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Paying taxes has always been a confusing topic for taxpayers. Here is a guide to help you out with all the basics of income tax in the UK that you should know.
Introduction
Income tax is a mandatory tax that is applied to your personal income. It is paid if your income is more than your personal allowance. Hence, you will be required to pay tax on several sources of your income. These include:
- Salaries from jobs or revenue generated from self-employment
- Pensions
- Income from renting a property
- Employment benefits
- Interest on your bank savings
- Benefits from a trust
You ought to file a self-assessment tax return if you generate income from any of the sources mentioned above.
However, some sources of income are exempt from any taxes. These sources include national savings certificates, working tax credits, premium bonds, income from tax-exempt accounts, for instance, Individual Savings Accounts (ISAs).
How much Income tax do you need to pay?
Income tax rates depend on your income tax brackets. Generally, people receive a personal allowance of tax-free income. There are three categories in which you need to pay the income tax on your personal income. These include basic rate, higher rate and additional rate.
Basic rate: If your taxable income is up to £34,370, you are entitled to pay the income tax at the basic rate of 20 per cent on your income.- Higher rate: If your taxable income falls between £34,370 and £150,000, you are entitled to pay the taxes at the higher rate of 40 per cent on your income.
- Additional rate: If you have a taxable income of over £150,000, you are entitled to pay the income tax at an additional rate of 50 per cent on your income.
How much amount do you need to pay as income tax in the UK?
There are two methods to pay your income tax in the UK. These include PAYE, i.e. pay as you earn and Self-assessment.
- PAYE: PAYE tax refers to the income tax directly reduced from your salary. The amount of tax to be paid is calculated based on your earnings along with the personal allowance you receive. If your earnings are greater than the personal allowance, you will be charged at the basic rate, higher rate and additional rate, i.e. 20 %,40% or 60%, respectively.
- Self-assessment: If you earn through self-employment, you need to pay the income tax return by self-assessment. You also need to fill out the self-assessment tax return if you have other sources of income, including payments from renting out a property, grants like COVID-19 grant or any other support payments, tips and commission, savings interest or foreign income. These sources of income must be informed to HMRC by filing a self-assessment tax return.
At what age do you start paying Income tax in the UK?
Children aged under 18 are allowed to earn up to a tax-free year if they earn less than the tax-free allowance. Children ought to pay the tax irrespective of their age if they earn anything more than £1000 in a tax year.
If any child’s income is more than a specific income threshold, he needs to register himself with HMRC. The registration form is available on the online portal of Her Majesty’s Revenue and Customs.
Children generally have the following sources of income. They are
- Earning from employment
- Revenues generated from self-employment
- Interest on bank savings or dividends on shares
Moreover, children below the age of 18 receive benefits from the annual Capital Gains Tax Exemption. Children below 18 years of age can earn a tax-free year by the investment in Junior ISAs. However, they cannot withdraw the amount until they attain 18 years of age.
How much can a child earn tax-free?
A child can earn up to £1000 tax-free within a tax year. He can avail of this benefit through the trading income allowance.
The children are allowed to earn a profit of £12,570 tax-free within a tax year. This rule is the same for every UK resident. However, if the child starts earning over the tax-free amount, he is entitled to pay the income tax according to the basic rate, higher rate or additional rate. These are listed below.
- Basic rate: Your income tax will be charged at the basic rate of 20 per cent on your profits if it exceeds £12,570 but are less than £50,270.
- Higher rate: Your income tax will be charged at a higher rate of 40 per cent on your profits if it exceeds £50,271 but are less than £150,000.
- Additional rate: Your income tax will be charged at an additional rate of 45 per cent on your profits if it exceeds £150,000.
However, you would have to pay the National Insurance only if you are above the age of 16 and you earn over the tax-free threshold, or your weekly earning exceeds more than £183. The list of national insurance rates is provided below.
- Class 2 National Insurance: If you earn a profit of over £6,515 per year, you are liable to pay the national insurance at a weekly rate of £3.05
- Class 4 National Insurance: If you earn a profit of over £9,658 but less than £50,270 per year, you are liable to pay the national insurance at a rate of 9 per cent on your profits.
However, if your profit exceeds over £50,270, you are liable to pay the national insurance at a rate of 2 per cent on your profits.
When do you have to pay the income tax in the UK?
- You have to pay the income tax if your average monthly earning is more than £1042 or your weekly earning is more than £184. The income tax is deducted automatically from your monthly or weekly salaries by the employer. However, if you are self-employed, you are required to pay the income tax through the self-assessment tax return.
- Every UK resident is allowed to earn up to £12,570 tax-free during a tax year.
