What is income tax?

Income tax is deducted from the salary you receive from your job, and other earnings like bank interest, or pension income.

Income tax is taken by the tax office (HMRC) and deducted in varying ways depending on the form of income. The most common way HMRC deducts income tax is through the PAYE (Pay As You Earn) system, which is how all employed people pay tax.

Why do I pay income tax?

No one likes paying it but it is important. Income tax is used by the government to pay for services provided by the state, such as education and healthcare.

Have I paid too much income tax?

As many as one in three have overpaid income tax. If you have been employed under PAYE in the last four tax years, you could be eligible to claim income tax relief or an income tax rebate.

Lots of reasons exist that can mean you could be eligible to claim a rebate on the income tax you have paid.

For PAYE tax payers not claiming back tax relief on work related costs is a common way to miss out on a refund of income tax. An example is a vehicle or car technician who pays for their own toolboxes and hand tools.

What is the rate of income tax?

The amount of income tax you pay depends on the total you earn from all sources of employment. How much you pay is calculated by working out how much money you earn and then subtracting a percentage of that money in tax. Most people who live in the UK are entitled to a tax free amount of earnings; this is known as a basic personal allowance.

The basic personal is deducted from your earnings and then the rest is normally taxed. In some special circumstances extra allowances are granted, for example age related additions for those over 65, or a blind person’s allowance for those who are registered blind.

Income tax rates and bands

The rates of income tax and the Personal Allowance are usually set during the annual Budget, so each tax year has a different applicable rate. Taxable income is what you have earned, minus your personal allowance. The remainder is taxed at the appropriate rate, depending on your earnings.

2015-16 tax year example

Basic Rate at 20% – Income of £0 – £31,785

Higher Rate at 40% – Income of £31,786 – £150,000

Additional Rate at 45% – Income of £150,000+

Personal Allowance – £10,600


Tax year – 2015-16

You earn £33,000 and your personal allowance is £10,600

33,000 – 10,600 = 22,400

You will pay basic rate tax at 20% on £22,400

Do I have to pay income tax on all my income?

The good news is you don’t have to pay income tax on all of your income.

Income tax is not payable on:

  • Interest on certain types of savings, for example ISA’s.
  • First £4250 a year from a lodger in your only or family home.
  • Tax Credits.
  • Many state benefits, including housing benefit and some income support payments.
  • Wins from Premium Bonds.
  • Student grants and loans.
  • Maintenance payments received from a spouse or partner.

Income tax is payable on:

  • Earnings from work, either self employed or normally employed. The number of hours you work doesn’t matter, if you earn enough you will pay income tax. These earnings include many bonuses and perks for example company cars and medical insurance.
  • Investment income, that is income coming from interest payments, dividends and capital gains collected upon the sale of assets.
  • Some state benefits, including job seekers allowance and carer’s allowance.
  • Interest on savings in some bank, building society and national savings and investments accounts and bonds.
  • Income from a personal, state or company pension.
  • Rent received from tenants in a second or subsequent property, and/or, if over £4,250 a year, rent from a lodger in your own home.

Income tax rebate services

Our income tax rebate services will review your tax position to make sure you reclaim all of the tax you are owed. What you can claim for is all down to your own set of circumstances with different factors affecting your eligibility.

Do you buy your own tools for work?
Follow the link below to claim a rebate

Do you need to check your tax code
with HM Revenue & Customs?

More Income Tax Rebates and Tax Refunds:

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