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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.

How much Income Tax do I have to pay?

Income Tax allowances
Almost everyone is allowed to earn a certain amount of money on which they do not have to pay Income Tax. This is called your personal allowance. There are also allowances that only some people receive.

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

There are several different Income Tax allowances. The main ones are:

Personal Allowances

  • Taxpayers earning less than £100,000 receive an individual allowance which in 2010/11 is £6,475. (£6,475 for 2009/10)
  • For those with an income of more than £100,000, personal allowances are reduced by £1 for every £2 of income above the limit until they reach zero.
  • Personal allowance for people aged 65 to 74: older taxpayers aged between 65 to 74 receive a slightly larger personal allowance which in 2010/11 is £9,490. (£9,490 for 2009/10)
  • Personal allowance for people aged 75 and over: older taxpayers aged 75 or over receive a slightly larger personal allowance which in 2010/11 is £9,640. (£9,640 for 2009/10)
  • 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 £1 for every £2 that your total income exceeds the limit so that, for people on higher incomes, the allowance eventually reduces back to the normal Personal Allowance.

Blind Person's Allowance
This is an additional allowance for people who are registered blind with their local authorities. In 2010/11 this allowance is £1,890 (£1,890 for 2009/10)

Married Couple's 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. It only applies if you pay tax. In 2010/11, the minimum amount is £2,670 and the maximum amount £6,965.

Income Tax rates and thresholds

The more you earn the more Income Tax you pay. There are three taxable bands:

  • Basic Rate 20% - you pay 20% on your earnings up to £37,400
  • Higher Rate 40% - you pay 40% of everything you earn over £37,400
  • Additional rate 50% - on everything you earn over £150,000.

The bands determine how much you pay after your personal allowance has been deducted. To learn how your tax is calculated visit the Wages from an employer page.

Tax credits
Some people are eligible for Tax credits, which are payments from the Government.

  • Working Tax Credit
    Working Tax Credit is a means-tested allowance that is paid to you through your wages. You are entitled to it if you are in employment and if you meet certain conditions. It depends on how much money you have coming into your household each year whether you are entitled to this tax credit or not. If you are entitled to this tax credit the amount also depends on your annual household income. See our Working Tax Credit page for more details.
  • Child Tax Credit
    Child Tax Credit is a means-tested allowance. It is paid to parents and carers of children or some young people who are still in education.
    You are entitled to receive Child Tax Credit if you or your partner

    • are aged 16 or over and
    • are responsible for at least one child or for some young people who
      are still in education and
    • if your household income is below £58,000 a year (or £66,000 if there is a child of less than 12 months)

    The amount of Child Tax Credit that you are entitled to receive is made up of different elements. These elements are:

    • A family element- this is paid to any family with responsibility
      for at least one child. This element is £545 in 2010/11

    • A child element - this is paid for each child or qualifying young
      person in the family. This element is £2,300 in 2010/11

    • Further elements for 2010/11:

      • Family element, baby addition: families are entitled to this
        addition in the first year of a child's life. This element is £545
      • Disability element: £2,715
      • Severe disability element £1,095

How do I pay Income Tax?

Income tax is paid in different ways depending on whether you are an employee or you work for yourself.

Pay As You Earn (PAYE)
If you are an employee it is your employer’s responsibility to deduct the right amount of Income Tax from your wages throughout the year and pass it on to HMRC, which is the part of the Government that is responsible for collecting taxes. This system of collecting tax is known as PAYE, which stands for Pay as You Earn.

Tax codes
HMRC sends your employer a tax code for you. This tells your employer how much tax to deduct from your wages.

  • You tax code is a number such as 489, which is usually followed by a letter, for example 489L.
  • The number 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 £4890 before paying any tax on the remainder of your earnings.
  • The letter shows how the number should be adjusted following any changes to allowances. For example, L shows that you are eligible for the basic Personal Allowance.
  • For more information on tax codes see Directgov.

See Wages from an employer in Where Money Comes From for more information

UK Self Assessment FormSelf Assessment
If you are self-employed (which means you work for yourself), you need to deduct tax from the money you are paid and pass it on to the Government yourself. HMRC will ask you to complete a form describing your income. This is called Self Assessment. To find out more about Self Assessment, see Directgov.

Further information

 

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