Income Tax Advice

Income Tax is a tax on your income. 'Income' includes earnings from employment or self-employment. It also includes things like money paid to you from a pension, income from shares, or interest on your savings.

How much Income Tax do you have to pay?

Tax allowances

Not all your income is taxed. Everyone who lives in the UK has a personal allowance, which is the amount of income you are allowed to earn each year tax-free.

This tax year (2006-2007), the basic personal allowance – or tax-free amount – is £5,035. You may be entitled to a higher personal allowance if you are 65 or over. There is also an extra allowance if you are certified blind.

Tax rates

Once your tax allowance has been taken into account, the amount of tax you pay is calculated using different tax rates and a series of tax bands. Details, for the tax year 2006-2007, of the Income Tax you pay is shown in the table below.

There are different rates of tax on savings and investment income (interest and dividends). Your Income Tax can be reduced further if you are entitled to the married couple's allowance; to qualify either you or your husband or wife has to be born before 6 April 1935. (Unlike the personal allowance the married couple's allowance is not income you can receive without having to pay tax; instead it reduces your tax bill by a fixed amount.)

Pay As You Earn (PAYE)

If you're an employee, your employer will deduct Income Tax from your wages throughout the year and send it to HMRC. This system of collecting Income Tax is known as Pay As You Earn (PAYE). Your tax code is used to calculate the tax you pay through PAYE.

Self Assessment

You may need to pay your tax by a system known as Self Assessment if either of the following apply:

1. you are self-employed
2. you have more complex tax affairs (eg you earn money from rents or investments)

HMRC will send you a tax return to complete and tell you how to pay your tax.