UK Income Tax is a tax on your profits. When you earn more than your personal allowance, you must pay tax on the following sources of income:
- Employment
- Trust
- Rental
- Pension
- Savings interest
- Employment benefits
Normally, you do not pay Income Tax on all of your taxable income. This is due to the fact that most people are eligible for one or more allowances.
An allowance is a certain amount of otherwise taxable income that you can earn each year.
How do I pay UK income tax?
If you work, income tax (and national insurance) will be taken automatically through the Pay As You Earn (PAYE) system. You are not required to do anything; your employer will handle it. If you work for yourself, you pay the same rate as everyone else, except it’s paid a year in advance through a self-assessment tax return. Additionally, you will pay twice a year through ‘payments on account,’ which is a payment towards the upcoming year’s tax. These payments are dependent on the tax bill from the previous year. Self-employed individuals must be aware of what they will owe so they have time to save money for their tax payments.
Income is taxed regardless of whether you work full-time or part-time. Employees who switch to part-time hours with the same employer should not need to take any action as long as their PAYE code is accurate. This is because the system automatically recalculates the tax throughout the year.
If you change jobs or hours, it’s essential to keep an eye on your tax code. HMRC can check your tax code. If you’re unsure, it’s worth phoning to ensure you have the right one. Even a minor error can lead to over or underpaying.
Who pays income tax?
Employees and self-employed people must pay income tax on earnings above the personal allowance.
Everyone receives a personal allowance. After your earnings exceed £100,000, your allowance is cut by £1 for every £2 earned beyond that threshold, until it hits £0. So, if you make £125,000, you must pay income tax on the entire amount and there is no tax-free allowance.
Anyone who is deemed a resident of the United Kingdom is required to pay income tax. Non-residents’ income earned in the UK, such as rent or investment income, is automatically taxed.