Workers who pay income tax through the pay-as-you-earn (PAYE) scheme receive their wages after tax has been paid, whereas self-employed workers have to pay their tax themselves. How you pay income tax depends on a few more things, such as the type of work you do, your employer and the amount you earn.
Here we explain how income tax works, who has to pay it, how to make a payment, and how you may be able to pay less tax.
How is income tax collected?
In the UK tax is paid to HM Revenue and Customs (HMRC) on money you earn from employment, whether it’s through a company, or if you’re self-employed.
It may also be paid on:
- Income from a pension
- Some benefits including Jobseeker’s Allowance (JSA) and the carer’s allowance
- Interest on savings
- Income from shares
- Rental income
- Income from a trust
If you pay tax through the PAYE system, the tax and National Insurance contributions will be taken from your wages before you receive them. This is called being taxed ‘at source’.
You will have a tax code which tells an employer how much tax to take off, as the amount varies depending on how much you earn. Private pensions also use a tax code to work out how much tax to deduct from your payments.
If you are self employed, you will need to make a tax payment and file a tax return, which you can do online or through the post. There are set deadlines for these, and if you file late you may face a penalty.
Who has to make tax payments?
Most people have to pay tax, but the amount paid depends on your individual circumstances. National Insurance is also due on your wages, although while this may seem like tax it’s separate to income tax.
The majority of people are given a personal allowance, which is an amount of money they can earn before they start paying tax. For the current tax year, which runs from 6 April 2023 to 5 April 2024, the personal allowance is £12,570.
Calculate if you need to be paying tax
In order to work out if you need to be paying tax, the first thing to do is add up all of your taxable income, including your wages, pensions and interest from savings.
Next calculate your tax-free allowances, such as the personal allowance, and take this away from your taxable income. If there’s nothing left at this point, you shouldn’t be paying tax.
How much do you need to earn to pay tax?
The amount of tax you pay depends on your income, if you’re self-employed and where you live in the UK.
Workers in England, Wales and Northern Ireland will pay the following tax rates from April 2023:
- Basic rate: 20% on earnings from £12,570 to £50,270
- Higher-rate: 40% on earnings from £50,271 to £125,139
- Additional rate: 45% on earnings over £125,140
Scotland uses different tax bands and from April 2023 Scottish workers will have to pay the following rates:
- Starter rate: 19% on earnings from £12,571 to £14,732
- Basic rate: 20% on earnings from £14,733 to £25,688
- Intermediate rate: 21% on earnings from £25,689 to £43,662
- Higher rate: 41% on earnings from £43,663 to £125,140
- Top rate: 46% on earnings over £125,140
If you earn £1,000 or more from self employed work, you’ll need to fill out a self-assessment tax return too. People with other sources of untaxed income (for example, if you rent out a property or earn an income from shares) will need to declare this to HMRC and may need to complete a tax return.
How can you pay a tax bill?
Your tax is automatically paid if you are in the PAYE system and at the end of the tax year you’ll be given a P60 form to tell you how much you have paid.
If you need to make an additional tax payment, or you are making a self-assessment payment, you can do this online via the Government website.
If you don’t want to pay online it’s also possible to pay a tax bill by the following methods:
How to pay less tax
While there’s no way to avoid paying tax, there are legal ways you might be able to reduce your tax bill. These include taking advantage of tax breaks that apply to you, such as the marriage tax allowance, which allows some people to transfer £1,260 of their personal allowance to their spouse or civil partner if they earn more. You can also take advantage of tax-efficient savings plans like ISAs and pensions to shelter more of your hard-earned money from tax.
Life insurance is usually paid out tax-free. But depending on how much your estate is worth when you die, and whether or not your policy is in a trust, there may be inheritance tax (IHT) to consider.