What is income tax?
Income tax encompasses tax that must be paid on certain types of income, including:
money earned from employment as well as job-related benefits
profits made from self-employment
most pensions (eg state pensions and private pensions)
rental income (with some exceptions for live-in landlords)
income from trusts
There are certain types of income on which income tax does not need to be paid, including:
any interest on savings that falls below the savings allowance
the first £1,000 of income from self-employment (a ‘trading allowance’)
the first £1,000 of income from property you rent (unless you're renting under the Government's rent a room scheme)
For more information on income tax and the income tax rates, read Income tax.
Note that these rates only apply if you live in England or Wales. For more information, read Income tax in Scotland.
What is National Insurance?
National Insurance (NI) is a UK-wide tax which must usually be paid for an individual to qualify for the State Pension and certain state benefits, including Jobseeker’s Allowance (JSA) and Employment Support Allowance (ESA).
NI must be paid by any employee who earns over £242 per week or anybody who is self-employed and who makes a yearly profit of more than £12,570. Note that individuals earning less than these amounts but more than certain lower thresholds usually still qualify for some state benefits, including the State Pension, even though they don’t have to pay NI contributions.
If you are employed, your NI contributions will be paid directly through your employer’s payroll system using your National Insurance Number. Your employer will usually make a matching NI contribution. If you are self-employed you will normally pay your NI contributions using the Self Assessment process.
The amount of NI you must pay depends on which NI class you sit in, which is determined based on your employment status and your income. Some of the key NI classes and rates that individuals within those classes must pay, as of 6 April 2023, are:
Class 1 (most employees) for earnings between £242 and £967 per week - 12%
Class 1 (most employees) for earnings above £967 per week - 2%
Class 2 (most self-employed people with earnings above £12,570 per year) - £3.45 per week
Class 4 (most self-employed people with earnings above £12,570 per year) - for profits between £12,570 and £50,270 per year - 9%
Class 4 (most self-employed people with earnings above £12,570 per year) - for profits above £50,270 per year - 2%
For more detailed information about National Insurance, including more complex rules regarding the different classes, read the Government’s guidance.
What is PAYE?
Most employees pay their income tax and NI contributions through the Pay As You Earn (PAYE) system. PAYE, which forms part of the payroll handled by employers, is used to calculate the tax payable by employees and make any relevant deductions at the source, paying these directly to HM Revenue and Customs (HMRC).
Employers with at least one employee who earns at least £123 per week are generally required to operate PAYE. See the Government website for more details.
What is Self Assessment?
Anyone who is self-employed needs to handle their own tax affairs using the Self Assessment system and pay the relevant levels of income tax and NI to HM Revenue and Customs (HMRC). There are certain deadlines by which annual assessments need to be submitted and payments made. For the 2023/2024 tax year, you need to register for Self Assessment (eg if you’re self-employed or a sole trader) by 5 October 2023.
But it's not just self-employed people who need to complete Self Assessment. Anyone with other sources of income that do not go through PAYE may be required to carry out Self Assessment.
Self Assessment tax returns need to be submitted by midnight:
31 October 2023 for paper returns
31 January 2024 for online returns
Any income tax you owe on a Self Assessment tax return needs to be paid by midnight on 31 January 2024.
See the Government website for more information.
What is capital gains tax?
Capital gains tax (CGT) must be paid on any profits made from the disposal of certain assets which have increased in value. CGT is commonly paid on the sale of second homes, shares or business assets.
There are various specific rates of CGT and exceptions. Read Capital gains tax for more information.