Understanding UK government income tax is essential for all taxpayers in the United Kingdom. Income tax is a tax levied on the income of individuals and businesses in the UK. The tax is collected by HM Revenue and Customs (HMRC) and is used to fund public services such as healthcare, education, and infrastructure. In this comprehensive guide, we will explore the different aspects of UK government income tax and provide taxpayers with a better understanding of how it works.
What is Income Tax?
Income tax is a tax levied on the income of individuals and businesses in the UK. The tax is calculated based on the amount of income earned in a tax year, which runs from 6 April to 5 April the following year. The amount of income tax paid depends on the individual’s income, with higher earners paying a higher rate of tax.
How is Income Tax Calculated?
The amount of income tax paid is calculated using a system of tax bands and rates. The current tax bands and rates for the 2021/22 tax year are as follows:
- Personal Allowance: £12,570
- Basic Rate: 20% on income between £12,571 and £50,270
- Higher Rate: 40% on income between £50,271 and £150,000
- Additional Rate: 45% on income over £150,000
For example, if an individual earns £40,000 in the tax year 2021/22, they would pay 20% tax on the amount earned between £12,571 and £40,000. This would result in a total income tax bill of £5,086.
What is the Personal Allowance?
The personal allowance is the amount of income an individual can earn before they start paying income tax. The current personal allowance for the 2021/22 tax year is £12,570. This means that an individual can earn up to £12,570 before they start paying income tax.
What is National Insurance?
National Insurance is a separate tax that is paid by individuals and businesses in the UK. It is used to fund state benefits such as the state pension, unemployment benefits, and maternity pay. National Insurance is calculated based on the individual’s earnings and is paid in addition to income tax.
Who Needs to Pay Income Tax?
Most individuals who earn an income in the UK are required to pay income tax. This includes employees, self-employed individuals, and those who receive income from investments or rental properties. The amount of income tax paid depends on the individual’s income and tax status.
Employed individuals have income tax deducted from their pay by their employer through the PAYE (Pay As You Earn) system. The amount of income tax deducted is based on the individual’s tax code, which is calculated based on their personal allowance and any other income they may have.
Self-employed individuals are responsible for calculating and paying their own income tax. They are required to register with HMRC and submit a self-assessment tax return each year. The tax return calculates the amount of income tax owed based on the individual’s income and expenses.
Individuals who receive income from investments such as dividends or interest are required to pay income tax on this income. The amount of tax paid depends on the individual’s total income and tax status.
How to Pay Income Tax
There are several ways to pay income tax in the UK. The most common methods are:
- PAYE: Income tax is deducted from an individual’s pay by their employer through the PAYE system.
- Self-Assessment: Self-employed individuals and those with other sources of income are required to submit a self-assessment tax return each year and pay any tax owed.
- Direct De