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Income Tax Explained: How much tax should I pay?

Tamires Criscio
Tamires Criscio
  | Edited by Tom Church
Updated 26th April 2021

Aren’t you sure about how much tax you are going to pay? Latest Deals is here to help you to find out what you need to know about income tax. Now it will be much easier to know how much tax you should pay and how.

Aren’t you sure about how much tax you are going to pay? Latest Deals is here to help you to find out what you need to know about income tax. Now it will be much easier to know how much tax you should pay and how. 

What is income tax? 

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Income tax is a type of tax you need to pay on your income. Your income is any money you receive on a regular basis via work or other ways, such as investments like rentals. In the UK, some types of income are tax-free. Find what is taxable income and what is tax-free income below:

Taxable income Tax-free income 
Money you earn from employment.The first £1,000 of income from self-employment. 
Profits you make if you’re self-employed - including from services and products you might sell.The first £1,000 of income from property you rent, with exceptions.
Some state benefits, for example, state pension. Income from tax-exempt accounts, like Individual Savings Accounts (ISAs).
Some grants, for example, Self-Employment Income Support Scheme. Dividends from company shares under your dividends allowance.
Most pensions other than state pension, such as company pension and personal pension. Some state benefits, for example, pension credit, universal credit and child benefit. 
Rental income, with exceptions. Premium bond or National Lottery wins.
Benefits you get from your job.Rent you get from a lodger in your house if you make less than £7,500 per year with the rents.
Income from a trust.
Interest on savings over your savings allowance.

Even with this table, it can be confusing to know for sure if you need to pay tax on a different type of income. To find out if you need to pay tax or not, you can use this page. This is the best way to make sure you are paying your income tax correctly and avoiding any problems in the future. 

Who pays income tax in the UK?

Everyone that is making more than £12,570 per year (Personal Allowance which is tax-free) needs to pay income tax in the UK. The average income in the UK is around £29,900 per year, so most people pay income tax. 

What is Income Tax used for?

In the UK, HM Revenue & Customs is responsible for collecting Income Tax. This is used for public services such as the NHS, education, housing, roads and rails, public projects and much more. 

How is decided how much tax is paid in the UK? 

Usually around March, the government releases a budget for that following year. In this document is decided how much tax will be paid during that period. This document can change tax rates, and personal allowances, for example. You can learn more about this year’s budget here. 

IMPORTANT NOTE: At the moment, this guide is updated with the current numbers for the year of 6th of April 2021 to the 5th of April 2022. 

How much is income tax? 

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The amount of money you will need to pay for income tax depends on two things. First, how much of your income is above your Personal Allowance. Secondly, how much of your income falls within each tax band.

Understanding Personal Allowance

At the moment, during the current tax year, the Personal Allowance is £12,570, which is the amount of income you do not have to pay tax on. This can change depending on your circumstances. If you claim Marriage Allowance or Blind Person’s Allowance, you can increase your Personal Allowance. If your income is over £100,000, your Personal Allowance is decreased. 

IMPORTANT NOTE: You do not get a Personal Allowance on taxable income over £125,140.

Understanding Income Tax Bands

Depending on how much is your income, you will fall into a different band and therefore a different tax rate. The maximum tax rate in the UK is 45% of the annual income, and the minimum tax rate is 20%. Most people in the UK pay 20% on income taxes. 

Band Taxable Income Tax Rate 
Personal AllowanceUp to £12,5700%
Basic rate£12,571 to £50,27020%
Higher rate£50,271 to £150,00040% 
Additional rateover £150,00045%

IMPORTANT NOTE: If you don’t live in England, the amounts can change. Also, if your salary falls between bands, in the 2021-22 tax year, the first £37,700 above your personal allowance will be taxed at 20%. 

How to calculate income tax? 

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There are many online tools that can help you calculate your income tax, but you can also use this page ‚ÄúEstimate your Income Tax for the current year‚ÄĚ. If you are self-employed, you can use this: ‚ÄúBudget for your Self Assessment tax bill if you're self-employed‚ÄĚ.

