This information applies to England, Wales, Scotland and Northern Ireland
Tax-free income
It is important to know what income is tax-free and can be ignored for tax purposes. You only pay tax on your taxable income so you do not want to include any tax-free income in your calculations. You do not have to tell HM Revenue and Customs (HMRC) about income which is not taxable so you leave it off tax returns and any other forms HMRC sends you asking about your taxable income. When you are working out your taxable income you also need to know about tax allowances and tax reliefs.
The following types of income are free from tax.
Means-tested social security benefits
The following means-tested benefits are free from tax, so you can ignore them for tax purposes:
- Council Tax Benefit
- Income-related Employment and Support Allowance
- Housing Benefit
- Income Support, unless you are on strike when you claim
- Pension Credit
- Social Fund payments including budgeting loans, community care grants, crisis loans, funeral expenses payments and Sure Start Maternity grants
- School uniform and clothing grants.
Non-means-tested social security benefits
The following non-means tested benefits are free from tax, so you can ignore them for tax purposes:
- Adoption Allowances
- age-related payments paid at the discretion of the government from time to time
- Attendance Allowance
- Back to Work Bonus
- Child Benefit
- child dependency additions paid with Carer’s Allowance, Incapacity Benefit, State Retirement Pension and Widowed Parent’s Allowance
- Child’s Special Allowance
- Child Trust Fund payments
- Christmas bonus for pensioners
- Cold Weather Payments
- Constant Attendance Allowance
- Disablement Benefit and Exceptionally Severe Disablement Allowance
- Disability Living Allowance
- Guardian’s Allowance
- Health in Pregnancy Grant
- lower rate short-term Incapacity Benefit paid for the first 28 week period and benefit paid to claimants who were receiving the former Invalidity Benefit at 12 April 1995 for the same incapacity and transitional awards of Incapacity Benefit
- Income Support (taxable when paid while the claimant is on strike)
- Industrial Injuries Benefit including Industrial Injuries Disablement Benefit, industrial injuries pension, Reduced Earnings Allowance, Retirement Allowance, Constant Attendance Allowance and Exceptionally Severe Disablement Allowance
- job finder’s grant
- low cost bus passes
- Maternity Allowance
- One-parent Benefit payable only where your claim was made before April 1997
- Pneumoconiosis, byssinosis and miscellaneous disease benefits
- Reduced Earnings Allowance
- Invalidity Benefit payable only where your invalidity started before April 1995
- Retirement Allowance
- Severe Disablement Allowance, only available to claimants who were claiming before April 2001
- War Disablement Pension, including allowances
- War orphan’s pension and War Widow’s/Widower's pension
- Widow's Pension or dependant’s pension or Bereavement Payment
- Winter Fuel Payments
- Workmen’s Compensation Supplement, for accidents and diseases before 5 July 1948
- Wounds and disability pensions.
Interest and income from savings and investments
Interest from some types of savings is tax-free. The following types of interest are free from tax, so you can ignore them for tax purposes:
- Income from Government Savings Certificates
- Income from certain UK Government stocks (gilts) if you do not normally live in the UK
- the first £70 of interest on a National Savings Bank ordinary account. Interest paid on other accounts is not tax-free
- interest from Individual Savings Accounts (ISAs)
- interest on National Savings Certificates
- interest and terminal bonuses from Save As You Earn schemes
- interest from Tax Reserve Certificates
- shares or share options issued under HMRC approved employer schemes
- withdrawals from insurance policies or investment bonds of up to 5% of the amount originally invested.
