The first income tax was introduced in Great Britain in 1799, to fund the war against the French forces under Napolean. Income Tax is a “temporary tax” and expires every year on the 5th April and Parliament has to reapply it by an annual Finance Act. The PAYE (Pay As You Earn) system was introduced in 1944 as it was thought to be a more efficient tax collection system.
What Do I Have To Pay Income Tax On
Income tax is applicable to taxable income which includes the following:
How Do I Pay Income tax
There are various ways that you may pay income tax, it may be deducted at source, such as with salaried income under Pay As You Earn (PAYE) or with bank interest. Tax payers that have earnings from sources such as rental income or self-employment will be required to file a self-assessment tax return (SATR) annually. The tax calculated from this will either be paid yearly or bi-annually.
How Is Income Tax calculated
It is calculated on the income received, or with the case of self-employed income the net profit. Most people have a personal allowance, some groups have a higher personal allowance e.g. over 65s. Any income earnt within your personal allowance will not have any income tax deductions. If any tax has been deducted, this can be claimed back. Once the personal allowance has been exhausted the following levels of income tax are applied:
Current rates and allowances
The current tax year is from 6 April 2014 to 5 April 2015
Personal Allowance
Most people’s Personal Allowance is £10,000, unless you were born before 6 April 1948 or your income’s over £100,000.
Income tax rates
| Tax rate | 2014 to 2015 – Taxable income above your Personal Allowance |
|---|---|
| Basic rate 20% | £0 to £31,865 Most people start paying basic rate tax on income over £10,000 |
| Higher rate 40% | £31,866 to £150,000 Most people start paying higher rate tax on income over £41,865 |
| Additional rate 45% | Over £150,000 |
Previous tax years
| 2011 to 2012 | 2012 to 2013 | 2013 to 2014 | |
|---|---|---|---|
| Personal Allowance | £7,475 | £8,105 | £9,440 |
| Tax rate | Taxable income above your Personal Allowance | Taxable income above your Personal Allowance | Taxable income above your Personal Allowance |
| Basic rate 20% | £0 to £35,000 | £0 to £34,370 | £0 to £32,010 |
| Higher rate 40% | £35,001 to £150,000 | £34,371 to £150,000 | £32,011 to £150,000 |
| Additional rate 45% | n/a | n/a | Over £150,000 |
| Additional rate 50% | Over £150,000 | Over £150,000 | n/a |
A 10% starting rate applies to savings income only. If, after deducting your Personal Allowance from your total income liable to Income Tax, your non-savings income is above this limit then the 10% starting rate for savings will not apply. Non-savings income includes income from employment, profits from self-employment, pensions, income from property and taxable benefits.
The rates available for dividends are the 10% ordinary rate, the 32.5% dividend upper rate and the dividend additional rate of 42.5%.
Please note that tax payers that earn over £100,000 have a gradually reduced personal allowance, and that the top rate of income tax of 50% was reduced to 45% in the 2013-14 tax year.
Income Tax Example
Niko has income tax (including national insurance) to pay from his self-employment as a consultant and two rental properties, the total tax for the year 2011/12 (6th April 2011 to 5th April 2012) is £26,000 and has already paid £21,000 on account in January and July 2012 for this tax year. He files his 2011/12 tax return in August 2012; he will have to pay the following:
The underpayment of £5,000 tax will need to be paid by 31st January 2013, he will then also be asked to be paid the same amount of tax on account for the year 2012/13, so will pay as follows:
By 31st January 2013:
- £5,000 balance outstanding on 2011/12 tax year
- £13,000 first payment on account
By 31st July 2013:
- £13,000 second payment on account
If he thinks that 2012/13 is going to be a less profitable year for him than 2011/12 he can request to pay a lower payment on account.
Tax-free and taxable state benefits
Most UK residences qualify for a Personal Allowance of tax-free income. This is the amount of income you can have before you pay tax. The amount of tax you pay can also be reduced by tax reliefs if you qualify for them.
National Insurance
When planning for your income tax payments do not forget to consider National Insurance (NI) implications. NI is effectively an additional tax, however, it has different rates and is not applicable in all income.
For example NI is not applicable to rental income or bank interest. If you are under the PAYE system you will pay Class 1 employee national insurance and your employer will pay employer national insurance. If you are self-employed you are subject to Class 4 and Class 2 NI.
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