Examples of how to calculate income tax : How much tax will you pay?

On a £20,000 annual salary

  • The first ¬£12,570 is your personal allowance, tax-free = ¬£0.¬†
  • You then pay the basic rate of 20% on the rest of your income (¬£7,430) = ¬£1,486
  • In total then, you pay tax of ¬£1,486.

IMPORTANT NOTE: You also need to take into account the National Insurance which will be discounted. If you make £20,000 per year, you will pay £1,486 on income tax. 

On a £60,000 annual salary

  • The first ¬£12,570 is your personal allowance, tax-free = ¬£0.¬†
  • You then pay the basic rate of 20% on ¬£37,700 = ¬£7,540
  • Then you pay the higher rate of 40% on the remaining taxable income (¬£9,730) = ¬£3,892.
  • In total then, you pay tax of ¬£7,450 + ¬£3,892 = ¬£11,432

IMPORTANT NOTE: You also need to take into account the National Insurance which will be discounted. If you make £60,000 per year, you will pay £11,432 on income tax. 

On a £160,000 annual salary 

  • First, you don‚Äôt get a personal allowance because your taxable income is higher than ¬£125,140.
  • You then pay the basic rate of 20% on ¬£37,700 = ¬£7,540
  • Then you pay the higher rate of 40% on the remaining taxable income up to ¬£150,000 (¬£112,300) = ¬£44,920
  • Then you pay the additional rate of 45% on the remaining taxable income (¬£10,000) = ¬£4,500.
  • In total then, you pay tax of ¬£7,540 + ¬£44,920 + ¬£4,500 = ¬£56,960

IMPORTANT NOTE: You also need to take into account the National Insurance which will be discounted. If you make £160,000 per year, you will pay £56,960 on income tax. 

The higher your income, the more complex the calculation is. You can fit in more than one band and therefore be charged at different tax rates. You can also use The Salary Calculator. 

When do you need to pay income tax?

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In the UK, a tax year starts from April to April. The current tax year is from 6th April 2021 to the 5th April 2022. Depending on the type of income, either you will pay monthly (or how often you get paid) and automatically as it’s discounted from the amount before it even reaches your bank account, or you will pay annually, taking into account the full amount earned that year. In the first case, you don’t need to do anything as it’s done for you. In the second case, you will need to submit your information to know how much you need to pay. 

Pay As You Earn (PAYE) - monthly payments 

PAYE is a system your employer or pension provider uses to take Income Tax and National Insurance contributions before they pay your wages or pension. Your tax code tells how much to deduct. Depending on the tax code the deductions can vary. 

Self Assessment tax returns - yearly payments 

If you are self-employed or have more than one source of income such as freelance work and rentals, you will need to pay Income Tax and National Insurance through Self Assessment. If you make more than £1,000 from self-employment and £2,500 from other untaxed income, you are required to fill a tax return. 

IMPORTANT NOTE: If you have a full-time job and extra sources of income, you will be paying your income tax using both ways. 

Paying less Income Tax with Tax reliefs 

Depending on your circumstances, you can pay less income tax with tax reliefs. You can get tax relief if you donate to charity or have work expenses, for example. 

If you are self-employed, you can claim what you spend to run your business. 

If you are employed, you can claim what you spend to be able to do your job, such as travel fees, uniforms and courses.

Paying for National Insurance

If you are employed, you and your employers need to pay for National Insurance. These payments are collected to help you build your state benefits. 

In the UK, for the year of 2021/2022, you start paying for National Insurance once you earn more than £184 a week). You will pay 12% of your weekly earnings between £184 and £967. For everything else above £967, you will pay 2%.

National Insurance also has different categories, so depending on your category letter, you will be charged differently. Check them out here.

IMPORTANT NOTE: You also need to payNational Insurance if you are self-employed.

FAQ 

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