Other income which is tax-free
Other types of income which are tax-free and can be ignored for tax purposes include:
- Child Tax Credit
- childcare vouchers up to a value of £55 a week
- employer sponsored courses – up to £15,000
- educational grants, including the parental contribution and scholarships
- Educational Maintenance Allowance (there are separate allowances for England, Wales, Scotland and Northern Ireland)
- eye tests, prescription charges and help with other health costs
- fares to school
- Higher Education Student Support grant (there are separate grants for England, Wales, Scotland and Northern Ireland)
- HM forces – mess and ration allowances
- foreign pensions and lump sums paid under overseas pension schemes in certain circumstances – only 90% of the income is taxable
- foreign social security benefits – a large number are free of tax
- foster care receipts below specified limits
- friendly societies – any gains on qualifying insurance policies
- gallantry awards – annuities and additional pensions paid to holders of the Victoria Cross, George Cross and most other gallantry medals are free from tax
- holocaust victims – compensation
- Home Energy Efficiency Scheme (Wales)
- home improvement grants from your Local Authority
- hospital patients’ travelling expenses under the Hospital Travel Scheme
- housing grants from your Local Authority
- income from overseas as long as it is not brought into the UK by individuals who are not domiciled in the UK
- compensation or damages awarded for personal injuries whether received in one lump sum or over a period and whether awarded by a court or out of court settlement
- interest up to the time of judgment awarded by a court on compensation or damages for personal injuries
- jurors’ financial loss allowance, if the juror is an employee
- life assurance policies – certain bonuses and profits
- long service awards to employees where the gift does not exceed £50 for each year of service and where the gift is tangible, for example a clock or shares in a company after 20 years of service. A cash award is usually taxable unless it is a one-off payment which is not included in your contract of employment
- luncheon vouchers, up to the value of 15p a working day
- maintenance payments following divorce or separation – depends on your age and only applies if you or your spouse or civil partner were born before 6 April 1935
- miners’ free coal or cash in lieu of coal is tax-free under an HM Revenue and Customs (HMRC) concession
- certain pensions. Voluntary pensions which are not connected to a past job and to which you contribute annually are tax-free. Disability pensions of members of the armed forces are tax-free. Any pension awarded to you as an employee on retirement because of an injury at work is tax-free
- German and Austrian annuities and pensions for victims of Nazi persecution
- lump sum pension payments (maximum 25% of the capital value up to the trivial commutation limit - £17,500 for 2009/10)
- compensation and interest for mis-sold personal pensions taken out between 29 April 1988 and 30 June 1994 inclusive
- insurance benefits paid to you if you are sick, disabled or unemployed to meet your financial commitments, for example, benefits paid under mortgage protection insurance, permanent health insurance, payment protection (creditor) insurance and long-term care insurance
- strike pay and unemployment pay from trade unions
- premium bond prizes, winnings from the National Lottery and football pools, and from betting for example, horse racing
- purchased annuities – capital element of the amount you receive
- the first £30,000 of payments which are compensation for loss of a job, including statutory and contractual redundancy payments and, in certain cases, a lump-sum payment in lieu of notice
If you have received a payment for loss of a job and are not sure whether it should be paid tax-free, you should 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 e-mail, click on 
nearest CAB
- Rent a Room scheme – the first £4,250 of the income is tax-free
- repayment supplement in connection with interest paid on repayment of overpaid tax
- Thalidomide Trust payments to victims of thalidomide
- TV licence payment for the over 75s
- vaccine damage lump sum payments
- Warm Deal Grant, or from 5 April 2009 Energy Assistance Package (Scotland), Warm Front Grant (England), or Warm Homes (Northern Ireland)
- Working Tax Credit.
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Taxable income
Income which is taxable includes:
- some social security benefits and pensions
- employment-related allowances and benefits
- some earned income
- some benefits in kind
- most occupational pensions
- most private pension income or pensions from personal pension plans or retirement annuity policies
- interest on some types of savings
- other types of income.
More details of some of these is given in the following paragraphs.
Some social security benefits and pensions
The following social security benefits and pensions are taxable:
- Bereavement Allowance
- Carer's Allowance
- Employment and Support Allowance – contributory and youth
- Incapacity Benefit – except for the first 28 weeks (higher rate) and those who were receiving the former Invalidity Benefit at 12 April 1995 for the same incapacity (long term)
- Income Support paid to people who are on strike
- industrial death benefit pensions
- Jobseeker’s Allowance – both contribution-based and income-based up to a taxable maximum
- State Retirement Pension – including any Invalidity Allowance when paid with the State Retirement Pension
- Statutory Adoption Pay
- Statutory Maternity Pay
- Statutory Paternity Pay
- Statutory Sick Pay
- Widowed Mother’s Allowance
- Widowed Parent's Allowance
- Widow’s Pension.
Additions for dependent children paid with any of the above benefits are not taxable. An addition for a spouse or civil partner is taxable.
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Employment-related allowances and benefits
The following employment-related allowances and benefits are taxable:
- job release benefit for men aged 62 and 63 on part-time schemes
- job release benefit for disabled men aged 60-63 on both part-time and full-time schemes.
