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You pay income tax on your taxable income which is your gross income minus your personal allowance. Everyone is entitled to a tax-free personal allowance which depends upon your marital status, age and income. These are reviewed each year in the Budget and allowances for the current tax year (tax years run from 6th April of one year to the 5th April of the next) are available from the Inland Revenue.
The first £1,880 of 'taxable' income is taxed at 10%, then the portion of your income up to £29,400 is taxed at the basic rate. If you are lucky enough to be earning over £29,400 then you are taxed on the excess at the higher rate of 40%.
A Simple Example
The situation is more complicated if you have any other 'taxable benefits' such as a company car and we have not included National Insurance.
| Graduate starting salary: | £18,000. |
| Taxable income: | £18,000 - single persons allowance £4,535 = £13,465. |
| Start rate: | £1880 taxed at 10% (£188). |
| Basic rate: | Remaining £11,585 taxed at a rate of 22% (£2,548.70). |
| Total income tax: | £2,736.70 per annum. |
The income tax you are due to pay is usually taken directly from your earnings by your employer who passes it on to the Inland Revenue. This scheme is known as 'Pay As You Earn' (PAYE). This means that you generally don't have to worry about paying you tax as its all taken care of for you. The amount of taken you pay under PAYE is denoted by your tax code which should appear on your payslip. It is advisable to check that you have been given the correct code as mistakes can be made and too much tax paid. More information on this is available from the Inland Revenue.
What income is taxable?
The most common forms of taxable income are:
If you think you've overpaid tax you can claim it back - find out from your employer which is your tax office and claim back what you've overpaid.
What do I do about any other sources of income?
The Inland Revenue sends out forms known as Tax Returns at the end of each tax year asking for information on income. If you are sent one you must complete details of all the income you receive, failing to do so is a serious offence. If are in reciept of other income but do not get a Tax Return you should contact your Tax Office - this is another legal requirement. You will need to quote your National Insurance number whenever you get in touch with the Tax Office so that they can access your records.
Click on more to find out about important documents.
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