Taxes

What is taxable income?

Income tax is payable on all your taxable income, but the following are not taxable:

• Student Grants

• Scholarships

• Most research awards

• Housing benefit

• Allowances from parents or spouse

• Grant from the University Access Fund

Sources of income which are liable to income tax include:

• Earnings from full and part-time work (and note that tips are taxable)

• Profits from a business or dividends from shares

• Jobseekers Allowance

• Rent from letting rooms in a house

• Interest from bank, national savings or building society accounts

If you have income from any other source, and you are unsure whether it is taxable you can ask the tax office for advice - anonymously by telephone if you like.

back to top

How do I pay tax?

If you are employed, employers have to deduct tax from your pay. If you are self-employed, you are responsible for keeping records of your earnings and paying the tax due.

back to top

What are tax allowances?

All taxpayers have a personal allowance (currently £4,385 per annum), which is the amount they are allowed to earn before they pay tax. Tax is payable on all earnings over this figure.

Extra allowances are given in some circumstances, such as the additional Personal Allowance (generally for single parents), blind person's allowance etc. If you think you may be eligible for extra allowances you can read Inland Revenue leaflet IR90 entitled Tax Allowances and Relief for more detailed information.

back to top

How much is income tax?

Income tax is a progressive tax - in other words, the rate rises with the level of income. The personal allowance is tax-free. After that three rates of income tax are employed:

• Lower Rate (currently 10%) - payable on the first £1,520 of taxable income over the personal allowance.

• Basic Rate (currently 22%) - payable on the next £26,880 of taxable income.

• Higher Rate (currently 40%) - payable on all remaining taxable income.

Therefore, a person earning £40,000 per year of taxable income would pay no tax on the first £4,385, 10% on the next £1,520 (= £152), 22% on the next £26,880 (= £5,913.60) and 40% on the remaining £7,215 (= £2,886), making a total of £8,951.60 in income tax.

back to top

How does my employer know how much tax to deduct?

Your tax code tells your employer how much you have earned in the current year (if anything), and how much tax (if any) you have paid so far in the current tax year. This information enables them to calculate the correct amount of tax due from your next pay packet. This information only relates to the current tax year that runs from 6th April to 5th April the following year.

back to top

I don't have a tax code. How do I get one?

If you have already worked, your previous employer should have given you a P45 when you left. If you haven't worked before, ask your employer for a P46. In due course you'll receive a form from the tax office asking for details of your income and employment history. Complete this form and return it promptly - if you don't, you may end up paying more tax than necessary. It will help the tax office if you ensure your employer's tax reference number appears on the form. When they receive your completed form the tax office will issue you with a tax code, a copy of which will be automatically sent to your employer.

back to top

Students who only work in vacations (and who have not claimed Jobseekers Allowance in the current year) can complete a P38 and their employer will be able to pay them without deducting tax, provided that their total taxable income for the tax year is not expected to exceed their personal allowance (i.e. £4,385). You won't get a P45 when you leave.

back to top

A P60 details your earnings and tax deductions for the year. You won't be able to get a duplicate so keep it in a safe place, because the law requires you to keep a record of your taxable income for at least 22 months after the end of the applicable tax year. Self-employed people must keep records for up to six years after the relevant tax year.

back to top