Income tax in the UK is calculated based on how much money you earn over the course of a year. The process might seem complicated at first, but it follows a simple idea: you pay tax on the money you earn above a certain amount, called your personal allowance.
First, every individual has a personal allowance—a set amount of income that is tax-free. For example, if the personal allowance is £12,570, you can earn up to that amount without paying any tax. If you earn less than this, you don’t pay income tax at all. If you earn more, you only pay tax on the money above the allowance.
Next, the taxable income (the amount above your personal allowance) is divided into different chunks called tax bands. In the UK, there are different tax bands with different rates. For instance, the first tax band might be taxed at 20% (this is known as the basic rate). If your income is high enough to enter the next tax band, the income in that band might be taxed at a higher rate, such as 40% (this is called the higher rate). There is also an additional rate for very high incomes.
To calculate your tax, you start with your total income, subtract your personal allowance, and then apply the tax rates to the remaining amount based on the tax bands it falls into. This means if you earn more money, not all of it is taxed at the same rate; only the portion that fits into each tax band is taxed accordingly.
Finally, after the calculation, your employer usually deducts the tax from your salary if you work as an employee, using a system called PAYE. If you’re self-employed, you report your earnings and calculate your tax using self-assessment. This way, income tax helps fund public services like schools, hospitals, and roads while keeping the process fair based on what you earn.
If you’re uncertain, call our tax accountants or send us an email for further clarification.
