Essential guide to Income Tax
Income Tax is one of the primary taxes that residents in the UK must pay and is the single largest source of revenue for the Treasury – the government’s finance ministry. Though you likely already pay for Income Tax automatically, it’s not often explained what it is, how it works and how to calculate how much of it you’re actually paying. That’s where we come in. This handy guide will have you clued-up on the ins and outs of Income Tax in no time.
In a nutshell
What is Income Tax?
Income Tax is a tax that you pay to the UK government on your earnings or profits (your taxable ‘income’) if they exceed the annual Personal Allowance, which is £12,570 for the 2024-25 tax year. This is the maximum amount you’re allowed to earn before you must start paying Income Tax. Over 32 million adults in the UK paid Income Tax between 2021 to 2022. We explain more about what counts as taxable income later, but first let’s explain how Income Tax bands work and how you can use them to calculate how much tax you need to pay.
Income Tax bands explained
The amount of Income Tax you need to pay depends on which tax band you fall into, which is calculated using your total annual income – that is, everything you earn over the course of the tax year (6 April to 5 April). Your Income Tax band can also affect how much you need to pay for other types of tax, such as Capital Gains Tax on the profit you make from investments not shielded in an ISA, or your eligibility for tax relief and allowances, such as the Personal Savings Allowance (more on this later). The table below helps to break it down.
Income Tax Band | Taxable Income | Income Tax Rate |
Personal Allowance | Up to £12,570 | 0% |
Basic Rate | £12,571 to £50,270 | 20% |
Higher Rate | £50,271 to £125,140 | 40% |
Additional Rate | Over £125,140 | 45% |
Correct as at 2024-25 tax year.
What is taxable income?
Taxable income includes most types of earnings such as your wages or salary from work, but can also include things such as pensions and certain state benefits. It’s important to understand what you do and don’t need to pay Income Tax on so you know that you’re paying the right amount and can identify an error if HMRC is incorrectly charging you.
*Income from popular trading websites such as eBay, Etsy and Vinted can contribute to your taxable income – even if you only sell things on them occasionally. If you want to know if this affects you, you can check using a helpful quiz on the gov.uk website here.
What is the Personal Savings Allowance?
Your Personal Savings Allowance is the total amount of interest you’re allowed to earn from your savings (i.e. all your bank accounts - except for tax-exempt ones like Individual Savings Accounts/ISAs) before you need to start paying Income Tax.
Your Personal Savings Allowance is connected to your usual Income Tax band. For the 2024-25 tax year, the Personal Savings Allowance is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers do not have any Personal Savings Allowance. The table below helps to illustrate:
Income Tax Band | Personal Savings Allowance |
Basic Rate | £1,000 |
Higher Rate | £500 |
Additional Rate | £0 |
Correct as at 2024-25 tax year.
When do you not have to pay Income Tax?
You do not have to pay any Income Tax at all if your total earnings are below the annual Personal Allowance of £12,570.
There are also some types of income or earnings which do not contribute to your taxable income. These include:
The first £1,000 of income from self-employment (this is your ‘trading allowance’)
The first £1,000 of income from property you rent (unless you’re using the Rent a Room Scheme)
Income from tax-exempt accounts, like ISAs and National Savings Certificates
Dividends received from company shares under the dividend allowance (currently £500)
Some state benefits, including Child Benefit, Universal Credit and the Disability Living Allowance (DLA)
Premium bond or National Lottery wins
Rent you earn from a lodger in your home that is below the Rent a Room Scheme threshold (currently £7,500)
You can read more about how Income Tax works and if you’re eligible for any exemptions on the gov.uk website here.
Free Income Tax calculator
If you’re unsure if – and how much - Income Tax you should be paying, you can use the gov.uk's handy calculator to crunch the numbers for you here.
Join Boring Money
Already have an account? Login
