Income Tax

An Introduction To British Income Tax

In this article about the basics of income tax in the UK we discuss the following popular matters relating to income tax:

  • What income tax is
  • How much is income tax in the UK
  • How much income tax do you have to pay?
  • Do students pay income tax?

What is income tax?

Income tax is the money which is paid to the government to cover the expenses of running the country such as the roads, education, Armed Forces and so on. In the UK, it is administered and collected by HMRC (Her Majesty’s Revenue & Customs).

How much is income tax in the UK?

The amount of income tax you pay in the UK depends on your income, and in which tax bracket(s) this income falls. Apart from extremely high-earners (making over £123,000), everyone in the UK has a Personal Allowance of £11,500 (for the 2018-19 tax year). This means that any money earned under this threshold is completely tax-free.

The basic income tax rate for income  between £11,851 to £46,350 is 20%

The next tax band is for those earning £11,501-£45,000. Taxpayers in this band pay the basic rate of 20% on everything earned over their Personal Allowance. Higher rate taxpayers (with a take-home pay of £45,001-£150,000) pay 40% on any income which falls between these two amounts. Finally, those who make over £150,000 a year pay the Additional Tax Rate of 45%. Some state benefits are taxed (such as pensions). However, others are completely tax-free (like Housing Benefit).

How much income tax do I have to pay?

Apart from the tax on salaries or pensions, British citizens might be taxed on other types of income such as money paid as dividends or interest from savings. Unless you keep savings in a governmental scheme like ISA (which isn’t included), the basic starting rate for interest on savings is £5,000 tax-free. However, the more you earn, the lower this starting rate is.

A man is shown calculating the UK tax free personal allowance he may be entitled to

Unless you take part in the government’s Rent a Room Scheme, the tax-free allowance for money received for renting out property is £1,000 a year. You’re also entitled to a ‘trading allowance’ of £1,000. This covers any additional money you might earn by self-employed/freelance work, selling unwanted belongings, etc. One of the most common reasons people pay too much tax is that they have been given the wrong tax code. For citizens with one source of income (for example, a single pension or a job working for one employee), the tax code is 1185L.

Do students pay income tax?

Many university students supplement their student loan by taking on a part-time job during term-time. Unless they earn over their Personal Allowance of £11,500 a year, they won’t have to pay income tax on the money they make. On the other hand, they won’t be exempt from paying National Insurance if they receive more than £162 a week.

If students work a full-time job only during the university holidays, this probably won’t be enough to take them over the threshold of the Personal Allowance either. In the past, students used to be able to complete a form and be exempt from paying tax. As income tax in the UK is automatically deducted by the employer for all workers using the PAYE scheme, they should now contact HMRC and arrange for the tax to be refunded.

About the author

Megan Walsh

Megan, a former employee of over 20 years in the insurance industry, is devoted to sharing her valuable insights on familymoney.co.uk

Apart from her interest in insurance, Megan also enjoys painting, gardening and keeping up with current affairs.

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