Family finances:
Income Tax
The majority of individuals in the UK pay income tax but not all income is taxable. The main forms of taxable income are:
- Earnings from employment and self employment
- Jobseeker’s allowance
- Business profits
- Retirement pensions
- Rental income from property
- Bank and building society interest
- Dividends on shares and distributions from unit trusts
- Most non-means tested benefits
- Some means tested benefits.
Income tax in the UK operates through a system of allowances and income bands. Each individual has a personal allowance which is deducted from their total income before tax to give their taxable income. There are higher allowances for people aged over 65. Taxable income is subject to different tax rates depending on the level of total income. The current tax bands and rates are:
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To add further complication, the basic rate for dividend income is 10% (with a higher rate of 32.5%) and the basic rate for interest is 20%.
The tax bands and allowances are generally increased every year in line with statutory indexation provisions. The increases are announced at the time of the annual Budget.
Most income tax is deducted at source:
- By employers through the PAYE system
- By banks etc before paying over interest.
Many people do not need to do anything further. Those with more complicated affairs, however, such as higher rate tax payers, company directors, and landlords, must fill in a self assessment tax return setting down their income from each source and any tax already paid, plus details of reliefs they are entitled to, so their correct tax liability for the tax year can be calculated.
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Where next?
Within Overview of the UK personal tax system...
Within Family finances
- Managing your paperwork
- Managing your money
- Self assessment and tax returns
- Caring for elderly relatives
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