income tax

Income tax… you can almost hear the groans that come with this noun phrase. For the cynical (looking at you libertarians), it’s is a huge waste of money; for the optimistic, income tax represents society’s progression. Today we’ll be discussing what income tax is and who has to pay.

What is Income Tax?

Simply enough, income tax is a tax taken from the money you earn (otherwise known as your income). That income can be from regular jobs, self-employment and/or pensions. You’ll usually pay income tax on things like bonuses and, if you fall into the specific criteria, you’ll also pay it on things like renting property. The full list of what you pay income tax on can be found at GOV UK’s Income Tax page. It’s used for things like the NHS, pensions and tax credits.

Who Has to Pay?

The short answer is almost everyone that earns money. There are, however, exceptions to who has to pay income tax. The standard personal allowance in the UK is £11,500 per year. This is the money everyone in the UK can earn tax-free. If you earn under this amount, you do not have to pay. Bad news if you earn a lot more than £11,500; you don’t get a personal allowance on taxable income over £123,000 per year.

Any Exemptions?

The interest you make on some savings accounts (an ISA, for example) have a tax-free allowance. For an ISA you pay 0% tax on the interest gained, however, you can only put £20,000 in an ISA per year. Other savings accounts are given a £5,000 tax-free allowance on any interest earnt. Similarly, dividend payments are also tax-free if they are £5,000 or less. Some government benefits are also tax-free, such as housing benefit and working tax credit. A full list of what you don’t need to pay tax on can be found on GOV UK’s Income Tax overview page.


There are three tax rates for income tax. Basic rate is 20%, therefore, 20% of your income is taken through the pay-as-you-earn (PAYE) scheme directly by employers (unless your income is earned through other means). Basic rate applies to those who earn between £11,501 and £45,000.

Example: Gross income per year: £20,000 – 20%  = £4,000 is the total amount you’ll pay in income tax per year.

The higher rate of income tax is 40% and applies to those with an income between £45,001 to £150,000.   

Example: Gross income per year: £59,000 – 40% = £23,600 is the total amount you’ll pay in income tax per year.

The additional rate income tax is 45% and applies to those earning over £150,000 per year.

Example: Gross income per year: £375,000 – 45% = £168,750 is total amount you’ll pay in income tax per year.

Interested in becoming a tax accountant? Contact an Aspiring Accountants course advisor today to find out which accounting qualification can help you achieve your professional goal. 


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