Income tax

The following are liable to pay income tax:

• individuals

• partnerships (partners are individually responsible for the tax due on their share of the partnership profits)

• personal representatives (who pay the deceased's outstanding income tax during the administration of the estate), and

• trustees (who pay income tax on the income produced by the trust fund)

Companies pay corporation tax.

Income tax is paid with reference to the 'tax year', which runs from 6 April until 5 April. It is referred to by the calendar years which it straddles, eg the tax year beginning on 6 April 2022 is referred to as the tax year 2022/23.

When calculating income tax, you will need to work through the following steps:

Calculate your total income

Add together all of your taxable income before tax.

What constitutes taxable income?*

Taxable income is any income you pay tax on and includes:

• money you earn from employment (including bonuses and commission)

• profits you make if you are self-employed (including from services you sell)

• taxable social security benefits

• income from renting out property

• pensions

• interest from bank and building society accounts

• income from a trust

What does not constitute taxable income?*

The following income is not taxable and can, therefore, be ignored for tax purposes. You do not have to tell HM Revenue and Customs (HMRC) about income that is non-taxable. Income that is not taxable includes:

• income from tax-exempt accounts, like Individual Savings Accounts (ISAs)

• the first £2,000 of dividends from company shares

• premium bonds or National Lottery wins

• rent you receive from a lodger that is below the rent a room limit (currently £7,500)

*These lists are not exhaustive.

Deduct any allowable tax relief

Check whether you can claim any tax relief for any payments made during the year. Allowable reliefs remove sums of money from the income tax calculation and apply to:

• pension contributions: you can get tax relief on private pension contributions if certain conditions are met

• charity donations: donations to charity from individuals are tax-free (ie if they are made through Gift Aid)

• maintenance payments: Maintenance Payments Relief reduces your income tax if you make maintenance payments to an ex-spouse or civil partner

• work expenses: you can claim tax relief if you are employed and use your own money for travel or things you have to buy for your job. If you are self-employed (ie a sole trader or partner in a partnership), you can get tax relief on what you spend running your business

When you deduct allowable tax relief from your total (gross) income, the result is your net income.

Deduct any personal tax allowances

Most people get a Personal Allowance of tax-free income (ie the amount of income you can have before you pay tax).

The standard Personal Allowance for the 2022/23 tax year is £12,570.

If your income is over £100,000, your Personal Allowance goes down by £1 for every £2 that your net income is above £100,000. This means your allowance is zero if your income is £125,140 or above.

When you deduct personal allowances from your net income, the result is your taxable income.

Calculate the tax

The income tax rates are subject to change. For the 2022/23 tax year:

• taxable income between £12,571 and £50,270 should be taxed at 20%. This is the basic rate limit

• taxable income between £50,271 and £150,000 should be taxed at 40%. This is the higher rate limit

• if you have taxable income over £150,000, then this should be taxed at 45%. This is the additional rate limit 

Example: Your net income is £70,000. After deducting your personal allowance (£12,570), your taxable income is £57,430. 

• £50,270 of that £57,430 would be taxed at 20% = £10,054

• the remaining £7,160 would be taxed at 40% = £2,864

• there is no taxable income over £150,000

These figures should then be added together, leaving the amount of tax payable. In this example, the tax payable would be:

£10,054 + £2,864 = £12,918

Estimate your income tax for the current year using the Government's income tax calculator.