Overview of Income Tax

Income tax is nothing but what you pay on your annual taxable income, however you do not pay tax on all kind of income. In the United Kingdom, you pay taxes on the following:
  • Your annual income i.e. whatever you are earning as a part of your employment
  • State benefits like as State Pension, Carer’s Allowance, Bereavement Allowance, Widow’s pension, Widowed parent’s allowance, Jobseeker’s allowance, contribution-based Employment and Support Allowance (ESA), Incapacity benefit applicable from 29th week, pensions paid by the Industrial Death Benefit Scheme etc.
  • If you are self-employed, then you have to pay income tax on the profits that you have earned in a financial year
  • Pensions including State Pensions, company and personal pensions, retirement annuities etc
  • Benefits from your job, if any
  • Income from a trust
  • If you are having a rental income
  • Interest on savings; and
You are exempted from paying income tax on the following:
  • State benefits such as housing benefit, Child tax credit, Working Tax credit, Guardian’s allowance, Personal Independence Payment, Disability Living Allowance etc.
  • Trading Allowance i.e. on the first £1,000 from your self-employment.
  • On the first £1,000 of income from the rent coming from your property.
  • Dividends from company shares under your dividends allowance.
  • Premium bond
  • If you have rented a lodger in your house that’s below the rent of room limit.

How you pay Income Tax?

Pay As You Earn (PAYE)

One of the widely used process to pay the income tax is through PAYE i.e. Pay As You Earn, which is used by the employer or the pension provider to deduct the Income Tax and applicable National Insurance Contributions (NIC) on your income or pension. If you are working then it is duty of your employer to sending the taxes to the Her Revenue Majesty and Customs and at the end of the financial year, you get a form P60 that shows the total amount you have been paid and total income tax you have paid for that particular financial year. Under the PAYE system, HMRC uses a tax code to inform your pension provider or your employer how much tax is applicable as per your pension or salary and the tax code used is called PAYE code that is alphanumeric in nature.

Tax Free and Taxable State Benefits

State benefits that are taxable

There are various state benefits that are taxable such as:
  • the State Pension
  • Jobseeker’s Allowance (JSA)
  • Carer’s Allowance
  • contribution-based Employment and Support Allowance (ESA)
  • Incapacity Benefit (from the 29th week you get it)
  • Bereavement Allowance
  • pensions paid by the Industrial Death Benefit scheme
  • Widowed Parent’s Allowance
  • Widow’s pension

Tax-free state benefits

There are various state benefits that are tax free such as:
  • Housing Benefit
  • income-related Employment and Support Allowance (ESA)
  • Income Support - though you may have to pay tax on Income Support if you’re involved in a strike
  • Working Tax Credit
  • Child Tax Credit
  • Disability Living Allowance (DLA)
  • Child Benefit
  • Personal Independence Payment (PIP)
  • Guardian’s Allowance
  • Attendance Allowance
  • Pension Credit
  • Winter Fuel Payments and Christmas Bonus
  • Free TV licence for over-75s
  • Lump-sum bereavement payments
  • Maternity Allowance
  • Industrial Injuries Benefit
  • Severe Disablement Allowance
  • Universal Credit
  • War Widow’s Pension

Find out if you need to pay Income Tax?

United Kingdom is known and famous for its stringent taxation policies and thus it is important to know and understand if you need to pay the income tax or not and also the right amount that you have to pay as per your annual income. In order to see if you have to pay income tax or not, you can follow the below mentioned steps:
  • Add up all your taxable income including taxable state benefits. Taxable income includes everything starting from money that you earn from your employment, taxable state benefits, any income from the trust etc.
  • Once you have calculated your total income, next step is to see tax free allowances. Tax free allowances include standard personal allowance, marriage allowances, Blind person’s allowance etc.
  • Once you have all the details and figures of your total income and your allowances, next step is to deduct the tax-free allowances from your taxable income.

Check if you are paying the right amount of Income Tax

It is very important to see if you are paying the right amount as income tax. In order to reconfirm the amount or income tax, you can check the same online for the present financial year i.e. from 6th April 2019 – 5th April 2020, you can check the following information online:
  • Check the income tax payments
  • How much income tax you must be paying
  • How much income tax you have paid for the last year i.e. 6th April 2018 – 5th April 2019