Introduction to Income Tax

In this section:

Income Tax - the basics
Taxable and non-taxable income at a glance
Should you be paying Income Tax?
Ways you pay Income Tax

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Income Tax - the basics

Income Tax - the basics

Income Tax is a tax on income. Not all income is taxable and you're only taxed on 'taxable income' above a certain level. Even then, there are other reliefs and allowances that can reduce your Income Tax bill - and in some cases mean you've no tax to pay.

What counts as taxable income?

Taxable income includes:

earnings from employment
earnings from self-employment
most pensions income (State, company and personal pensions)
interest on most savings
income from shares (dividends)
rental income
income paid to you from a trust

Non-taxable income

There are certain sorts of income that you never pay tax on. These include certain benefits, income from tax exempt accounts, Working Tax Credit (WTC) and premium bond wins. These income sources are ignored altogether when working out how much Income Tax you may need to pay.

Find details of taxable and non-taxable income

Tax-free allowances

Nearly everyone who is resident in the UK for tax purposes receives a 'Personal Allowance', which is an amount of taxable income you're allowed to earn or receive each year tax-free.

This tax year (2008-09), the basic Personal Allowance - or tax-free amount - is £5,435. You may be entitled to a higher Personal Allowance if you're 65 or over.

If you're registered blind, or are unable to perform any work for which eyesight is essential, you can also claim the tax-free Blind Person's Allowance.

Income Tax is only due on taxable income that's above your tax-free allowances.

Get information about Personal Allowance

Find out about Blind Person's Allowance

Allowances and reliefs that can reduce your Income Tax bill

If you're due to pay Income Tax, there are a number of deductible allowances and reliefs that can reduce your tax bill. These include:

Married Couple's Allowance - the husband, wife or civil partner has to be born before 6 April 1935
Maintenance Payment Relief - either you or your former spouse or civil partner must have been born before 6 April 1935

Unlike the tax-free allowances, these aren't amounts of income you can receive tax-free. Rather they're amounts that can reduce your tax bill.

Find out about other tax allowances and reliefs

Tax allowances and reliefs for employees or directors

If you're an employee or director you might be able to get tax relief for business expenses you've paid for.

Get details of tax allowances and reliefs for employees or directors

Tax on company benefits

If you're employed and you receive non-cash benefits from your employer you will have to pay tax on them.

Taxable benefits

Benefits that you might have to pay tax on include:

company cars or vans
fuel provided for your vehicle
medical insurance
living accommodation
loans at low interest rates

Find detailed information on taxable company benefits

How much Income Tax you pay

After your allowable expenses and any tax-free allowances have been taken into account, the amount of tax you pay is calculated using different tax rates and a series of tax bands.

Income Tax rates 2008-09 by tax band and type of income
Income Tax band	Income Tax rate on non savings income	Income Tax rate on savings	Income Tax rate on dividends
£1 to £2,320 Starting rate:	Not available	10%	n/a - see basic rate band
£1 to £36,000 Basic rate:	20%	20%	10%
£36,001 and above Higher rate:	40%	40%	32.5%

Because the rate of Income Tax you pay on savings is worked out after any non-savings income has been taken into account, if your non-savings income is less than the starting rate for savings limit (£2,320) - or if savings and investments are your only source of income - your savings income will be taxed at the 10 per cent starting rate up to the limit. But if you already have non-savings income which takes you above the starting rate, all of your savings will be taxed at the 20 per cent basic rate.

Remember, the tax band applies to your income after your tax allowances and any reliefs have been taken into account - you're not taxed on all of your income.

'Non savings income' includes income from employment or self-employment, most pension income and rental income.

'Dividends' means income from shares in UK companies.

Savings and dividend income is added to your other taxable income and taxed last. This means you pay tax on these sorts of income based on your highest Income Tax band.

Find out about tax on savings

Get details of tax on UK dividends

How you pay Income Tax

Income Tax is collected in different ways depending on the type of income and whether you're employed, self-employed or not working. The different ways Income Tax is collected include:

PAYE (Pay As You Earn)
Self Assessment (SA)
tax deducted 'at source' whereby tax is deducted from bank/building society interest before the interest is paid to you
in some cases, one-off payments

If you're an employee, your employer will deduct tax through PAYE. If you're self-employed, you'll be responsible for filling in a Self Assessment tax return and paying your own tax.

Find detailed information on the ways you pay Income Tax

Paying the right amount of Income Tax

It's important to check that you're paying the right amount of tax. You can do this by checking your:

total taxable income
tax-free allowances and reliefs
current tax code

If you're paying too much tax you can claim this money back. If you think you're paying too little you'll need to contact us to change your tax code.

Find out how to get your Income Tax right

Find out about tax codes

National Insurance

As well as paying Income Tax on your income, you'll also have to pay National Insurance contributions (NICs). NICs build up your entitlement to certain social security benefits, including the State Pension. The amount of NICs that you pay depends on how much you earn and whether you're employed or self-employed. You stop paying NICs when you reach retirement age.

Find out about National Insurance - on the Directgov website

Get information about tax on earnings from employment

Find details of tax on earnings from self-employment