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This information applies to England, Wales, Scotland and Northern Ireland
Income which is not exempt from tax but which is free of tax
It is important to make the distinction between income which is exempt from tax (see under heading Income which is exempt from tax) and tax-free income. Tax-free income includes personal allowances and reliefs.
Personal allowances
In addition to having income which is exempt from tax, everyone will have a part of their income which is free of tax. This is because all taxpayers are entitled to personal tax allowances which are deducted from their income. This means that these will give the taxpayer a certain amount of income which is free of tax.
For more information about personal allowances, see Income tax allowances.
Reliefs
As well as being able to claim personal allowances against income tax which give taxpayers a certain amount of income which is tax free, many taxpayers may be able to claim reliefs against income tax. Reliefs against income tax are amounts which are allowed against the person’s tax bill because s/he has had to make certain outgoings, commonly in connection with her/his work.
For more information about tax reliefs, see Tax reliefs - excluding self-employed people.
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Income which is exempt from tax
Some types of income are exempt from tax (see below).
Interest from savings
Interest from some types of savings is exempt from tax. The following types of interest are exempt:
- interest from Tax Exempt Special Savings Accounts (TESSAs)
- the first £70 of interest on a National Savings Bank ordinary account. Interest paid on other accounts is not exempt
- interest on National Savings Certificates
- interest from Save As You Earn certified contractual savings schemes
- loan interest paid by a member of a credit union to the union
- interest from Personal Equity Plans (PEPs), unless the amount of interest withdrawn in the tax year is more than £180.
- interest from Individual Savings Accounts (ISAs).
Social security benefits
Means tested benefits
The following means-tested benefits are exempt from tax:
- Council Tax Benefit
- Housing Benefit
- Income Support, unless the claimant is on strike
- Pension Credit
- income-related Employment and Support Allowance
- Social Fund payments.
Non-means tested benefits
The following non-means tested benefits are exempt from tax:
- Attendance Allowance
- Child Benefit and Guardian’s Allowance
- child dependency additions paid with Widowed Parent’s Allowance, Retirement Pension and Incapacity Benefit
- Christmas bonus
- Disability Living Allowance
- Disablement Benefit, Constant Attendance Allowance and exceptionally severe Disablement Allowance
- lower rate short-term Incapacity Benefit and transitional awards of Incapacity Benefit
- Maternity Allowance
- Severe Disablement Benefit
- War Disablement Pension, including allowances
- war orphan’s pension and war widow’s/widower's pension
- Widow's Pension or Bereavement Payment
Other income which is exempt
Other types of income which are exempt from tax include:
- damages awarded for personal injury
- interest awarded by a court on damages for personal injuries
- jurors’ financial loss allowance, if the juror is an employee
- long service awards to employees
- luncheon vouchers, up to the value of 15p per day
- certain pensions. Voluntary pensions which are not connected to a past job and to which the taxpayer contributes annually are exempt. Disability pensions of members of the armed forces are exempt. Any pension awarded to an employee on retirement because of an injury at work is exempt
- insurance benefits paid to a person who is sick, disabled or unemployed to meet her/his financial commitments, for example, benefits paid under mortgage protection insurance, permanent health insurance, payment protection (creditor) insurance and long-term insurance
- strike pay and unemployment pay from trade unions
- earnings when the person is working abroad
- employment rehabilitation allowance
- employment training allowance
- youth training scheme allowance, unless the trainee has employee status
- fares to school
- educational maintenance allowance
- school uniform and clothing grants
- student grants, including the parental contribution and scholarships
- hospital patient’s travelling allowance
- premium bond prizes and winnings from gambling, for example, football pools, horse racing, the National Lottery
- home improvement, repair and insulation grants
- Working Tax Credit and Child Tax Credit
- rent a room scheme - some of the income is exempt
For more information, see Tax reliefs (excluding self-employed people).
- 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 exempt from tax, 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.
- some maintenance payments.
If you receive maintenance payments 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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Income which is taxable
Income which is taxable includes:
- some social security benefits and pensions
- employment related allowances and benefits
- some earned income
- some fringe benefits, for example, company cars
- some occupational pensions
- interest on some types of savings
- other types of income.
More details of each of these is given in the following paragraphs.
Some social security benefits and pensions
The following social security benefits and pensions are taxable:
- Income Support paid to people who are on strike
- industrial death benefit
- Carer's Allowance
- Retirement Pension
- Statutory Maternity Pay
- Statutory Paternity Pay
- Statutory Adoption Pay
- Statutory Sick Pay
- Contribution-based and income-based Jobseeker’s Allowance
- Widowed Parent's Allowance
- Widow’s Pension and Bereavement Allowance
- higher rate short-term, and long term, Incapacity Benefit
- contributory Employment and Support Allowance.
Additions for dependent children paid with any of the above benefits are not taxable. An addition for a spouse or civil partner is taxable.
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 and disabled men aged 60-63 on both part-time and full-time schemes
Earned income
The following earned income is taxable:
- wages and salaries
- profits from self-employment
- commission
- bonuses
- tips
- certain foreign earnings.
Other types of income which are taxable
The following other types of income are taxable:
- some maintenance payments
- profits from the sale of most goods and property
- profits from renting part of a property. 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.
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.
Occupational pension paid by a former employer
Occupational pensions paid to an employee by her/his former employer count as the employee’s income and are generally taxable. There are some circumstances when the income is not taxable, for example:
- where the person has retired early following an accident at work, work-related illness or war wounds, the excess pension paid to her/him above the normal early retirement pension is not taxable
- where the occupational pension scheme is approved by HM Revenue and Customs
- if the employee works outside the UK, and so does 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 Organisations that can help give advice on pensions in 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 income for tax purposes on the date when it is credited to the 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. This has tax deducted at source, before the interest is paid to 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.
- National Savings and Investments (NS&I) income and capital bonds and investment accounts are taxable in full. Tax is not deducted at source.
- 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.
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