If you’re feeling unsure about your Income Tax obligations, it’s important to understand what you are required to pay, how you pay it and what to do if you haven’t paid enough or have paid too much.
What is Income Tax?
There are several things you will pay Income Tax on.
- Money from employment or self-employment
- State benefits
- Grants and support payments made to your business
- Pension payments
- Rental income
- Income from a trust
Most people in the UK get a tax-free Personal Allowance (currently £12,570). For most people, this is the amount of income you can have before you pay Income Tax.
However, those earning over £100,000 need to be aware that your Personal Allowance is reduced by £1 for every £2 that your adjusted net income is above £100,000.
If your income exceeds £125,140, this means your allowance is £0.
You will be taxed on your marginal rate:
- If you earn up to £12,570, you will pay 0 per cent income tax
- If you earn £12,571 to £50,270 you will pay the basic rate tax of 20 per cent
- If you earn £50,271 to £125,140 you will pay the higher rate tax of 40 per cent
- If you earn over £125,140 you will pay the additional rate tax of 45 per cent.
Under this system, if you are classified as a higher rate taxpayer, then you would pay Income Tax at a rate of 40 per cent on all earnings between £50,271 and £125,140.
For the lower part of your earnings (between 12,571 to £50,270) you’ll still pay the appropriate 20 per cent rate of tax and anything below that will benefit from the personal allowance depending on your entitlement to this.
How can you pay Income Tax?
Most people pay Income Tax through Pay As You Earn (PAYE).
This is when your employer or pension provider takes Income Tax and National Insurance payments before they pay your wages or pension.
You will have a personal tax code, which tells how much should be deducted.
However, there are many taxpayers, such as people who are self-employed, who must report their income via their Self-Assessment tax return and make tax payments directly to HM Revenue and Customs (HMRC).
From 2026, if you have business and/or property income of £50,000 or more you will need to follow the new Making Tax Digital rules for Income Tax Self-Assessment.
This will require you to complete quarterly tax statements digitally using HMRC-compliant software and complete an annual tax return.
If you need advice on Income Tax and your obligations, contact us today.