Income tax is collected by the government, from your personal income, to pay for public services including but not limited to education, welfare and the NHS. Most personal income is subject to tax including earnings from employment, self-employment, some benefits and pensions, rental income and returns from savings and investments, over certain thresholds.
Why do we Pay Income Tax?
Income tax is one of the main sources of revenue for the government. If you are employed tax is deducted from your pay before it ends up in your bank account. Pay as you earn (PAYE) is deducted from your wages by your employer and sent to the government on your behalf. If you are self-employed, you will need to fill in a self-assessment tax return once a year which calculates the amount of income tax you owe and instructs you on how to pay this. In our Guide to Self-Employment versus Limited Company we explain the differences between registering for self-employment, or a limited company, so you can select which is the right business model for your long term profitability. Income tax is levied on most types of personal income, but each individual has an amount of personal allowance that can be earned tax-free. In fact only approximately 60% of the workforce has earned income over the tax free threshold. Those who earn over the personal allowance will be taxed at a rate relative to their earnings. tax is split into bands that are taxed at different rates. These can be adjusted by the government according to economic trends and the revenue required to deliver essential projects and services to the nation.
Which Earnings are Liable for Income Tax?
Savings, dividends and pensions are taxed less than ordinary income. Income from employment and self-employment is subject to National Insurance contributions as well as income tax. National Insurance Contributions (NICs) are a type of tax paid upon earnings for employees and the self-employed. NICs are the UK’s second largest tax revenue source, after tax. NICs are only paid by those who earn over the tax threshold annually. What are NICs? The majority of revenue from NICs is generated by employer contributions. Followed by employee contributions. Money accrued in a private pension or donated to charity can be deducted from an individual’s income for tax purposes. You can find out the current income tax rates from HMRC. If an individual’s annual income is under the personal allowance, they can choose to transfer 10% of the full allowance to a spouse or civil partner, who is a basic-rate taxpayer.
Savings and Investments
Income from savings and investments is taxed differently to other income. Money held in an Individual Savings Account (ISA) is exempt from tax completely. Individuals are allowed to receive certain amounts of interest income and dividends outside of ISAs tax free. Dividends that are still subject to tax are taxed at reduced rates. When calculating which income falls into which tax band, dividends are treated as the top slice of income, followed by interest income.
Income that is paid into a pension is exempt from tax when it is added to the pension. Income earned within the pension fund is also exempt. Instead pension income is classed as deferred earnings for tax purposes. This means that your money is taxed when you receive it from the pension. There are caps on the annual and lifetime amounts that you can save in a pension.
Prestige Business Management Works for You
Prestige Business Management can help you streamline your tax and ensure that your financial products are working hard for you, so you can save money and focus on your earnings. Find out what we can do for you. Call us today on 0203 773 2927.