Income Tax is payable on most income earned in a given tax year. It is paid by employees and the self-employed and may also be payable if you aren’t working, for example on income from a pension or savings, providing it exceeds the income allowance band. Follow the link below to see which income is taxable.
Some income is not taxable and this income should be ignored when estimating how much tax is payable. Examples of income which are not taxable include premium bond prizes, housing benefit and child benefit.
If you live in the UK on a day to day basis you are entitled to a basic personal allowance which is set at £12,500 for the 2020/21 tax year, and therefore no tax is paid should your income remain below this level. Where your income exceeds £100,000 in a financial year, your personal allowance will be reduced by £1 for every £2 of income. This reduction will therefore mean that, once your earnings exceed £125,000 in a financial year, you will effectively have a personal allowance of zero.
If you are an employee and are taxed under Pay As You Earn (PAYE), your personal allowances will be spread throughout the year, in order 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 your personal allowances will be taken in to account when your tax bill is calculated after you have sent in your annual tax return or repayment claim.
In addition to personal allowances, income spent on certain expenses (for example professional subscriptions or the cost of tools of your trade) can be deducted when calculating the tax due. This is known as tax relief on outgoings and can reduce the amount of taxable income.
Most taxpayers pay their tax through deductions that are made from their income before they receive it and this is called deduction at source, for example PAYE. Self-employed individuals will have to pay tax to HMRC direct through the system of Self Assessment where the full liability was not met by deduction at source.
Tax may need to be paid via Self-Assessment, this may happen with the following: