Income tax

Income tax is a tax on your earnings. How much income tax you pay each year depends on how much of your income is above your Personal Allowance and how much of your income falls within each tax band. Find out more income tax and how to calculate it in our guide.

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Who pays income tax?

The following are liable to pay income tax:

  • Individuals;

  • Partnerships (partners are individually responsible for the tax due on their share of the partnership profits);

  • Personal representatives (who pay the deceased's outstanding income tax during the administration of the estate); and

  • Trustees (who pay income tax on the income produced by the trust fund).

Companies pay corporation tax.

What is the tax year?

Income tax is paid with reference to the 'tax year', which runs from 6 April until 5 April. It is referred to by the calendar years which it straddles, eg the tax year beginning on 6 April 2018 is referred to as the tax year 2018/19.

How much income tax is payable?

When calculating income tax, you will need to work through the following steps:

Calculate your total income

Add together all of your taxable income before tax.

What constitutes taxable income?*

  • Money you earn from employment (including bonuses and commission).

  • Profits you make if you are self-employed (including from services you sell).

  • Taxable social security benefits.

  • Income from renting out property.

  • Pensions.

  • Interest from bank and building society accounts.

  • Income from a trust.

What does not constitute taxable income?*

The following income is not taxable and can therefore, be ignored for tax purposes. You do not have to tell HM Revenue and Customs (HMRC) about income which is non-taxable.

  • Income from tax-exempt accounts, like Individual Savings Accounts (ISAs).

  • The first £5,000 of dividends from company shares.

  • Premium bonds or National Lottery wins.

  • Rent you receive from a lodger that is below the rent a room limit (currently £7,500).

*These lists are not exhaustive. If you're unsure as to whether income is taxable or not, you can always Ask a lawyer.

Deduct any allowable tax relief

Check whether you can claim any tax relief for any payments made during the year. Allowable reliefs remove sums of money from the income tax calculation and apply to:

  • Pension contributions: you can get tax relief on private pension contributions if certain conditions are met.

  • Charity donations: donations to charity from individuals are tax-free (i.e. if they are made through Gift Aid).

  • Maintenance payments: Maintenance Payments Relief reduces your income tax if you make maintenance payments to an ex-spouse or civil partner.

  • Work expenses: you can claim tax relief if you are employed and use your own money for travel or things you have to buy for your job. If you are self-employed (i.e. a sole trader or partner in a partnership), you can get tax relief on what you spend running your business.

When you deduct allowable tax relief from your total (gross) income, the result is your net income.

Deduct any personal allowances

Most people get a Personal Allowance of tax-free income, i.e. the amount of income you can have before you pay tax. This income is tax-free.

  • The standard Personal Allowance for the 2018/19 tax year is £11,850.

  • If your income is over £100,000, your Personal Allowance goes down by £1 for every £2 that your net income is above £100,000. This means your allowance is zero if your income is £127,000 or above.

When you deduct personal allowances from your net income, the result is your taxable income.

Calculate the tax

For the 2018/19 tax year:

  • Taxable income of up to £34,500 should be taxed at 20%. This is the basic rate limit.

  • Taxable income over £34,500 should be taxed at 40%, but only up to the value of £150,000.

  • If you have taxable income over £150,000, then this should be taxed at 45%.

Example: Your net income is £70,000. After deducting your personal allowance (£11,850), your taxable income is £58,150.

  • £34,500 of that £58,500 would be taxed at 20% = £6,900.

  • The remaining £23,650 would be taxed at 40% = £9,460.

  • There is no taxable income over £150,000.

These figures should then be added together, leaving the amount of tax payable. In this example, the tax payable would be:

£6,900 + £9,460 = £16,360

Estimate your income tax for the current year using GOV.UK's webtool.

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