Income Tax is levied on what you earn - this could be through employment, self-employment, rental income, and more. Not all income falls under the purview of Income Tax, though.
In the current framework, the UK's basic rate for Income Tax is 20%, escalating to 40% for incomes exceeding £50,270, and peaking at 45% for those earning above £125,140.
A key component of the tax system is the Personal Allowance – a tax-free threshold set for everyone in the UK. For the fiscal year 2023/2024, this stands at £12,570.
Income Streams Subject to Income Tax
Income Tax is applicable to a variety of income sources, including but not limited to:
- Earnings from employment
- Self-employment profits
- Certain state benefits like Job Seekers Allowance
- Most pension incomes, inclusive of the state pension
- Rental income
- Interest on savings exceeding your savings allowance
- Income derived from trusts
It's worth noting that earnings from the sale of assets for profit are taxed under Capital Gains Tax, not Income Tax. These categories have distinct tax rates and allowances and are treated separately.
Paying Your Income Tax
The majority of taxpayers settle their Income Tax via the Pay As You Earn (PAYE) system. This straightforward method deducts your due tax from your wages or pension before you receive them. Your specific tax code instructs your employer or pension provider on the exact amount to deduct.
Furthermore, for most of the income types mentioned, you may need to complete a Self Assessment tax return. This is essential for declaring such incomes and handling the tax dues on them. You're obligated to submit a tax return if you've earned more than:
- £1,000 from self-employment or
£2,500 from other untaxed income sources, like tips or property rental.
