Tax - In England

This information applies to England, Wales, Scotland and Northern Ireland

What is income tax

Income tax is a tax paid on income. It is paid by employees and people who are self-employed. It may also be payable if you aren't working if, for example, you have an income from a pension or savings. Not all types of income are taxable and it will seldom be the case that all of your income is taxed. There is no minimum age at which a person becomes liable to pay income tax. What matters is the amount of your income. If this is below a certain level, no tax is payable.

There is no single definition in tax law of income. Income tax law divides various types of income into schedules. If an item comes within a schedule it counts as income and income tax must be paid on it. The way the tax must be paid will depend on which schedule it falls into. The most common schedules are Schedule E for employees and Schedule D for the self-employed.

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How is income tax calculated

To calculate how much income tax is payable for a particular year, use the following steps:

Step 1: Add together your yearly income from all sources, including earnings, social security benefits, income from renting out accommodation, pensions and interest from bank and building society accounts. Remember to use the gross amounts, that is, the amount before any tax has been deducted.

Step 2: Take off any income which is exempt from tax, for example, certain benefits. Check whether you can claim tax relief on any of the money you have spent over the year (tax relief usually applies to people who are self-employed and have to buy items for the business). Deduct any tax relief.

Step 3: check which tax allowances you are entitled to. You will be entitled to a personal allowance (plus age related additions if appropriate) and you may be entitled to blind person's allowance. These allowances are deducted at this stage in the calculation, leaving income on which tax is payable. This is called taxable income.

Step 4: Multiply your taxable income by the appropriate tax rate. Different rates apply to non-savings income such as earnings and pensions and savings income such as interest from bank and building society accounts. You now have the amount of tax due to be paid that year, unless you are entitled to married couple's allowance (see below).

Step 5: If you are married or in a civil partnership, and one of you was born before 6 April 1935, you may be entitled to married couple's allowance. If you are eligible, 10% of the married couple's allowance is deducted from your tax bill at this stage.

Income which is exempt from tax

Some income is exempt from income tax, which means that tax is not paid on it. This income should therefore be put to one side before estimating how much tax is payable. Examples of income which is exempt from tax include premium bond prizes, Housing Benefit and Child Benefit.

For a list of income which is exempt from tax, see Tax-exempt and taxable income.

Tax allowances

Everyone is entitled to a basic personal tax allowance. You may also be entitled to other allowances on top of the basic allowance. This means that some of your income, which would otherwise be taxable, will be tax free.

Tax allowances are announced in the Budget each year. If you are an employee and so are taxed under Pay As You Earn (PAYE), your personal allowance(s) will be spread throughout the year, so that each week or month you will be left with a certain amount of tax- free income after the tax has been deducted. If you are self-employed or have an income but are not working, your personal allowance(s) will be taken into account when your tax liability is assessed each year.

For information about personal tax allowances and who can claim which allowances, see Income tax allowances.

For more information about amounts available, see Income tax allowances: amounts.

Tax reliefs

In addition to personal tax allowances, income spent on certain things can be deducted when calculating tax. This is known as tax relief on outgoings. These reliefs reduce the amount of tax payable.

Tax reliefs for employees are spread throughout the year in the same way as personal tax allowances. Tax reliefs for self-employed people and people who have an income but are not working are taken into account when tax is assessed after the end of the tax year.

For more information about tax reliefs, see Tax reliefs (excluding self-employed people).

Income tax rates

Income is taxed at different percentage rates, depending on the amount of taxable income and the source of the income. These rates are announced in the Budget every year.

For more information on income tax rates, including rates for past years and how to calculate how much tax is payable, see Income tax rates.

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Income on which tax has already been paid

When calculating the tax due, you need to work out whether or not you have received any income on which tax has already been paid. For example, interest on savings in a building society or bank account, where the interest is paid to you after the bank/building society has taken the tax off it. Payments from an occupational pension will also have had tax taken off before the payment is made to you.

When working out the total tax due for the year, you need to take into account the fact that tax has already been paid on this income. This income (which needs to have the tax deducted added back in) will also count towards taxable income on which personal tax allowances are allowed.

