Income tax is a tax you pay on some of your earnings which includes your salary, pensions and profits. The amount of tax you’ll need to pay will depend on your overall income and where you live in the UK. Here, we explain how income tax works, how much you need to pay, and where the money goes.
What is income tax?
Income tax is collected on most of the money we receive, including wages we earn from a job and income from state or private pensions. The government uses taxes to fund public spending.
Some people may also pay tax on benefits they receive through their job – such as a company car or medical insurance – on some state benefits, and also on some interest earned through savings accounts. If you let a property, your rental income may be subject to income tax as well.
The amount of income tax you pay depends on the size of your overall income, and it works differently if you’re self-employed.
How does income tax work?
Income tax is applied to earnings over the personal allowance. This is a sum of money you can earn without having to pay any income tax.
The personal allowance is normally set on a yearly basis. It is usually confirmed in the budget, which typically takes place in the autumn prior to any changes being made.
However, the personal allowance is currently frozen at £12,570 and is set to remain frozen until the 2027/2028 tax year.
The higher-rate income tax threshold – the point at which higher-rate income tax kicks in – also remains frozen at £50,270. and will also stay the same until 2026.
If you earn more than £100,000 a year, your personal allowance will be reduced by £1 for every £2 over that threshold. As such, once you earn £125,140 a year you no longer have the benefit of a personal allowance and all of your income is subject to income tax.
Does everyone pay income tax?
The majority of us will pay tax on any money we earn or are given, but there are some exemptions, including the following:
- the first £1,000 earned if you’re self-employed
- the first £1,000 of rental income if you rent out a property
- if you rent out a room in your home, no tax is paid on the first £7,500 you earn
- any interest earned on savings accounts that are exempt from tax, including individual savings accounts (ISAs)
- dividends earned from company shares, up to a yearly allowance, which is currently £500. However, share dividends can be totally exempt from income tax if they are held within a tax-free wrapper, such as a stocks and shares ISA.
- some state benefits, including child benefit
- money won through Premium Bonds or the National Lottery
How much is income tax?
Income tax in England, Wales and Northern Ireland has three tiers, basic, higher-rate and additional rate. You’ll be charged a different level of interest depending on which bands your income falls into.
From April 2024, the following income tax rates will apply:
- 20% on earnings from £12,570 to £50,270 (basic)
- 40% on earnings from £50,271 to £125,140 (higher rate)
- 45% on earnings over £125,140 (additional rate)
Scotland uses slightly different income tax bands. From April 2024, the following rates will apply:
- 19% on earnings from £12,571 to £14,876 (starter rate)
- 20% on earnings from £14,877 to £26,561 (basic rate)
- 21% on earnings from £26,562 to £43,662 (intermediate rate)
- 42% on earnings from £43,663 to £75,000 (higher rate)
- 45% on earnings from £75,001 to £125,140 (advanced rate)
- 47% on earnings from over £125,140 (top rate)
How do I pay income tax?
The way you pay income tax depends on your employment. Everyone has a tax code that explains how they need to be taxed.
The majority of people pay via Pay As You Earn (PAYE), and this way tax is automatically taken from your wages or pension provider before you receive the rest of the money.
Those who are self-employed and some higher earners pay tax a little differently. They need to fill out a self-assessment tax return once a year and manually make a payment to HM Revenue & Customs (HMRC) for their tax and national insurance.
Where does the money go?
Money collected through income taxes goes to a wide-range of areas of public spending.
In the latest government report, welfare, state pensions, national debt interest, healthcare and education were the areas where the majority of the money went. But tax helps fund other areas including defence, transport, culture, overseas aid and environmental issues.
Dive even deeper
Autumn Budget 2024: What Tax Rises Mean for You
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