A dictionary definition and its simplest explanation, income tax is the tax levied on personal income that you earn.
What is personal income?
Personal income that is taxed in this way is made up of:
- Income received from employment including benefits in kind
- Your profits on self-employment
- Pension received
- Rental income
- Some state benefits – a list of what is and isn’t taxable can be found here: https://www.gov.uk/income-tax/taxfree-and-taxable-state-benefits
- Income from trust
Who pays income tax?
- Any individual who receives the above income including children. Although if the money is from parents you must make sure if doesn’t go over £100, otherwise the parent gets taxed on all the child’s income.
- Trustees
- Personal representatives of deceased individual
- Companies pay income tax if they are required to account for income tax on certain payments.
How is income tax charged?
Income tax is charged at 20% at the basic rate. This is after a personal allowance of £11,500 for 2017/18. In other words, the first 11,000 is tax free. After £11,500 up to £45,000, your income is taxed at 20% and then any income after that is taxed at 40% up to a maximum of £150,000. Any income above that is taxed at 45%. A table showing this is below:
| Band | Taxable income | Tax rate |
| Personal Allowance | Up to £11,500 | 0% |
| Basic Rate | From £11,500 to £45,000 | 20% |
| Higher Rate | From £45,001 to £150,000 | 40% |
| Additional Rate | Above £150,001 | 45% |
Income tax is charged on worldwide income if you are a UK resident and domiciled in the UK. There are some exemptions for those who are not domiciled in the UK and non-resident of UK who are receiving some UK income are only taxed on that income which arises in the UK. If income is liable to both UK and foreign tax, then there is a double taxation relief so that you don’t pay tax twice for your income.
How is income tax calculated and taken?
If you are self-employed, then any income you received for the tax year from 6th April to the following 5th April is declared in your personal tax return and your tax liability is calculated on this. Your tax is due on the 31st January following the end of tax year on the 5th April.
If you are employed, your employer will calculate it and take it from your salary as PAYE and forward it onto HMRC. When it is done in this way, there is nothing for you to do unless you have other income listed above in which case all income you receive needs to be declared on our tax return along with how much tax you have already paid.
Income that’s not taxed
You may receive some income that does not get taxed at all. This income can include things like:
- Interest on savings up to your savings allowance which is currently £1,000 for basic rate payers and £500 for higher rate payers
- Income from ISA
- Income from National Savings Certificates
- Winnings from Premium Bonds
- Winnings from National Lottery
- Dividends up to the dividends allowance which is currently £5,000
- Rent from a lodger in your house that is below the rent a room limit which is currently at £7,500
- Property income allowance of £1,000 starting from this tax year
- Trading allowance of £1,000 starting from this tax year – in other words if you sell things on eBay etc, as long as it’s below £1,000, you don’t have to declare it.
Tax calculator
Finally, if you want to work out how much net income you take home after all the taxes are paid, there are many tax calculators on the internet. Some of my favourites are listed below:
http://www.moneysavingexpert.com/tax-calculator/
http://www.thesalarycalculator.co.uk/ which also has an app for the phone if you required it.
They go into as much or as little details that you require or depending on how much information you have.
This is just a brief overview of income tax in the UK.
If you require more information on your particular situation, you can get in touch with me on nisha@anaccountantandamum.com or on nisha@qaaccountancyservices.com.
Alternatively, take a look at this website for more details on other services that are available.
Your monthly tax date download for April is attached here:
An accountant and a Mum 