What is Income Tax in the UK?

Income tax is the mode by which the personal income of an individual is taxed in the UK. In order to make personal income taxable, a part or proportion of it is taken from the same purpose out of the earnings of an individual in a financial year. This tax is collected by HMRC (HM Revenue and Customs) and is then listed in their treasury.

Earlier, Inland Revenue was responsible for the collection of income taxes, but HMRC has been doing the honors since April 2005. Also, this has led to the amalgamation of Inland Revenue Departments with the HM Customs and Excise Departments, and together they formed the current HMRC or HM Revenue and Customs.

The common type of earnings that are subjected to income tax in the UK are incomes from employment, earnings from self-employment, incomes from the pensions after retirement, profit generated from the businesses, income gained from the properties, interest received on the savings, dividend income on the various investments, allowances, and bonuses.

Income tax in the UK is the tax where deductions are made at source, which means at the point where income is credited but not transferred to the concerned person and is thus, also known as tax deducted at source. The paying authority or the employer is the person who deducts the tax at the source and then passes it over to the HMRC before it reaches the person entitled to such income.

But in the scenario where an individual is self-employed, he has to make deductions in the income by paying to the tax authorities as he assesses his income and tax liabilities. There are other types of earnings that are exempted from being taxed and include income from various means-tested benefits, pension contributions made by the employer or the employee, income from student grants, loans, scholarships, income from a specific type of saving products like Individual Savings Accounts, etc.

Residents of the UK have the facility to gain or received a specific amount of taxable income in each financial year that cannot be taxed or is tax-free. Such a type of allowance is known as a personal allowance and the Blind Person’s Allowance may also be allowed for this facility for the registered blind people by adding it to their personal allowance.

For the people under the age of 65, the income tax personal allowance, also considered as the amount you can earn before paying tax got extended to £9,440 in April 2013. On the other hand, for the people above the age of 65, allowance concerning the same are the same as they were in April 2013 since they got stabilize right at that point. Also from the year 2014-15, taxpayers will get a new personal tax statement where enlisted will be information regarding the amounts paid on Income Tax and National Insurance and the type of spending being made from such money.

Categories for the income tax rates in the UK

The tax year from which the income is to be taxed begins from April 6 to the April 5 of the following year. However, the percentage of tax rates or the bands for the taxable income can be changed each year. You may be having an income that is not liable for taxation under a certain band or are even liable for allowance, for that you have to go through the information provided for such purposes on the government’s site.

Here is how your income is categorized for the purpose of paying taxes each year.

Personal allowance– A personal allowance is a type of tax-free income that most taxpayers get. There is a certain amount of tax-free allowance, which is for now is £12,500.

Basic rate– The basic rate on the taxable income is 20% for the range of income taxable up to £50,000. This tax bar applies to countries such as England and Wales. But in countries like Scotland, this basic tax rate can slightly vary as 19%, 20%, and 21% for an income taxable up to £43,430.

Higher rate– If you are having taxable income crossing the basic range of £50,000, then the tax rate percentage will go up to 40%, the income tax to be deducted from the taxable income ranging between or on the amount £50,000 to £1,50,000 (Note: This is the taxable income range if you are residing in Wales or England). In case you are a resident of Scotland, then the taxable income range for you will go up to 41% on the income exceeding the limit and is between £43,430 up to £150,000.

Additional rate– Additional rates for the taxable income for the residents of England or Wales having income more than £150,000, is 45% for the amount exceeding this range. It means that you have to pay an additional rate of 45% on your taxable income in case your income exceeds £150,000. For the residents of Scotland, the same type of additional rate on the amount of taxable income is 46%.

About the Personal Saving Allowance

Most of the taxpayers can get some income on their savings without having to pay the taxes for the same. For instance, for the basic rate taxpayer category, you can make up to £1,000 on your savings that are going to be tax-free. And for the higher tax rates payers, such amount comes down to £500. Such type of limited amount of allowance on savings is termed as Personal Savings Allowance.

In case you are having your taxable income of £17,500 or less than that, then you won’t be required to pay any type of tax on the income from your savings.

Other allowances

Apart from it, you can get tax-free allowances for the following:

  • Saving interest
  • Dividends, in case you have shares in a company

You may also get tax-free allowances for:

  • Allowance on your first £1,000 earned if you are self-employed and this is registered as a trading allowance
  • The first £1,000 income earned on the rented property unless the same property is coming under a scheme

You can also go to the UK government site to find out whether you are eligible for the trading and property allowances. You have to pay tax on the interests, dividends, or other incomes besides the allowances. You can also get or claim other income tax reliefs provided you are eligible for them and that you have to check.

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