What is income tax?
Income Tax is a tax you pay on your income. You do not have to pay tax on all types of income.
Most people in the UK get a Personal Allowance of tax-free income. This is the amount of income you can have before you pay tax
You pay tax on things like:
- Money you earn from employment
- Profits you make if you’re self-employed – including from services you sell through websites or apps
- Some state benefits
- Some grants, including the Self-Employment Income Support Scheme, the Small Business Grant Fund, the Retail, Hospitality and Leisure Grant Fund, the Coronavirus Job Retention Schemeand the Test and Trace Support Payment
- Most pensions, including state pensions, company and personal pensions and retirement annuities
- Rental income (unless you’re a live-in landlord and get less than the rent a room limit)
- Benefits you get from your job
- Income from a trust
- Interest on savingsover your savings allowance
How you pay Income Tax
Pay As You Earn (PAYE)
Most people pay Income Tax through PAYE. This is the 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 your employer how much to deduct.
Tax on state benefits
Your tax code can take account of taxable state benefits, so if you owe tax on them (for example for the State Pension) it’s usually taken automatically from your other income.
If the State Pension is your only income, HM Revenue and Customs (HMRC) will write to you if you owe Income Tax. You may need to fill in a Self-Assessment tax return.
Self-Assessment tax returns
If your financial affairs are more complex (for example you’re self-employed or have a high income) you may pay Income Tax and National Insurance through Self-Assessment. You’ll need to fill in a tax return every year.
You must also fill in a tax return if you earned more than either:
- £1,000 from self-employment
- £2,500 from other untaxed income, for example from tips or renting out a property