Income Tax

At the risk of stating the obvious - income tax is a tax on income.

However, not all income is taxable and you're only taxed on 'taxable income' above a certain level.

Even then, there are other reliefs and allowances that can reduce your income tax bill - and in some cases mean you've no tax to pay.

What counts as taxable income?

Taxable income includes:

• Earnings from employment
• Earnings from self-employment
• Most pensions income (State, company and personal pensions)
• Interest on most savings
• Income from shares (dividends)
• Rental income
• Income paid to you from a trust

Non-taxable income

There are certain sorts of income that you never pay tax on.

These include certain benefits, income from tax exempt accounts, Working Tax Credit (WTC) and premium bond wins. These income sources are ignored altogether when working out how much income tax you may need to pay.

Tax-free allowances

Nearly everyone who is resident in the UK for tax purposes receives a 'Personal Allowance', which is an amount of taxable income you're allowed to earn or receive each year tax-free. The table below shows tax free allowances for the 2010-11 tax year.

You may be entitled to a higher Personal Allowance if you're 65 or over. If you're registered blind, or are unable to perform any work for which eyesight is essential, you can also claim the tax-free Blind Person's Allowance.

Income Tax is only due on taxable income that's above your tax-free allowances.

Income Tax Allowances Table - 2010-2011

Personal Allowance1	£6,475
Income limit for Personal Allowance	£100,000
Personal Allowance for people aged 65-741 2	£9,490
Personal Allowance for people aged 75 and over1 2	£9,640
Married Couple's Allowance - aged 75 and over2 3	£6,965
Income limit for age-related allowances	£22,900
Minimum amount of Married Couple's Allowance	£2,670
Blind Person's Allowance	£1,890

1. From the 2010-11 tax year the Personal Allowance reduces where the income is above £100,000 - by £1 for every £2 of income above the £100,000 limit. This reduction applies irrespective of age.
2. These allowances reduce where the income is above the income limit - by £1 for every £2 of income above the limit. For the 2008-09 and 2009-10 tax years they will never be less than the basic Personal Allowance or minimum amount of Married Couple's Allowance. However, from the 2010-11 tax year the Personal Allowance for people aged 65 to 74 and 75 and over can be reduced below the basic Personal Allowance where the income is above £100,000.
3. Tax relief for the Married Couple's Allowance is given at the rate of 10 per cent.

Allowances and reliefs that can reduce your Income Tax bill

If you're due to pay income tax, there are a number of deductible allowances and reliefs that can reduce your tax bill. These include:

Married Couple's Allowance - the husband, wife or civil partner has to be born before 6 April 1935

Maintenance Payment relief - either you or your former spouse or civil partner must have been born before 6 April 1935

Unlike the tax-free allowances, these aren't amounts of income you can receive tax-free. Rather they're amounts that can reduce your tax bill.

Tax allowances and reliefs for employees or directors

If you're an employee or director you might be able to get tax relief for business expenses you've paid for.

Tax on company benefits

If you're employed and you receive non-cash benefits from your employer you will have to pay tax on them.

Benefits that you might have to pay tax on include:

• Company cars or vans
• fuel provided for your vehicle
• Medical insurance
• Living accommodation
• Loans at low interest rates

How much Income Tax you pay

After your allowable expenses and any tax-free allowances have been taken into account, the amount of tax you pay is calculated using different tax rates and a series of tax bands.

Income Tax Rates and Taxable Bands - 2010-11

Starting rate for savings: 10%*	£0-£2,440
Basic rate: 20%	£0-£37,400
Higher rate: 40%	£37,401-£150,000
Additional rate: 50%	Over £150,000

Because the rate of Income Tax you pay on savings is worked out after any non-savings income has been taken into account, if your non-savings income is less than the starting rate for savings limit (£2,440) - or if savings and investments are your only source of income - your savings income will be taxed at the 10 per cent starting rate up to the limit. But if you already have non-savings income which takes you above the starting rate, all of your savings will be taxed at the 20 per cent basic rate.

Remember, the tax band applies to your income after your tax allowances and any reliefs have been taken into account - you're not taxed on all of your income.

'Non savings income' includes income from employment or self-employment, most pension income and rental income.

'Dividends' means income from shares in UK companies.

Savings and dividend income is added to your other taxable income and taxed last. This means you pay tax on these sorts of income based on your highest Income Tax band.

How you pay Income Tax

Income Tax is collected in different ways depending on the type of income and whether you're employed, self-employed or not working. The different ways Income Tax is collected include:

• PAYE (Pay As You Earn)
• Self Assessment
• Tax deducted 'at source' whereby tax is deducted from bank/building society interest before the interest is paid to you in some cases, one-off payments

If you're an employee or you receive a company or private pension, your employer or pension provider will deduct tax through PAYE.

If you're self-employed, you'll be responsible for filling in a Self Assessment tax return and paying your own tax.

Paying the right amount of Income Tax

It's important to check that you're paying the right amount of tax. You can do this by checking your:

• Total taxable income
• Tax-free allowances and reliefs
• Current tax code (if relevant)

If you're paying too much tax you can claim this money back. If you’re an employee or you receive a company or personal pension and you think you're paying too little tax you'll need to contact us to change your tax code.

National Insurance

As well as paying income tax on your income, you'll also have to pay National Insurance contributions. National Insurance contributions build up your entitlement to certain social security benefits, including the State Pension.

The amount of National Insurance you pay depends on how much you earn and whether you're employed or self-employed. You stop paying National Insurance contributions when you reach retirement age.

For much more information visit the HMRC website

 

Club50! is not responsible for the content of external sites.