As you may have guessed, income tax refers to the amount of tax that is placed on the income that you earn from your job or trade. Earnings that are subject to income tax include:
- Self-employed earnings
- Employment earnings including ‘benefits in kind’
- Most pension income (personal, occupational and state pensions)
- Certain social security benefits
- Interest earned on income from a trust
- Rental income
It is important to note that not all of these forms of income are taxable. In the UK, every citizen is entitled to up to £11,000 of tax free income. This means that if you are a UK citizen then any amount of income that you earn up to £11,000 between the 6 April to 5 April of the next year is free from any tax. Income tax is owed regardless of age and the amount of tax that is paid is dependant on the amount that is earned.
Income Tax rates
The amount of income tax that is paid each year depends on a number of factors. For example the amount earned must be above the personal tax allowance amount. The amount of tax them depends on which tax ‘band’ the amount earned falls into. The rates of tax are as follows:
- Personal Allowance – Up to £11,000 – 0% tax
- Basic Rate – Between £11,001 to £43,000 – 20% tax
- Higher Rate – £43,001 – £150,000 – 40% tax
- Additional Rate – Above £150,001 – 45% tax
The way the tax bands work is by charging tax at that rate of interest only on the amount that falls within that bracket. For example, if someone was to earn £50,000 a year, £11,000 of that will be covered by their personal allowance and will therefore be tax free. The remaining £39,000 are taxed differently. 20% tax (basic rate) will be charged on the next £32,000, since that fall within that band. The remaining £7,000 will fall into the higher bracket and subsequently be charged at 40% tax.
It is important to note however that income tax differs from other forms of tax such as Dividend tax, Corporation tax, Inheritance tax, Capital Gains Tax etc. These all apply to different situations and affect Sole Traders, limited Companies, Contractors and Partnerships differently.
If you have any further questions about Income tax or if you would like to learn more about Accountant Chelsea and how we can help you, you can visit our homepage here for more information.