, without Transport||143.8||14.4|
|State Pensions||Within ‘Social Protection’||101.2||10.1|
|Transport||Economic Affairs, without Business and Industry but shown in more detail in table 5.2||45.1||4.5|
|National Debt Interest||Within General Public Services, but shown in more detail in table 5.2||41.5||4.1|
|Public Order & Safety||Public Order & Safety||38.6||3.9|
|Government Administration||Captured under General Public Services, but shown in more detail in table 5.2||20.2||2.0|
|Housing and utilities (e.g. street lights)||Housing & Community Amenities||13.9||1.4|
|Culture (e.g. sports, libraries, museums)||Recreation, Culture & Religion||12.3||1.2|
|Overseas Aid||Captured under General Public Services, but shown in more detail in table 5.2||8.6||0.9|
|UK Contributions to EU budget||EU Transactions||5.8||0.6|
Of the total £447.5 billion total receipts for 2021/2022, £103.5 billion came from Income Tax and £13 billion came from Self Assessed Income Tax.
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. However, you may not have to pay UK Income Tax on foreign income if you are a UK resident and your permanent home is not within the UK.
Your domicile (permanent home country) depends on the country that was the permanent home of your father at the time of your birth. Your domicile may have changed if you have since moved to the UK and do not intend to return.
Non-domiciled UK residents have to pay UK tax on foreign income if:
- The income exceeds £2,000
- The income is brought into the UK (i.e. via a transfer to a 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’. The latter is an alternative tax treatment that individuals can use if they reside in the UK but are not domiciled and have foreign income and gains.
Claiming the remittance basis means that only foreign income that you have brought into the UK is taxable. The downside of this is the loss of tax-free allowances and a potential annual charge if you reside 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 UK residents for seven of the previous nine tax years is £30,000. This charge increases to £60,000 if you have resided 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