22 March 2010
This information applies to England, Wales, Scotland and Northern Ireland
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 taxable income. If this is below a certain level, no tax is payable.
Income tax law defines income tax as a tax on income and sets out how each type of income listed below is charged to income tax:
To roughly calculate how much income tax is payable for a particular tax year, use the following steps. The income tax rules are complex so this will not necessarily give you the precise answer in every case:
Step 1 Add together all your taxable income, before tax, from all sources, including employed earnings and self-employed profits, taxable social security benefits, income from renting out accommodation, pensions and interest from bank and building society accounts, for that year. Exclude non-taxable income such as housing benefit, pension credit, maternity allowance, child benefit, child tax credit and working tax credit, disability living allowance, premium bond prizes and lottery winnings. For a full list of tax-free income see Tax-free and taxable income. You must use gross amounts in Step 1,that is, the amount of taxable income before any tax was deducted.
Step 2 Check whether you can claim tax relief for any money you have spent out over the year. For example, on your contributions towards a retirement annuity (but not on pension contributions where tax relief is given at source – these are taken into account in Step 4) or for paying certain employment expenses. Take these off here. If you are self-employed business expenses are deducted before reaching your taxable profit.
Step 3 Check which tax allowances you are entitled to. If you live in the UK on a day to day basis, you will be entitled to a personal allowance. You will also be entitled to age-related additions, if you are over 65, depending on the amount of your income and you may be entitled to Blind Person's Allowance (or to the surplus of your spouse’s Blind Person’s Allowance). These allowances are deducted at this stage in the calculation, leaving an amount of income on which tax is payable. This amount is called your taxable income.
Step 4 Multiply your taxable income by the appropriate tax rate. Most income is taxed at the basic rate of 20% (in 2009/10) and at higher rates for those with a sufficiently high income. If you will be paying tax at higher rates, any charitable payments you make under Gift Aid. Savings income will, in some circumstances, only be taxable at 10%, even if your bank or building society has taxed it at 20% (see Income tax rates) so a repayment may be due. You should now be able to work out the amount of tax due for that year, unless you are entitled to Married Couple's Allowance (see Step 5). When you have calculated the total tax due, take off tax already paid – that is, PAYE tax deductions from employment earnings and occupational pensions, and tax deducted at source from savings income.
Step 5 If you are married or in a civil partnership, and one of you was born before 6 April 1935, Married Couple's Allowance will be due. For marriages before 5 December 2005, the husband should claim the allowance, for marriages and civil partnerships made on or after 5 December 2005 the spouse or civil partner with the higher income should claim it. (It is possible for spouses or civil partners to share the minimum part of the allowance but, unless you married or registered your civil partnership during the tax year, you must have contacted HMRC about this before the start of the tax year). If you are claiming the allowance, 10% of the Married Couple's Allowance is deducted from your tax bill at this stage.
Following these steps may not give the right result if:-
Everyone who lives in the UK on a day to day basis 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 have a certain amount of tax-free income and then pay tax on the remainder. If you are self-employed or have taxable income but are not working, your personal allowance(s) will be taken into account when your tax bill is calculated after you have sent in your annual tax return or repayment claim.
For information about tax allowances and who can claim which allowances, see Income tax allowance and amounts.
In addition to personal tax allowances, income spent on certain things, for example, professional subscriptions or the cost of the tools of your trade, can be deducted when calculating tax. This is known as tax relief on outgoings. These reliefs reduce the amount of your taxable income so you pay less tax.
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 taxable income but are not working are taken into account when their tax bill is calculated after they have sent in their annual tax return or repayment claim.
For more information about tax reliefs, see Tax reliefs.
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.
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 employment or occupational pension may also have had tax taken off before the payment was 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. The gross amount of this income (that is, the amount you have received plus the tax deducted) is taken into account when calculating your total taxable income before personal allowances and tax reliefs are taken off.
