Recently, the government has been finding ways to manage economic pressures in the UK by freezing income tax thresholds. When referring to income tax, we are talking about the amounts paid by employees, taken from salaries. There has been a recent increase in the amount of taxpayers, with 4.4 million people now income tax payers over the last 3 years.
The freeze has been in place since 2021, and has since, as we’ve noted, grown the amount of people paying tax. This also means that more people are under the basic and higher brackets, with there being 29.5 million basic rate taxpayers, and 6.31 million high rate taxpayers.
This is referred to as “fiscal drag” and has effectively raised money for the government without having to increase actual tax rates. This however, leads to more lower income families becoming liable for tax, which is considered unethical by policymakers, and the public alike.
How Does Income Tax Work, And Who Pays It?
Income tax is applied based on your earnings, such as wages, profits from self-employment, certain state benefits, and other sources like rental income and savings interest. Anyone who earns money over the thresholds set by the government would pay income tax. This can be from work, or profits if you’re self-employed, and state, company, and personal pensions, for example. If you receive rental incomes above a certain amount, that would also be taxed.
Benefits received from a job, such as a company car or accommodation, are included in taxable income. This also includes any income generated from providing services through websites or apps, where it’s necessary to determine if you need to inform HM Revenue and Customs about this income.
Lastly, income from a trust or interest on savings that exceeds your savings allowance needs to be declared. Most people pay Income Tax through the Pay As You Earn system, where taxes are deducted by employers. And then, if you’re self-employed or have multiple sources of income, you might need to file a Self Assessment tax return.
How Income Tax Is Determined And Taken In The UK
In the UK, income tax is taken through a PAYE System. As to how it works, it’s quite simple:
- The system automatically deducts Income Tax and National Insurance contributions from your wages or pension.
- Also, it uses your tax code to determine how much tax to take.
In the cases where you need a self assessment:
- Self-assessments are required if you earn more than £1,000 from self-employment or more than £2,500 from other untaxed income.
- This then allows you to report income and calculate tax due annually.
What Isn’t Taxed Under Income Tax?
Not all forms of income are taxable. So take the instance where you don’t need to pay tax on the first £1,000 of income from self-employment or property rental, known as your ‘trading allowance’. Income from tax-exempt accounts like Individual Savings Accounts and National Savings Certificates are non-taxable as well, according to the government.
And then, dividends from company shares within your dividend allowance and certain state benefits are also tax-exempt. Income such as premium bond or National Lottery winnings and the rent received from a lodger under the Rent a Room Scheme limit also falls into the non-taxable category. If you occasionally sell items or rent out property, you may need to check if this income is an amount that is enough to require reporting to HMRC. Here is the full list of non-taxable types of income:
- Taxable Income Sources
- Earnings from employment or self-employment
- Most pensions, including state, company, and personal pensions
- Rental income
- Benefits received from your job
- Interest on savings that exceed your savings allowance
- Non-taxable Income
- The first £1,000 from self-employment (trading allowance)
- Income from tax-exempt accounts like ISAs
- Dividends within your dividends allowance
- Certain state benefits
How To Calculate Take Home Salary In The Uk
On the government’s tax calculator, you can get your tax amounts by answering the following questions:
1. How much are you paid?
This is where you input your gross amount in pounds, which is the amount before any deductions.
2. How often are you paid this amount?
The options are yearly, monthly, every 4 weeks, weekly, daily, or hourly.
3. Are you over the State Pension age?
This is where your response affects whether you pay National Insurance contributions.
So, in the case where you earn £80,000 annually, the calculator would look like this:
- You’d confirm your gross annual income as £80,000 annually, and that you are not over the State Pension age (which essentially would mean that you do pay National Insurance). From this, it then calculates your take-home pay.
- The personal allowance (which is the amount of income not subject to tax) is deducted from your gross income: £80,000 – £12,570 = £67,430 taxable income.
- Income tax is then calculated at different rates for different portions of your income: 20% on the first segment and 40% on the higher band, resulting in £7,540 and £11,888.40.
- National Insurance contributions are also calculated, adding up to £3,610.60. These deductions result in a net take-home pay of £56,961 for the year.
National Insurance contributions fund important benefits such as the State Pension. Employees and employers both have to make these contributions, that are calculated based off of how much you earn with each category. So, for those who are self-employed, contributions are determined by how much profit is made, according to the different rates, compared to those who are employed.
You can also find out your take home salary by trying out these easy options:
1. Alternative Online Calculators– Like the one on the government’s site, the digital world brings quick and convenient systems that let you input your figures, so you can get your income tax rates instantly.
2. Payroll Software– In business settings, any payroll software used can usually calculate the amounts payable automatically.
3. Accountant or Financial Advisor– Speaking to and consulting with a professional can bring clarity and provide credible advice while being another source to determine your rates.
4. Fintech Apps– Apps that promote financial planning and budgeting usually can calculate the actual take-home salary one will earn each month automatically with their systems.
5. DIY Calculation Using HMRC Guidelines– You can manually calculate your take-home pay using the current tax bands and National Insurance rates provided by HMRC.
