What is Income Tax? How much tax do I pay?
August 10, 2024
We’re here to take the stress out of taxes and help you keep more of your hard-earned money. Income tax has long been a source of confusion for many people in the UK, leading to unnecessary stress. But don’t worry—My Pay Calculator is here to simplify things.
Let’s start with the basics: we’ll explain what income tax is and what types of income are taxable.
Understanding Income Tax
Income tax is a levy on your personal earnings. In other words, it’s the tax you pay on the money you make. Once your income exceeds your personal allowance, you’re required to pay tax on certain types of income, including:
- Earnings from employment
- Pension income
- Interest from savings
- Rental income
- Employment benefits
- Income from a trust
- Self employed profits
- State Benefits
- Backpay and Bonus
While paying income tax is inevitable if you receive income from these sources, you might also need to submit a Self Assessment tax return.
How Do You Pay Income Tax?
There are two main ways to pay income tax in the UK:
- PAYE (Pay As You Earn): Tax is automatically deducted from your salary.
- Self-Assessment: If you’re self-employed or receive income from the sources listed above, you’ll need to file a self-assessment tax return each year.
How Much Is Income Tax?
Most UK residents are entitled to a personal allowance of tax-free income. For the 2022/23 tax year, this allowance is £12,570. Your income tax rate depends on how much you earn (Below figures are for England):
For England, Wales and Northern Ireland
Assuming your tax code is 1257L.
| Taxable Income | Tax Rate | Band |
|---|---|---|
| Up to £12,570 | 0% | Personal Allowance |
| £12,571 to £50,270 | 20% | Basic rate |
| £50,271 to £125,140 | 40% | Higher rate |
| over £125,140 | 45% | Additional rate |
If you have a different tax code, you can use the following table to work out your tax band after removing your personal allowance from your taxable income.
| Taxable Income | Tax Rate | Band |
|---|---|---|
| £0 to £37,700 | 20% | Basic rate |
| £37,701 to £125,140 | 40% | Higher rate |
| over £125,140 | 45% | Additional rate |
For Scotland
Assuming your tax code is 1257L. Please note if you are resident of Scotland, your income from dividends, child benefits, savings interests will still be taxed at England rates.
| Taxable Income | Tax Rate | Band |
|---|---|---|
| Up to £12,570 | 0% | Personal Allowance |
| £12,571 to £14,876 | 19% | Starter rate |
| £14,876 to £26,561 | 20% | Basic rate |
| £26,562 to £43,662 | 21% | Intermediate rate |
| £43,663 to £75,00 | 42% | Higher rate |
| £75,001 to £125,140 | 45% | Advanced rate |
| over £125,140 | 48% | Top rate |
If you have a different tax code, you can use the following table to work out your tax band after removing your personal allowance from your taxable income.
| Taxable Income | Tax Rate | Band |
|---|---|---|
| £0 to £2,305 | 19% | Starter rate |
| £2,306 to £13,990 | 20% | Basic rate |
| £13,119 to £31,091 | 21% | Intermediate rate |
| £31,092 to £62,430 | 42% | Higher rate |
| £62,430 to £125,140 | 45% | Advanced rate |
| over £125,140 | 48% | Top rate |
Click here too see a summary of tax changes from April 2024
Non-Taxable Income
The good news is that not all income is subject to tax. For instance, you don’t need to pay tax on:
- Income from tax-exempt accounts like ISAs
- Some income from self-employment
- Some income from property you rent (rent a room scheme)
- State benefits
- Working tax credit
- Premium bond winnings
- National savings certificates
What your tax code means
Your tax code consists of a combination of numbers and letters.
For most people with a single job or pension, the current standard tax code is 1257L.
| Tax Code | Description |
|---|---|
| ****L | Standard tax-free Personal Allowance |
| ****M | Marriage Allowance: 10% transfer of partner’s Personal Allowance |
| ****N | Marriage Allowance: 10% transfer of your Personal Allowance to partner |
| ****T | Tax code includes calculations for Personal Allowance |
| K**** | You have income that is not being taxed another way and it’s worth more than your tax-free allowance. |
| 0T | Personal Allowance used up or new job without tax code |
| BR | All income taxed at basic rate |
| D0 | All income taxed at higher rate (Intermediate Rate in Scotland) |
| D1 | All income taxed at additional rate (Higher Rate in Scotland) |
| D2 | All income taxed at top rate |
| NT | No tax on this income |