The topic of taxes is usually met with feelings of frustration and confusion as many try to navigate their way through the different types of taxes and how they work. However, taxes needn't be so complicated; with a little guidance, they're pretty straightforward.
One of the most commonly encountered taxes in the UK is Income Tax, which you'll likely see as a deduction on your payslips, along with National Insurance contributions. And while it is frustrating to see a portion of your hard-earned income taken away, without Income Tax and other taxes, many of the UK's fundamental services would not receive the funds they need to operate.
Income Tax is paid to the Government through HM Revenue and Customs (HMRC) and then distributed to a variety of public sectors. For employed individuals, Income Tax and National Insurance contributions are automatically deducted from their income using the PAYE system. Those who are self-employed will be responsible for declaring the tax they owe and paying their tax bill through a process called Self Assessment.
If you're not sure whether you need to complete Self Assessment or are not sure how Income Tax works, this article is for you. We'll cover everything you need to know about Income Tax, including what it pays for, who pays it, and the tax-free allowances you may be eligible for. So, let's dive in!
UK Income Tax funds crucial services that we use daily, including the NHS, public transport, and education. Without taxes, these services would cease to be accessible to the millions of UK citizens who rely on them.
The majority of Government spending on the public sector, which includes healthcare and public safety, is funded by Income Tax. In 2021-22, the UK government raised over £915 billion in receipts — of which £228 billion was from Income Tax. The other main sources of tax revenue were National Insurance Contributions (£161 billion) and Value Added Tax (£143 billion).
The following table provides a breakdown of the Government's public sector expenditure for 2020-21.
|Tax Summary Description||Public Sector Expenditure (£mn)||Percentage (%)|
|General Public Services||108,591||11.40|
|Public Order and Safety||42,293||4.44|
|Housing and Community Amenities||15,259||1.60|
|Recreation, Culture and Religion||12,798||1.34|
The main public sector that Income Tax is used to pay for is social protection which funds a variety of benefits, including:
- Incapacity, disability and injury benefits
- Family benefits
- Income support
- Tax credits
- Universal Credit
The social protection sector also provides pensions for eligible individuals who have reached the State Pension age and personal social services for those in need.
Aside from social protection, Income Tax funds the health sector, which includes the National Health Service (NHS) and medical research. This sector accounts for nearly 23% of the Government's public sector expenditure.
Both social protection and health are set to be the biggest expenditures this year as well, as shown in the following breakdown of the UK government's budgeted public sector spending on services for 2021-22.
|Tax summary description||Public Sector Expenditure (£bn)||Percentage (%)|
|Industry, Agriculture and Employment||70||6.6|
|Other (Including EU Transactions)||57||5.4|
|Public Order and Safety||41||3.9|
|Personal Social Services||40||3.8|
|Housing and Environment||33||3.1|
Income Tax is a tax you pay on your income. You'll pay tax on things like:
- Income from employment
- Profits from self-employment
- Some state benefits
- Most pensions (including state pensions)
- Income from renting properties
- Interest on savings that are over the savings allowance
- Benefits in Kind from your job
This said, not all earnings are considered taxable income. You will not pay tax on the following:
- Your trading allowance, which is the first £1,000 of income you make from self-employment
- The first £1,000 of income received from renting property (unless you’re using the Rent a Room Scheme)
- Income from tax-exempt accounts, e.g. Individual Savings Accounts (ISAs)
- Dividends from company shares that fall under your dividends allowance
- Some state benefits
- Premium bond or National Lottery wins
- Rent you receive from a lodger in your house (provided it's below the rent a room limit)
National Insurance is another type of tax. Individuals pay National Insurance contributions to qualify for the State Pension and other state benefits such as Contribution-based Jobseeker's Allowance, Statutory Maternity Pay, and Statutory Sick Pay.
Like Income Tax, National Insurance contributions are deducted from your income by your employer through the PAYE system.
Income Tax is paid by nearly all individuals who receive income —approximately 32 million individuals in the UK currently pay Income Tax.
Earnings that exceed the Personal Allowance will be subject to Income Tax. For the current tax year (2022-23), individuals are permitted a tax-free allowance of £12,570. This means that if you earn less than this amount are exempt from paying Income Tax, but if you earn over the Personal Allowance threshold, you'll pay tax on the remaining amount.
The standard amount of tax-free income is £12,570 for the current tax year. However, if you earn over £100,000, your Personal Allowance is reduced by £1 for every £2 over the £100,000 limit — this can go to zero. Additionally, you will not be eligible for a Personal Allowance if you earn over £125,140.
The amount of Income Tax you'll pay depends on:
- How much of your income is above your Personal Allowance
- How much of your income falls within each tax band
The more you earn, the higher the amount of Income Tax you'll pay.
The Income Tax rates and bands for the 2022-23 tax year are as follows:
|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%|
As shown in the table, there are three income tax bands which each have a corresponding tax rate. However, you won't pay the same tax rate on all the income you receive. You'll instead pay the corresponding tax rate for the portion of your pre-tax annual salary that falls within each band.
For example, if your annual salary is £52,000 and you have a standard Personal Allowance, you'll pay £8,232 in Income Tax as shown in the following breakdown:
|Band||Taxable Income||Tax Rate||Tax Due|
|Personal Allowance||Up to £12,570||0%||£0|
|Basic rate||£12,571 to £50,270||20% Income Tax on £37,500 of your income(£50,270 - £12,570 = £37,700)||£7,540|
|Higher rate||£50,271 to £150,000||40% Income Tax on the remaining £1,730 of your income(£52,000 - £50,270 = £1,730)||£692|
|Additional rate||over £150,000||45% (not charged on any income)||£0|
There are two ways to pay Income Tax:
- Through the PAYE system
- Through a Self Assessment tax return
Pay As You Earn (PAYE) System
Most people pay Income Tax through the PAYE system. If you are employed, your employer will deduct Income Tax and National Insurance contributions from your wages before you are paid. If you receive a pension, the same system wi
Your employer will use your tax code to identify how much tax you will pay — you can find your tax code online. If you think your tax code is wrong, you can also use this service to update your employment details, or you can contact HMRC.
Self Assessment Tax Return
If you are self-employed or employed and receive income outside of PAYE, you'll pay Income Tax and National Insurance through Self Assessment — you'll need to complete this every year. You will be responsible for declaring your earnings and paying your tax bill.
The last tax year ran from 6 April 2021 to 5 April 2022. If you were self-employed or a high earner during this time, you'll need to ensure you register for Self Assessment, complete your tax return and pay your tax bill by the following deadlines:
|Register for Self Assessment — for those who are 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|
|Paying tax you owe||Midnight 31 January 2023|
You can pay your tax bill online using HMRC's system or using one of the following methods:
- Through your online bank account
- Online or telephone banking
- By debit or corporate credit card (online)
- At your bank or building society (you'll need a paying-in slip from HMRC to use this option)
- Direct Debit
- By cheque through the post
Income Tax is a tax on earnings that the Government collects through the PAYE or Self Assessment systems. The tax revenue is then used to fund a variety of public services, including:
- Social Protection
- Public safety
- Benefits (including income support and tax credits)
- Economic Affairs
- Industry, Agriculture and Employment
Individuals who are employed will pay taxes through the PAYE system, and their employer will deduct Income Tax and National Insurance contributions before wages are paid. Those who are sole traders or self-employed will be responsible for paying taxes themselves through the process of Self Assessment.