A guide to income tax

Income tax is a tax payable on income that you earn each year. You will probably not have to pay tax on all of your income because of the personal allowance that allows you to keep a percentage of your earned income, but any income earned over your personal allowance will be liable to income tax. The personal rate for 2016-17 will be £11,000. This means that an individual can earn up to this amount tax-free before becoming liable for income tax.

The amount of income tax you pay will be affected by how much you earn during the tax year. The tax year runs from 6 April one year to 5 April the following year. There is no minimum age at which you start becoming liable for income tax, so no matter what your age, if you earn over your personal threshold in a tax year, you will be liable to pay tax on your income.

You can class taxable income as money coming in from the following sources:

• earnings from employment, including benefits in kind such as a company car
• earnings from self-employment
• most pensions income, including state, occupational and personal pensions
• some social security benefits
• interest on most savings
• income from shares (dividends)
• rental income
• income from a trust.

How do I work out my income tax?

How income tax is calculated is quite complex, but you can use these tips as a guide to give you a rough idea of how much income tax you may be liable to pay:

The easiest way to work out your income tax liability is to note down all your sources of taxable income and how much you earn from them for the year. Remember to include money coming in from paid employment, self-employed earnings, any taxable social security benefits you receive, pension payments, interest from bank and building society accounts, as well as any money you get for renting out premises or accommodation. Add together all your income figures to get a final total. This will give you your total income for the year, and you can then work out how much tax you will need to pay on that figure.

You may be in receipt of some non-taxable income that you should exclude from your sums. These would include any of the following benefits and winnings: Tax credits (working tax credit and child tax credit), child benefit, maternity allowance, housing benefit, personal independence payment (PIP), premium bond prizes, gambling and lottery winnings. Do not include any of these payments in your income tax calculations.

In some cases you may be able to claim tax relief for some of your money spent during the year, such as with pension scheme contributions for example, or money paid out on certain employment expenses. Business expenses can be deducted from income for the self-employed, so these can be taken out of your earnings before calculating your total income figure.

For a UK resident you are entitled to your basic personal allowance before having to pay any income tax. The personal allowance for 2016-17 is £11,000 but if you were born before 6 April 1948, you will have a slightly higher age-related personal allowance.

Once you have taken off any allowances that you may be entitled to, then you should be left with an income figure on which you will pay income tax. This is what is known as your taxable income.

How to calculate your income tax payment

As a rough guide, if your taxable income figure is less than £31,785 then you should calculate your income tax at 20%.  For those with a figure between this and £150,000, you will be charged a higher tax rate so you need to calculate your income tax at 40% of your taxable income. If your taxable income is above £150,000 then you will be expected to pay 45% as income tax.

There are a few other allowances to take into consideration, such as Married Couple's Allowances, and also any tax already paid by you through PAYE from your regular employment for example, or occupational pension payments etc. Interest on savings in a bank or building society account usually has tax taken off before it's paid to you. You may have overseas income that is taxed abroad, or income that is not taxable such as child benefit and housing benefit, or income from winnings from gambling, lottery and premium bonds.

If you have any foreign income coming in that is not taxed abroad, then you may need to pay UK income tax on that income. This sort of income could be from wages earned from working overseas, interest payments for foreign savings and investments, income from overseas property rental etc. HMRC class foreign income as money paid to you from countries outside of England, Scotland, Wales and Northern Ireland.

How do I pay Income Tax?

Most employees working in a regular paid job will have their deduction of tax taken at source. This means they pay their tax through deductions that are made from their income before they have it paid to them. The most common example of this is the PAYE system. Employers are required by law to pay their employees through the PAYE system. This is the case for members of occupational pension schemes too. Payments taken, including class 1 national insurance contributions where appropriate, are sent to HMRC on your behalf by your employer. Confirmation of amounts deducted will be shown in your employee payslip or salary statements, and through a P60 certificate at the end of the financial year.

Bank and building society interest payments will be liable to income tax and your bank will deduct the tax from the amount earned before the interest is paid to you. Your bank will pay this over to HMRC on your behalf. Your bank or building society will show the details of the deductions made on your statements, and you can request to see this information free of charge by asking for it.

Self Assessment tax payments

If you are self-employed, receive income from rental property, get income from overseas, or receive gross interest from a savings scheme or investment account, then you will need to pay tax direct to HMRC through the system of Self Assessment. Each year you will need to submit a tax return, and HMRC will work out how much tax you will need to pay based upon the figures you include on your return.

You can submit a self-assement tax return online, or you can complete a paper copy. You will need to submit your paper copy return by the filing date of 31st October following the end of the tax year, and once you receive your tax calculation from HMRC, you will have until 31st January to send your payment. The online return will give you an automatic calculation, and the due date for filing and  payment is the same - 31st January following the end of the tax year.