Income Tax

IMPORTANT FACTS – Who deals with tax

Her Majesty’s Revenue and Customs (HMRC) is a department of the British Government primarily responsible for the collection of taxes and the payment of some types of benefits such as Child Benefit and Tax Credits.

Their website contains detailed information on current tax rates systems. You can contact them if you have queries about your tax, but usually you should speak to your local tax office.

You can appoint anyone to talk to HMRC on your behalf, however you will have to give permission for this person to deal with your affairs, either over the telephone or in writing to HMRC. 

IMPORTANT FACTS – What is income tax?

Income Tax is a tax on some types of income and one of the key deductions that people will see on their payslips.

Income tax applies to total taxable income over the tax year; for example, if someone had two jobs they would add up the total amount earned in both of these jobs during the tax year (which starts on 6 April) and the income tax due would be calculated on this figure.

IMPORTANT FACTS – Collection of Income Tax

Income Tax is collected in different ways depending on the type of income and whether a person is employed, self-employed or not working. The different ways Income Tax is collected include: 

  • PAYE (Pay As You Earn)
  • Self-Assessment
  • Tax deducted ‘at source’ whereby tax is deducted from bank/building society interest before the interest is paid to a person
  • In some cases, in one-off payments 

IMPORTANT FACTS – Personal Allowance

Personal allowance is the amount of income you can earn without paying any tax on it. This depends on a person’s age and also their total income for the tax year.

In 2020/21 a person under 65 does not pay tax on the first £12,500 they earn in that year, provided they earn under £100,000

If a person’s income is over £100,000, their Personal Allowance is reduced by half of the amount – £1 for every £2 – they have over that limit. For example if a person is earning £105,000 their Personal Allowance is reduced by £2,500 . If their income is large enough (i.e. if they earn £123,700 or above), their Personal Allowance will be reduced to nil. This limit applies irrespective of a person’s age.

The Personal Allowance for those aged 65 and above is higher, and people who are blind get an additional allowance.

IMPORTANT FACTS – Income tax, taxable bands and tax payable

For someone under 65, earning under £100,000 per year, the rates of tax payable on different slices of income are as follows:

2020/21RateMinimum incomeMaximum income
Personal allowance0%£0£12,500
Basic rate20%£12,501£50,000 
Higher rate40%£50,001£150,000Reduced Personal Allowance for over £100,000No Personal Allowance (over £125,000)
Additional Rate45%over £150,000Pay 45% on anything over £150,000

Example income tax at various gross salaries

Example Income£25,000 
RateIncome at that rateAmount of tax
Personal Allowance£12,500£0
Example Income£55,000 
RateIncome at that rateAmount of tax
Personal Allowance

Example Income£110,000 
RateIncome at that rateAmount of tax
Personal Allowance£7500£0
Example Income£160,000 
RateIncome at that rateAmount of tax
Personal Allowance£0£0

Savings income 

Most taxable income is taxed at the basic rate of 20%, but there is a special 0% starting rate for savings income (that is bank and building society interest) that you may qualify for.  There is a 0% income tax band for the first £5,000 of savings income.  This means if your earnings are less than your £17,500 (£12,500 Personal Allowance plus £5,000) then some or all of your savings income will be taxable at 0%.  This system replaces the previous 10% starting rate for savings.

For a worked example of how this system works in practice, click here.

Tax on Dividends

You pay tax at different rates on UK dividends (income from UK company shares, unit trusts and open ended investment companies) than you do on interest from savings, such as bank and building society interest. See here for full details.

Gifts to children

There’s no limit on how much a person can give or invest for their children or grandchildren. But the interest on this investment might be taxed as part of the investor’s income if they are the child’s parent or step-parent

Each parent has a separate £100 limit on the interest made on the money they give to their child. So if both parents contribute equally a child could get interest of £200 a year without either having to pay tax on it. There’s a separate limit for each step-parent too.

This limit only applies to parents and step-parents. People can give as much as they like to their grandchildren or other people’s children – the interest won’t be taxed as their income.

REAL LIFE EXAMPLE- In France, there is a 75% tax on high earners- employers are liable for the tax on salaries over 1m euros (£830,000). Read more here.