Income tax is a tax you pay on your income, but you don’t have to pay tax on all types of income. You pay tax on things like money you earn from employment or from being self-employed, some state benefits, most pensions, and rental income. You have to earn a certain amount of money in order to pay tax. So how much can you earn tax-free in the UK?
What is income tax used for?
Income tax is a necessary evil.
It is collected from those who earn enough by HMRC on behalf of the government.
Income tax is used to fund public services like the NHS, education, and the welfare system.
It is also put towards improving and maintaining public projects like roads, rail and housing.
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How much Income Tax will I pay this year?
How much Income Tax you pay in each tax year depends on:
- how much of your income is above your Personal Allowance
- how much of your income falls within each tax band
Check your Income Tax for the current year here.
What is the tax-free personal allowance?
The tax-free personal allowance determines how much can you earn tax free in the UK.
This tax year (from April 6, 2020 until April 4 2021) the Personal Allowance has risen up to £12,500.
This means those who earn this amount or less pay no tax.
If you earn the Basic rate, between £12,501 and £50,000, 20 percent of your taxable income will be taken to pay Income Tax.
If you earn between £50,001 and £150,000, 40 percent of your taxable income is spent on Income Tax.
Anyone who earns the additional rate of more than £150,000 will have to give 45 percent of it to HMRC.
The income tax bands are different if you live in Scotland- find them here.
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- Income tax calculator: How much can you earn before paying tax?
What is the tax-free personal allowance?
On April 6, 2020, the standard Personal Allowance increased to £12,500.
If you earn this amount or less, you do not have to pay income tax.
The amount of tax you pay can also be reduced by tax reliefs if you qualify for them.
You also have tax-free allowances for savings interest, and dividends if you own shares in a company.
You may have tax-free allowances for your first £1,000 of income from self-employment.
This is called your your ‘trading allowance’.
You may also have tax-free allowances for your first £1,000 of income from property you rent (unless you’re using the Rent a Room Scheme).
How do you pay Income Tax?
Most people pay tax income through PAYE, which stands for Pay As You Earn.
PAYE is the system your employer or pension provider will use to take Income Tax and National Insurance contributions before they pay you.
Your tax code will tell them how much Income Tax to take.
Find out your tax code here.
Your tax code can take account of taxable state benefits, so if you owe tax on them it is usually taken automatically from your other income.
If the State Pension is your only income, HMRC will write to you if you owe Income Tax.
You might need to fill in a Self Assessment tax return.
What are Self Assessment tax returns?
If your finances are more complex, you might pay Income Tax and National Insurance through Self Assessment.
This is common for those who are self-employed or have a high income.
This needs to be done at the end of every tax year on April 5.
It can either be filed online or filled out and sent in the post.
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