Income Tax

If there's a large chunk missing from your pay packet, or the Inland Revenue just sent you a scary letter and a form, you need to know more about income tax.

What is it for?

Money paid in income tax is used to pay for services provided by the state - such as education and healthcare. From April 6 2008 the basic rate of Income Tax fell from 22% to 20% and the 10% starting rate has been abolished.

Income tax is payable on:

• Earnings from full and part-time work
• Profits from a business, or dividends from shares
• Jobseekers Allowance
• Income from letting rooms or a property
• Interest from bank, national savings or building society deposits
• Tips and bonuses

If you have income from any other source, and you are unsure whether it is taxable you can ask the tax office for advice.

What income is not taxable?

• Student grants and loans
• Scholarships
• Most research awards
• Housing benefit
• Allowances from parents or spouse
• Grant from the University Access Fund

Part-time workers

You shouldn't be taxed unless you earn more than £105 per week.

Students

Your income will not be taxed if:

• You earn less than your personal allowance of £6,035 a year (2008-9) (see below).
• You haven't claimed JSA in the last year
• You only work during holidays

If you meet these requirements, complete a P38 form available from your local tax office and give it to your employer who will not deduct tax.

Personal allowance

Every single person is entitled to earn £6,035 tax-free over the tax year (April 6 2008/9). Extra allowances are given in some circumstances, such as the additional personal allowance for single parents, and blind person's allowance.

If you think you may be eligible for extra allowances look at the form entitled 'Tax Allowances and Reliefs' for more information.

Please note: The personal allowance for 2008-2009 was set at £5,435 when the budget was announced in April, but a month later it was decided to increase it to £6,035. The new rate will be introduced in September 2008, but backdated to the start of the financial year.

How do I pay tax?

• Employed? - Your employer will deduct tax from your pay and pass it on to the inland revenue (tax authorities)
• Self-employed? - You must keep records of your earnings, calculate how much you owe and pay the tax due to the Inland Revenue twice a year.
• Unemployed? - You do not have to pay income tax on your JSA

How does my employer know how much tax to deduct?

• First job? - Ask your new employer for a P46. You will receive a form from the tax office asking for details of your income and employment history. When they receive your completed form the tax office will issue you and your employer with a tax code.
• Not your first job - Your previous employer should have given you a P45 when you left. This will tell your employer how much you have earned in the current year (if anything) and how much tax (if any) you have paid so far in the current tax year. This information enables them to calculate the correct amount of tax due from your next pay packet.

What is a P60?

A P60 details your earnings and tax deductions for the current tax year. Your employer provides it. The law requires you to keep a record of your taxable income for at least 22 months after the end of the current tax year. Self-employed people must keep records for up to six years after the relevant tax year.

Where can I get help?

If you feel you really don't have the time or the confidence to handle your own tax affairs, then find a good tax return service or accountant. Ask your friends to recommend a good one. Charges vary enormously so make sure the costs are not going to outweigh the savings. For a simple tax return service you can expect fees of at least £100.