Income tax is the tax that you pay to the government based on how much you earn in a year. If you are self-employed, the tax you pay will be calculated based on any profit you make. This also includes profit that you make on products and services that you say sell online.
This tax is the main source of revenue for the government and is collected by HM Revenue and Customs HMRC from your wages if you are an employee and on the 31st January following the end of your tax year. The government uses this money to provide funding for public services such as the NHS, education and the welfare system. It is also used for other investments’ for public use, such as road construction, housing and railways.
Income tax applies to most types of income, including pensions, and even the rent you receive if you’re a landlord. Corporations, estates and other types of entities are also required to pay tax on their profits.
Most people qualify for one or more types of tax allowance. This is the amount that you can earn before you start paying income tax and is called your Personal Allowance. Earnings below £12,570 a year are tax-free, however, for every £2 that you earn over £100,000 your personal allowance is reduced by £1, meaning you do not get a Personal Allowance and all of your income is taxed.
How is it calculated?
Income tax is made up of different bands. The amount that you will pay will be calculated based on the Income Tax band that you are in, the more that you earn, the higher tax band that you will be in and the more tax you will pay. This was especially designed to may tax paying as fair as possible, meaning that those who earn more contribute more.
Currently, the UK basic income tax rate is 20%.This increases to 40% for your earnings above £50,270 and to 45% for earnings over £150,000.
When you start your first job, you may start by paying emergency Income Tax until you have been given a proper tax code, meaning you will pay more tax initially.
Here's how the different tax bands work if you are earning £30,000, £52,500, £140,000 or £163,750.
This shows the actual amount of tax would be taken for each band and how much tax you would pay overall for those amounts earned.