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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 which must be paid on certain types of income, including:

  • Money earned from employment as well as job related benefits
  • Any profits made as a result of self employment
  • Most pensions (eg state pensions and private pensions)
  • Rental income (with some exceptions for live-in landlords)
  • Income derived from trusts.

It does not need to be paid in respect of:

  • Any interest on savings which falls below the savings allowance
  • Income from Individual Savings Accounts (ISAs) and National Savings Certificates
  • The first £2,000 of dividends from company shares
  • The first £1,000 of income from self-employment
  • The first £1,000 of income from property you rent (unless you're renting inder the government's Rent a Room Scheme)
  • National Lottery or Premium Bond winnings

Income tax rates

No income tax needs to be paid on income which falls within the Personal Allowance (£12,550). After that the income tax rates are as follows (2019/20 rates):

  • Personal allowance (£12,500)
  • Basic rate (£12,500 to £50,000) - 20%
  • Higher rate (£50,001 to £150,000) - 40%
  • Additional rate (over £150,000) - 45%

For further information on income tax, see the GOV.UK website.

Note that these rates only apply if you live in England, Wales or Northern Ireland. Scotland has their own tax rates listed on the Scottish Government website.

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 £116 per week.

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

  • Class 2 if your profits are £6,325 or more a year
  • Class 4 if your profits are £8632 or more a year

For the tax year 2019 to 2020, Class 2 is £3 per week and Class 4 is 9% on profits between £8,632 and £50,000 and 2% on profits over £50,000. For further information read Self-employed national insurance rates

Most employees pay Class 1 NI contributions. Current rates are 12% for earnings of £116 to £892 a week and 2% thereafter.

For further information on NI contributions, see the GOV.UK 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 source, paying these direct to HMRC.

Employers with at least one employee who earns at least £116 per week are generally required to operate PAYE. See the GOV.UK 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 (generally 31st January) by which annual assessments need to be submitted and payments made. For the 2020/2021 tax year, you need to register for Self Assessment (eg if you’re self-employed or a sole trader) by 5th October 2020.

But it's not just self employed people who need to complete self assessment. Anyone with other sources of income which do not go through PAYE may be required to carry out self assessment - see the GOV.UK 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 - see the GOV.UK website for more information.

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