As well as checking that the correct tax has been taken off your pay, you may also want to check that the correct national insurance contributions have been deducted, so leaving you with the correct take home pay. National insurance contributions are calculated on gross income and for employees are deducted at different rates depending on your pension arrangements and on your level of income.
If you are self-employed you pay National insurance contributions at different rates depending on your profits.
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. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.
If you are a taxpayer, you must, by law, keep records of your income and any expenses you claim against tax. You will need these records if the tax office asks you to complete a tax return. You must keep personal or non-business records for 22 months after the end of the tax year to which they relate, and you must keep business records for 5 years and 10 months after the end of the tax year to which they relate.
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
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:-
For more information about PAYE and notifying the tax office about taxable income, see The Pay As You Earn (PAYE) system.
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 into your account.
The bank or building society must confirm the amount of interest earned in each tax year and the amount of income tax deducted. The bank or building society must give you the information free of charge 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. Statements and pass books may also show this information.
If you do not need to pay any tax on this interest, for example, because your total taxable income from all sources falls below your personal tax allowances 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. Interest will then be paid without tax deduction, avoiding the need to claim a tax refund.
Tax will have to be paid to HMRC direct through the system of Self Assessment where the full liability was not, or could not be, met by deduction at source. This will happen with, for example:-
If you have to pay your tax through Self Assessment because, for example, you are self-employed, then you must fill in an annual tax return. HMRC will calculate your tax bill based on the figures in your tax return but you can work out the amount of tax due yourself if you want to, but HMRC will do the calculation.
If you send in a paper tax return by the filing date of 31 October following the end of the return year you will be sent a tax calculation. HMRC will follow the calculation with a statement of account, which is like a tax bill, in time for the due date for payment of 31 January. If you file an online return, your tax bill is calculated automatically. The online filing date and the due date for payment is the same, 31 January following the end of the tax year.
For information about tax returns, see Tax returns.
For more information about Self Assessment, see Self Assessment - Your guide.
The due dates for the following types of taxable income are:-
| Taxable income | Normal due date |
| Income from self-employment - due in two equal payments on account, with a third balancing payment (or repayment) due when your tax return has been processed and your tax bill calculated | 1st payment: 31 January in the tax year 2nd payment: 31 July following the end of the tax year Final payment: 31 January following the end of the tax year |
| Rental income (payments on account may be due, depending on the level of income, the tax due and whether tax deductions at source equal 80% of the tax bill) | 31 January following the end of the tax year, unless payments on account are due and in which case the first payment will be due on 31 January in the tax year, the second on 31 July following the tax year, with a final balancing payment or repayment by 31 January after the end of the tax year |
| Investment income received gross (payments on account may be due, depending on the level of income, the tax due and whether tax deductions at source equal 80% of the tax bill) | 31 January following the end of the tax year, unless payments on account are due and in which case the first payment will be due on 31 January in the tax year, the second on 31 July following the tax year, with a final balancing payment or repayment by 31 January after the end of the tax year |
| Investment income received after basic rate tax deducted but where tax at higher rate is due - due in two equal payments on account, with a third balancing payment (or repayment) due when the tax liability has been assessed | 1st payment: 31 January in the tax year 2nd payment: 31 July following the end of the tax year Final payment: 31 January following the end of the tax year, unless payments on account are due and in which case the first payment will be due on 31 January in the tax year, the second on 31 July following the tax year, with a final balancing payment or repayment by 31 January after the end of the tax year |
| Capital gains | 31 January following the end of the tax year |
| Income from employment, pensions, benefits in kind, where not enough tax has been deducted under PAYE | If the underpaid tax can be recovered by changing your tax code HMRC usually does this two years after the underpayment, For example if you owe £300 for 2008/09 you will pay the tax through your code number in 2010/11. If you owe more tax than can be recovered through your tax code you will be asked to make payment direct to HMRC or to fill in a tax return and make payment through Self Assessment. |
If you need help with the Self Assessment process, you should contact HM Revenue and Customs, 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 e-mail, click on nearest CAB.
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