This is a very basic guide to income tax written for those with no prior knowledge. Unfortunately real life is not so simple. there are many many ‘if this then this’ type situations in tax law so please consult an expert who knows about your full situation rather than relying solely on this information.
Thresholds and rates in this post are based on the 2013/14 tax year.
What is taxed as part of income tax?
- Salary from employment
- Profits of a trade carried out as a self-employed person (ie outside of a ltd company)
- Pension income*
- Bank interest*
- Share dividends*
- Rental income (from a buy to let, for example)*
* Considered ‘Investment Income’ which does not incur any National Insurance charges
Income tax rates
The following tax rates apply to those earning less than £100,000 per annum. If you are earning more, congratulations, then search google for ‘Personal Allowance over £100,000’.
|£0 – £9,440||0%|
|£9,440 – £42,475||20%|
|£42,475 – £100,000||40%|
As an example let’s say someone is earning a profit as a self-employed person of £20,000 and receives a rental income of £10,000 per year, so a total of £30,000. They would incur tax as follows:
The first £9,440 taxed at 0% = £0
£9,440 to £30,000 at 20% = £4,112
Total = £4,112
National Insurance when self-employed
Class 4 NICs
If you are self-employed in addition to income tax you must pay Class 4 National Insurance Contributions. The 2012/13 rates for these are:
|£0 – £7,755||0%|
|£7,775 – £41,450||9%|
So going back to our example. The self employed person earning a profit of £20,000 will have to pay:
The first £7,775 at 0% = £0
£7,776 to £20,000 at 9% = £2,444.80
Total = £12,224
Note that the rental income does not incur any national insurance.
Class 2 NICs
The self-employed must also pay Class 2 NICs. These are much cheaper at a flat rate of £2.70 per week.
National insurance when in full time employment
The full time employed pay Class 1 National Insurance. This will always be deducted from their salary via PAYE. So we won’t discuss it any further here.
Company dividends (they’re different)
We’ve previously written a very detailed guide to dividends for limited companies, which may help. In short though dividends have their own tax rates:
|£0 – £42,475 (total earnings)||0%|
|£42,475 – £100,000 (total earnings)||25%|
Two things to bear in mind are:
- Add up all your earnings and then the dividends last. If you earn £40,000 from other sources and then earn £10,000 of dividends the first £2,475 will be at 0% (taking you up to £42,475) and then the remaining £7,525 will be taxed at 25%.
- The dividend tax credit distorts the thresholds above. Read our dividend tax credit guide to learn more.
Income tax payments deadlines and tax return deadlines
The income tax year runs from 6 April to 5 April. So the most recent at the time of writing is 6 April 2012 to 5 April 2013 (known as 2012/13). Payment is then due in the following January (ie. 31 January 2014)
The deadline for submitting your income tax return (an SA100 in HMRC’s language) is due on the same date.
Payments on Account
You may also have to make Payments on Account, which are advance payments for the next tax year.
So when you come to pay your first (2012/13) tax bill on 31 January 2014 you will have to pay an extra 50% to cover the 2013/14 tax year and then the remaining 50% on 31 July 2014, all based on the assumption that next year’s tax bill will be the same as this year’s.
So this means the first time you pay income tax you will probably have to pay 150% of your tax bill!