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Personal tax

This information only applies in England and Wales.

Most employees rarely have to consider their tax situation as it's all calculated by their employer through PAYE. But becoming self-employed - or taking on employees as a small business - means having to understand the ins and outs of personal taxation.

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 £2,000 of dividends from company shares
  • 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.

National Insurance (NI) contributions must be paid in order to qualify for certain benefits such as:

  • state pension
  • jobseeker's allowance
  • employment and support allowance
  • maternity allowance
  • bereavement payments

NI should be paid by: 

  • employees who are 16 or over and earning above £190 per week
  • self-employed individuals making a profit of at least £6,725 per year

Self-employed people usually pay 2 types of National Insurance:

  • Class 2 if your profits are £6,725 or more a year
  • Class 4 if your profits are £9,881 or more a year

For the tax year 2022/23:

  • Class 2 is £3.15 per week
  • Class 4 is 10.25% on profits between £9,881 and £50,270 and 3.25% on profits over £50,270

For more information, read the Government's guidance

Most employees pay Class 1 NI contributions. Current rates are: 

  • 13.25% on earnings between £190 to £967 a week
  • 3.25% on earnings above £967 a week

For more information on NI contributions, see the Government website.

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 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.

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 2022/2023 tax year, you need to register for Self Assessment (eg if you’re self-employed or a sole trader) by 5 October 2022.

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. See the Government website for more information.

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.