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National insurance contributions

When checking whether your tax has been correctly calculated, it may also be useful to calculate the national insurance contributions that you have to pay, as this will give the figure for your take-home pay. National insurance contributions are calculated on gross income. National insurance contributions for employees are deducted at different rates depending on your pension arrangements and on your level of income.

For help in calculating your national insurance contributions in order to work out your take home pay, an experienced adviser should be consulted, for example, at a Citizens Advice Bureau, whose address and telephone number will be in the local telephone directory. To search for details of your nearest CAB, including those that can give advice by email, click on nearest CAB.

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Record keeping

If you are a taxpayer, you must keep records of your income to enable you to complete a tax return. Personal or non-business records must be kept until 22 months after the end of the tax year that they relate to, and business records must be kept for five years after the fixed filing date.

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How HM Revenue and Customs collects income tax

Deduction of tax at source

Only a minority of taxpayers pay tax directly to HM Revenue and Customs (HMRC) every year. The majority of taxpayers pay their tax through deductions that are made from their income before they receive it. This is called deduction at source.

Some of the most common examples of deduction at source are PAYE, see below, and bank and building society interest, see below

Pay As You Earn (PAYE)

By law, anyone making payments to employees or members of occupational pension schemes is obliged to operate the PAYE system. This means they must deduct income tax and class 1 national insurance contributions from the payments that they make, and must send these sums to HMRC.

You are entitled to receive written confirmation of deductions that have been made by:-

• payslips, showing gross pay, deductions made and net pay if you are an employee; and
• a P60 certificate at the end of each tax year, confirming the amount of gross earnings, and the income tax and class 1 national insurance contributions deducted; and
• a P45 certificate whenever you change jobs, which shows the tax code operating on your earnings at the time you left and, in some cases, the earnings and income tax deducted in the tax year to date.

For more information about PAYE and notifying the tax office about taxable income, see The Pay As You Earn (PAYE) system.

Bank and building society interest

Banks and building societies deduct income tax from the interest paid on most deposits made with them by individuals, and pay this over to HMRC. This is done before the interest is paid to the account holder.

Confirmation of the interest earned in each tax year and the income tax deducted, must be provided by the bank or building society free of charge to you, the saver, if you ask for it. A number of banks and building societies send these details to all their investors each year, as a matter of course.

If you do not need to pay any tax on this interest, for example, because your total income from all sources falls below your tax free income for the tax year, you can arrange to receive your interest gross, that is without deduction of any tax. You should ask your branch of the bank or building society for form R85, which you must complete and return to the branch. This avoids the need to claim a tax refund.

Collection of tax by Self Assessment

Tax may have to be paid to HMRC direct by Self Assessment where the full liability was not, or cannot be, met by deduction at source. This may occur with, for example:-

• earnings from self-employment
• rental income from property
• interest received gross, for example, on National Savings investments accounts
• income from overseas
• fringe benefits received by employees and earnings of employees where an insufficient amount has been paid under PAYE.

Assessment procedure

Where tax needs to be collected by Self Assessment, for example, because you are self-employed, a tax return form must be completed. You can then either ask HMRC to calculate the tax due based on the figures in the tax return (revenue calculation), or can calculate the amount of tax due yourself (taxpayer calculation).

Paying tax under Self Assessment

If you have completed a tax return, you will usually be sent a statement of account, which is like a tax bill, when the tax is due. If you asked HMRC to do the tax calculation, the statement of account will show the result of the calculation and how much tax is due. If you did the tax calculation yourself, you will need to enter the amount that you are due to pay on the statement of account

For information about tax returns, see Tax returns.

For more information about Self Assessment, see Self Assessment - Your guide.

The due date for payment

The due dates for the following types of taxable income are:-

If you need help with the assessment procedure, you should contact a local tax office, or consult an experienced adviser, for example, at a Citizens Advice Bureau. To search for details of your nearest CAB, including those that can give advice by email, click on nearest CAB.

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