Income Tax
Everyone needs to know more about income tax, but you might only start thinking about it if there's a large chunk missing from your pay packet, or the Revenue just sent you a scary letter and a form.
Income tax is used to pay for services provided by the state - such as education and healthcare. It is calculated by working out how much money you earn (your income) and then taking a proportion of that money in tax.
For the 2009/10 tax year your basic personal allowance (or tax-free amount) is £6,475. After that you're generally taxed at the following rates:
- Any income up to £37,400 will be taxed at 20%;
- Any income over £37,400 will be taxed at 40%.
Income tax is payable on:
- Earnings from full and part-time work;
- Tips and bonuses;
- Jobseekers Allowance;
- Profits from a business;
- Dividends from shares;
- Income from letting rooms or a property;
- Interest from bank or building society deposits
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
If you have income from any other source, and you are unsure whether it is taxable or not you can ask the tax office for advice. A comprehensive list of what is taxable is available from the LITRG.
Part-time workers
Generally you shouldn't be taxed unless you earn more than £124 per week.
Students
You will not be liable to tax if you earn less than your personal allowance of £6,475 (2009-10).
If you only work during the holidays you can ask your employer not to deduct tax by completing a form P38S which you can download from the HM Revenue & Customs (HMRC) website.
If you work during term time then you will go into the normal PAYE system and any tax you overpay will have to be reclaimed at the end of the tax year.
Personal allowance
On the whole every single person is entitled to earn £6,475 tax-free over the tax year (2009/10). Extra allowances are given in some circumstances, such as the additional allowance if you are registered blind.
If you think you may be eligible for extra allowances look at the form entitled 'Tax Allowances and Reliefs' for more information.
How do I pay tax?
- Employed? - Your employer will deduct tax from your pay and pass it on to the HMRC, but you will need to check your PAYE code to make sure you are paying the right amount.
- Self-employed? - You must keep records of your earnings, calculate how much you owe and pay the tax due to the HMRC twice a year. This is known as Self Assessment.
- Unemployed? - You do not have to pay income tax on your Jobseeker's Allowance if your total income for the year is below your personal allowances.
How does my employer know how much tax to deduct?
- First job? - Ask your new employer for a P46. Depending on your circumstances you might then 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 and provide you with a copy.
- Not your first job? - Your previous employer should have given you a P45 when you left. This will tell your new 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. If you have lost your P45, or didn't receive one, you will have to go through the P46 procedure above.
What is a P60?
A P60 details your earnings and tax deductions for the last 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 do not receive a P60, but must keep records for up to six years after the relevant tax year.
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