Earned income
The following earned income is taxable:
- bonuses
- commission
- expenses paid by your employer when those expenses are not totally and necessarily incurred in doing your job including travelling expenses between your home and your place of work, and expenses incurred for the care of a member of your family, such as child minding costs
- certain foreign earnings
- payments in lieu of wages, such as payments made by a liquidator when your company has been wound up and employees are owed earnings
- permitted work, as part of a treatment programme under medical supervision
- profits from self-employment
- protective awards which may be ordered by an industrial tribunal if your employer has not given a trade union the statutory notice of redundancies or a payment which may be made to you as an ex-employee from the redundancy funds if your employer goes into liquidation
- redundancy or leaving payments over £30,000
- retainers. For example a payment made to you for a period when you do not carry out any actual work, such as payment made to you as an employee of the school meals service during school holidays
- tips
- non-cash vouchers that are liable for Class 1 National Insurance Contributions
- wages and salaries including backdated pay awards.
Occupational pension paid by a former employer
An occupational pension paid to you, as an employee by your former employer, counts as your income and is generally taxable. There are some circumstances when the income is not taxable, for example:
- if you have retired early following an accident at work, work-related illness or war injuries, the excess pension paid to you above the normal early retirement pension is not taxable
- if you work outside the UK as an employee, and so do not pay UK tax.
The law on tax and occupational pensions is complicated and an experienced adviser should be consulted for further details. For example, you can contact The Pensions Advisory Service (TPAS), which provides free, confidential advice on occupational pensions.
For more information about TPAS, see Pensions
Pension lump sum payments
An occupational pension scheme is allowed to pay a tax-free lump sum of up to 25% of the capital value of the pension. This is up to a maximum figure of 25% of a sum called a lifetime allowance which is specified by the government.
The rules on pension lump sums are complicated and an experienced adviser should be consulted for details, for example, a Citizens Advice Bureau. To search for details of your nearest CAB, including those that can give advice by email, click on nearest CAB.
Interest on savings
Interest on savings counts as taxable income on the date when it is credited to your account. It is not apportioned over the period when it builds up. The following types of interest on savings are taxable:
- interest paid on savings in most bank and building society accounts, and paid by local authorities, and from UK companies and UK government stocks (gilts). This has tax deducted at source, before the interest is paid to you the account holder. If you are a non-taxpayer, you can arrange to have the interest paid in full. You should obtain a form from the bank or building society in order to do this. More information about tax on bank and building society accounts is available at www.hmrc.gov.uk.
- interest on National Savings and Investments (NS&I) products is taxable in most cases but some are free from tax. For more information, go to the NS&I website at: www.nsandi.com.
- dividends paid on shares. For more information about taxation of dividends, see www.direct.gov.uk.
- The percentage rate of tax payable varies according to the amount of the taxable income. The HM Revenue and Customs helpline on 0845 307 3555 can give further advice. You can find more information about tax on the Directgov website at: www.direct.gov.uk.
Other types of income which are taxable
The following other types of income are taxable:
- taxable gains on life insurance policies
- income from trusts and settlements
- some maintenance payments
- pre-owned assets
- profits from the sale of most goods and property
- profits from renting part of a property, property letting including second homes and from furnished holiday lettings. Rental income from lodgers up to a certain limit is entitled to tax relief under the Rent a Room scheme
- profits on motor mileage allowances paid to volunteer drivers, for example, drivers for the hospital car service or other volunteer organisations
- purchased annuities – the income element of the amount you receive.
For more information on any of the above you should 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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Tax allowances and tax reliefs
Personal allowances
In addition to having income that is free from tax because it is not taxable, there are allowances that you take off your taxable income to reduce the amount on which you have to pay tax. This is because nearly all taxpayers living in the UK on a day to day basis are entitled to personal tax allowances which are deducted from their taxable income. These allowances give taxpayers a certain amount of taxable income on which they pay no tax.
For more information about personal allowances, see Income tax allowances and amounts.
Tax reliefs
As well as being able to claim personal allowances against income tax which give taxpayers a certain amount of taxable income on which they pay no tax, many taxpayers may be able to claim reliefs against income tax. Reliefs against income tax are amounts that are allowed against your tax bill because you have had to make certain outgoings, commonly in connection with your work. You can use the reliefs to reduce the amount of your taxable income so that you have less tax to pay.
For more information about tax reliefs, see Tax reliefs.
