Income Tax was introduced during the
Napoleonic Wars as a temporary wartime measure and has remained
with us ever since. Few people would admit to liking Income Tax
but we all want to benefit from the services
that governments provide and pay for using Income Tax.
Income Tax allowances
Almost everyone is allowed to earn a certain amount of money on which they do not have to pay Income Tax. This is called your personal allowance. There are also allowances that only some people receive.
Allowances change each year because the Government normally increases them by the rate of inflation and sometimes changes the way they are calculated.
There are several different Income Tax allowances. The main ones are:
- Taxpayers earning less than £100,000 receive an individual allowance which in 2010/11 is £6,475. (£6,475 for 2009/10)
- For those with an income of more than £100,000, personal allowances are reduced by £1 for every £2 of income above the limit until they reach zero.
- Personal allowance for people aged 65 to 74: older taxpayers
aged between 65 to 74 receive a slightly larger
personal allowance which in 2010/11 is £9,490.
(£9,490 for 2009/10)
- Personal allowance for people aged 75 and over: older taxpayers
aged 75 or over receive a slightly larger personal
allowance which in 2010/11 is £9,640.
(£9,640 for 2009/10)
- Over the age of 65, people on lower incomes have increased Personal Income Tax Allowances so that they will pay less Income Tax. The amount of these allowances varies depending on whether you are married or not and exactly what age you are. If your income exceeds a specified amount, the allowance will be reduced by £1 for every £2 that your total income exceeds the limit so that, for people on higher incomes, the allowance eventually reduces back to the normal Personal Allowance.
Blind Person's Allowance
This is an additional allowance for people who are registered
blind with their local authorities. In 2010/11 this allowance
is £1,890 (£1,890 for 2009/10)
Married Couple's Allowance
To claim married couple’s allowance you need to be living as a married couple or as civil partners and at least one of you must have been born before 5 April 1935. It only applies if you pay tax. In 2010/11, the minimum amount is £2,670 and the maximum amount £6,965.
The more you earn the more Income Tax you pay. There are three taxable bands:
- Basic Rate 20% - you pay 20% on your earnings up to £37,400
- Higher Rate 40% - you pay 40% of everything you earn over £37,400
- Additional rate 50% - on everything you earn over £150,000.
The bands determine how much you pay after your personal allowance has been deducted. To learn how your tax is calculated visit the Wages from an employer page.
Some people are eligible for Tax credits, which are payments from the Government.
- Working Tax Credit
Working Tax Credit is a means-tested allowance that is paid to you through your wages. You are entitled to it if you are in employment and if you meet certain conditions. It depends on how much money
you have coming into your household each year whether you are
entitled to this tax credit or not. If you are entitled to this tax credit the amount also depends on your annual household income. See our Working Tax Credit page for more details.
Income tax is paid in different ways depending on whether you are an employee or you work for yourself.
Pay As You Earn (PAYE)
If you are an employee it is your employer’s responsibility to deduct the right amount of Income Tax from your wages throughout the year and pass it on to HMRC, which is the part of the Government that is responsible for collecting taxes. This system of collecting tax is known as PAYE, which stands for Pay as You Earn.
HMRC sends your employer a tax code for you. This tells your employer how much tax to deduct from your wages.
- You tax code is a number such as 489, which is usually followed by a letter, for example 489L.
- The number represents the total amount of money you can earn before paying tax. To work out how much you can earn you need to multiply your code by ten so that a code of 489 means you can earn £4890 before paying any tax on the remainder of your earnings.
- The letter shows how the number should be adjusted following any changes to allowances. For example, L shows that you are eligible for the basic Personal Allowance.
- For more information on tax codes see Directgov.
See Wages from an employer in Where Money Comes From for more information
If you are self-employed (which means you work for yourself), you need to deduct tax from the money you are paid and pass it on to the Government yourself. HMRC will ask you to complete a form describing your income. This is called Self Assessment. To find out more about Self Assessment, see Directgov.