So, everyone has heard of this tax, but how many truly understand what it involves, and what they pay as part of their earnings? Well, let’s find out. Here is income tax explained.
Income Tax Explained – Definition
Uniquely, this form of tax is a type of tax that UK taxpayers pay on their earnings to the government. Additionally, the state may tax you on additional sources of income, such as dividends and interest from savings over a certain level, in addition to your personal income. So, this page will explain what it is, how it is calculated, and what the tax rates in the United Kingdom are.
The government’s main source of revenue is this tax, which HM Revenue & Customs (HMRC) collect on their behalf. They use the money they receive to pay public services such as the NHS, education, and the welfare system. However, this money is also used towards public initiatives like road development, trains, and housing.
Income Tax Explained – Who Pays It?
Most sources of income are subject to income tax, including your salary, business profits, pensions, and even the rent you collect as a landlord. Additionally, corporations, estates, and other sorts of businesses must also pay taxes on their earnings too.
Moreover, because most persons qualify for one or more types of tax-free allowances or tax relief, you may not have to pay this tax on all of your earnings. Thus, the amount of taxable income you can earn before paying income tax is known as an allowance (more on that below).
How Much Will You Pay?
Firstly, different bands exist that define what you must pay. So, your tax will be calculated according to the bracket you fit into, defined by earnings. The more your income, the higher your tax bracket, which means you’ll pay more tax. Income tax bands are intended to make taxation as equitable as possible for everyone, with the highest earners contributing the most.
| Personal allowance | £0 – £12,570 | 0% – No income tax payable |
| Basic rate | £12,571 – £50,270 | 20% |
| Higher rate | £50,271 – £150,000 | 40% |
| Additional rate | Over £150,000 | 45% |
Benefits That Avoid Tax
Tax-free state benefits are benefits that you can earn without having to pay tax. Hence, the following are the most common state benefits that aren’t taxed:
- Attendance allowance
- Bereavement support payment
- Child benefit
- Child tax credits
- Income-related employment and support allowance
- Industrial injuries benefit
- Lump-sum bereavement payments
- Maternity allowance
- Pension credit
- Personal independence payment
- Severe disablement allowance
- Universal credit
- War widow’s pension
- Winter fuel payments and Christmas bonus
- Working tax credit
- Disability living allowance
- Guardian’s allowance
- Housing benefit
- Income support
Conversely, please note that the government taxes some state benefits, such as jobseeker’s allowance and your state pension. Thus, you should include them should you need to complete a self-assessment tax return.
