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Income Tax

Income Tax was introduced during the Napoleonic Wars as a temporary wartime measure and has remained with us ever since. Few people would admit to liking Income Tax but we all want to benefit from the services that governments provide and pay for using Income Tax.

Income Tax is based on how much you earn and in simple terms the more you earn the more you pay. However, everyone is allowed to earn a minimum amount before they have to pay tax.

This is called your allowance. Each year the Inland Revenue sends you a tax code. This takes the form of a number such as 489. This represents the total amount of money you can earn before paying tax. To work out how much you can earn you need to multiply your code by ten so that a code of 489 means you can earn £4895 before paying any tax.

Allowances change each year since the government normally increases them by the rate of inflation and sometimes changes the way they are calculated.

Paying Income Tax
When you first start working you might expect to earn your allowance before having to pay tax but normal practice is to consider how much you would earn during the whole tax year and to average your income tax over the entire year so you will pay immediately.

There are also two new tax credits available since April 2004, which work in a different way to tax allowances, for more information click on each bar below.

Over the age of 65, people on lower incomes have increased Personal Income Tax Allowances so that they will pay less Income Tax.  The amount of these allowances varies depending on whether you are married or not and exactly what age you are.  If your income exceeds a specified amount, the allowance will be reduced by £2 for every £1 that your total income exceeds the limit so that, for people on higher incomes, the allowance eventually reduces back to the normal Personal Allowance.

To claim married couple’s allowance you need to be living as a married couple or as civil partners and at least one of you must have been born before 5 April 1935.

UK Self Assessment Form

Self Assessment
Your tax code and hence the amount of tax you pay is based on your income. The HM Revenue & Customs will ask some people to complete a form describing their income from employment, savings and other sources. This is called Self Assessment. In most instances, but not all, you will only be required to complete a Self Assessment form if your are self-employed.

Further information
Lots of leaflets and information are available online from the;
HM Revenue & Customs web site.

 

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