Making up to 30% of the total government revenue, income tax is the largest source of income followed by National Insurance contributions which are around 20%. According to the law, every person needs to pay a tax on their income, but there is also an income tax personal allowance which for the tax year 2014 – 2015 is of £10,000 for income of less than £100,000 of under-65s. Incomes above the personal allowance are taxed using a number of bands:

Rate Dividend income Savings income Other income (inc employment) Tax Bracket (of income above tax-free allowance)
Basic rate 10% 20% 20% £0 – £31,865
Higher rate 32.5% 40% 40% £31,866- £150,000
Additional rate 37.5% 42.5% 45% Over £150,000

Even if the income tax applies to a variety of income categories, it doesn’t apply to all of them.

  • money that you earn from being employed and profits you make as self-employed
  • some types of state benefits
  • pensions such as state pensions, company and personal pensions and retirement annuities
  • interest you earn on savings and pensioner bonds
  • income from rentals (unless you’re a live-in landlordand get £4,250 or less)
  • money obtained from a trust and dividends obtained from company shares
  • income obtained from tax-exempt accounts (e.g. Individual Savings Accounts (ISAs), National Savings Certificates)
  • some types of state benefits
  • premium bond or National Lottery wins
  • the first £4,250 of rent you get from a lodger in your home
  • Income Tax allowances and reliefs

Most people living in the UK benefit from a Personal Allowance of tax-free income which is the amount of income they can have before they pay tax and they can also benefit from tax reliefs if they qualify for them.

Pay As You Earn (PAYE)

The PAYE system is used by most people to pay their Income Tax and it is the system used by employers or pension providers to take Income Tax and National Insurance contributions before they pay employees wages or pension.

The tax code is used to tell your employer how much to deduct and it takes account of state benefits, so if you owe tax the money will be usually taken automatically from other incomes.

Self-Assessment tax returns

If you are self-employed, have a high income or your financial affairs are in any other way more complex than the average you may choose to pay Income Tax and National Insurance through Self-Assessment, for which you will need to fill in a tax return form every year.

Income that’s not automatically taxed

If you have untaxed income of over £2,500 or you don’t pay tax through wages or pension you must fill in a tax return form. In case it is less than £2,500, you should contact Income Tax helpline.