What is Income Tax?
Income Tax is the tax paid on income from employment, as well as tips and commission, self-employment, some state benefits, most pensions (including state pensions, company and personal pensions and retirement annuities), renting out property or land, employment benefits such as a company car, trust income, share income and interest on taxable savings.
As long as you do not claim allowable tax expenses, no Income Tax is payable on your first £1,000 of income from self-employment (this is your “Trading Allowance”) or the first £1,000 of property rental income (unless you’re using the Rent a Room Scheme). Moreover, Income Tax is not payable on income from ISAs (Individual Savings Accounts) and National Savings Certificates. Nor is Income Tax payable on share dividend payments that are below the Dividend Allowance (£500 in the 2024/25 tax year) or a long list of state benefits (e.g. Attendance Allowance, Child Tax Credit, etc.).
Most people who work in the UK pay Income Tax through PAYE, the system by which employers or pension providers deduct Income Tax and National Insurance contributions to pay to HMRC they pay on an employee’s wages or pension. The employee’s Income Tax code tells their employer how much tax to deduct.
Self-employed people, members of ordinary business partnerships, those who earn income from tips or commission, those earning taxable income of more than £150,000 a year, people who need to pay the High Income Child Benefit Charge landlords and others pay their Income Tax via Self Assessment, after completing a tax return to report their income. They need to be registered for Self Assessment to pay Income Tax this way.
Income tax can be reduced by tax allowances and reliefs and the amount you pay is determined by which Income Tax band your total taxable income falls into. The higher your income, the more Income Tax you’ll pay.