Income Tax

As the name suggests, this is a direct tax on your personal income, whether it be from employment, pensions, property letting, savings or investments. The income tax you pay is calculated on your income in the tax year.  The tax year runs from 6 April in one year to 5 April in the next.

The first important point to bear in mind is that your taxable income consists of a total of all your sources of taxable income added together.  So if your annual income is made up of £18,000 from part-time earnings and £6,000 from a pension, you will be assessed for tax on £24,000.

Income tax rates and bands last updated 2024-25

England, Wales and Northern Ireland

Band nameBandRate (England, Northern Ireland and Wales)
Basic Rate£12,571 – £50,27020%
Higher Rate£50,271 – £125,14040%
Additional Rateover £125,14045%

Scotland

Band nameBandRate (Scotland)
Starter rate£12,571 – £14,87619%
Basic rate£14,877 – £26,56120%
Intermediate Rate £26,562 – £43,66221%
Higher Rate£43,663 – £75,00042%
Advanced Rate£75,001 – £125,14045%
Top Rateover £125,14048%

Interest and Dividend Income – Rates and Allowances updated 2024-25

Band/Allowance nameBand/AllowanceRate (all of UK)
Starter rate for savings interest (max.)*£0 – £5,0000%
Personal Savings Allowance (max.)**£1,0000%
Dividend allowance£5000%
Tax rate on dividends after the allowance (basic/higher/additional rate)Above £500Basic 8.75%
Higher 33.75%
Additional 39.35%

*for every £1 of income above the personal allowance, the starting rate for savings reduces by £1

**basic rate taxpayers receive the full £1,000 personal savings allowance. This reduces to £500 for higher rate taxpayers and £0 for additional rate taxpayers

The personal allowance

The amount of tax-free income you can have in a year is called your Personal Allowance. The amount of this ‘personal allowance’ is set for each tax year. For the tax year 2024/25, the basic personal allowance is £12,570 (the same as in previous years).

Assuming you are not a Scottish taxpayer, above this level, you start to pay tax on a graduated scale.  On the first £37,700 of income above the personal allowance, you will pay tax at 20%, i.e. £7,540.  Thereafter the rate is 40%. So, on income £5,000 higher than this threshold (£50,270) you will pay another £2,000 in tax (https://www.gov.uk/income-tax-rates).

People with income above £100,000 will have their Personal Allowance reduced – if their income is high enough, they will not get a personal allowance at all.

What is taxable income?

  • Earnings from employment or self-employment, including tips. This can also include ‘casual earnings’ from hobbies or ‘side hustles’ if you earn over £1000
  • Taxable benefits e.g. Jobseeker’s Allowance, Carer’s Allowance, most Incapacity Benefit and contributions-based Education and Support Allowance
  • Pensions e.g. Occupational pensions, personal pensions and annuities, and the State Pension. However, pension credit is not taxable.
  • Income from owning or renting property
  • Savings Income – Interest, dividends and other investment income (but not ISA accounts)
  • Income from outside of the UK (for instance, a foreign pension, rent from a property outside of the UK)

Allowances

In our notoriously complex tax system, there are a host of variations and pitfalls such as the Blind Person’s Allowance, the Marriage Allowance, the gradual loss of personal allowances for those earning over £100,000 or those claiming child benefit when earning over £50,000.  You can find more information on this here: https://www.gov.uk/government/collections/income-tax-detailed-information#rates,-allowances-and-reliefs

Savings and Investments

Savings and investment income outside Individual Savings Accounts (ISAs) is taxed at different rates and with different allowances but is still aggregated with your other income to calculate the tax due for the year. (https://www.gov.uk/government/collections/tax-on-savings-and-investments-detailed-information ). 

Benefits

Income from state benefits is another minefield.  Carer’s Allowance and the state retirement pension are taxable, war pensions and Disability Living Allowance are not.  Check the taxability of any benefits you receive by asking DWP, who administers most benefits, the Jobcentre or the HMRC website (https://www.gov.uk/income-tax/taxfree-and-taxable-state-benefits).

How do you pay tax?

There are two ways of paying, Pay As You Earn (PAYE) & Self Assessment (SA).  Under PAYE, the most common way, the employer or pension provider deducts tax before paying the remainder to you.  HMRC tell them what tax-free allowances to give via a coding system  (https://www.gov.uk/tax-codes/what-your-tax-code-means ) and they deduct tax at the appropriate rate and pass it on to HMRC.  This means that by the end of the year, if your tax code is accurate and you have no non-PAYE income you have probably paid the correct amount of tax and have nothing more to do about it.

If you think your tax code is incorrect or does not include certain items of income, you can contact HMRC to update the income details they hold for you, which may result in a change in your tax code (Tax codes: How to update your tax code – GOV.UK).

Under Self Assessment, you complete an annual return of your total taxable income from all sources and HMRC will send you a bill for the tax owed.  You will then pay this as a lump sum by the following 31 January insert and may also have to make pre-payments towards the next year’s tax liability known as Payments on Account.  This system is generally used for those with income not taxed at source such as the self-employed or those with foreign income but there can be other reasons that you are required to file a tax return.  Sometimes you can come under both systems if you have both PAYE income and other untaxed income.  For more details on these, go to the HMRC website (https://www.gov.uk/government/collections/self-assessment-detailed-information ).

For further information look at:

Our section on Self Assessment

https://www.gov.uk/government/organisations/hm-revenue-customs

Further Income tax links on our website:

Income Tax Refunds

Tax Refund Scams