1. Overview
2. How you pay Income Tax
3. Tax-free and taxable state benefits
4. Work out if you need to pay Income Tax
5. Check you're paying the right amount
1. Overview
Income Tax is a tax you pay on your income.
You do not have to pay tax on all types of income.
You pay tax on things like:
i) money you earn from employment
ii) profits you make if you’re self-employed - including from services you sell through websites or apps
iii) some state benefits
iv) grants and support payments made to you or your business because of coronavirus, including the Self-Employment Income Support Scheme, the Coronavirus Job Retention Scheme, the Small Business Grant Fund or the Retail, Hospitality and Leisure Grant Fund - read about reporting coronavirus grants and support payments
v) the Test and Trace Support Payment in England (or the Self-isolation Support Payment in Scotland and the Self-isolation Support Scheme in Wales)
vi) most pensions, including state pensions, company and personal pensions and retirement annuities
vii) rental income (unless you’re a live-in landlord and get less than the rent a room limit)
viii) benefits you get from your job
ix) income from a trust
x) interest on savings over your savings allowance
You do not pay tax on things like:
i) the first £1,000 of income from self-employment - this is your ‘trading allowance’
ii) the first £1,000 of income from property you rent (unless you’re using the Rent a Room Scheme)
iii) income from tax-exempt accounts, like Individual Savings Accounts (ISAs) and National Savings Certificates
iv) dividends from company shares under your dividends allowance
v) some state benefits
vi) premium bond or National Lottery wins
vii) rent you get from a lodger in your house that’s below the rent a room limit
If you only occasionally sell items or rent out property (for example through auction websites or short-term rental apps), check if you need to tell HMRC about this income.
Income Tax "Allowances" & "Reliefs"
Most people in the UK get a Personal Allowance of tax-free income. This is the amount of income you can have before you pay tax.
The amount of tax you pay can also be reduced by tax reliefs if you qualify for them.
2. How you pay Income Tax
i) Pay As You Earn (PAYE)
Most people pay Income Tax through PAYE. This is the system your employer or pension provider uses to take Income Tax and National Insurance contributions before they pay your wages or pension. Your tax code tells your employer how much to deduct.
Tax on state benefits
Your tax code can take account of taxable state benefits, so if you owe tax on them (for example for the State Pension) it’s usually taken automatically from your other income.
If the State Pension is your only income, HM Revenue and Customs (HMRC) will write to you if you owe Income Tax. You may need to fill in a Self Assessment tax return.
ii) Self Assessment tax returns (SATR)
If your financial affairs are more complex (for example you’re self-employed or have a high income) you may pay Income Tax and National Insurance through Self Assessment. You’ll need to fill in a tax return every year.
You must also fill in a tax return if you earned more than either:
* £1,000 from self-employment
* £2,500 from other untaxed income, for example from tips or renting out a property
Contact the Income Tax helpline if your income from renting out a property was between £1,000 and £2,500.
Tax-free and taxable state benefits
State benefits that are taxable
The most common benefits that you pay Income Tax on are:
i) Bereavement Allowance (previously Widow’s pension)
ii) Carer’s Allowance
iii) contribution-based Employment and Support Allowance (ESA)
iv) Incapacity Benefit (from the 29th week you get it)
v) Jobseeker’s Allowance (JSA)
vi) pensions paid by the Industrial Death Benefit scheme
vii) the State Pension
viii) Widowed Parent’s Allowance
Tax-free state benefits
The most common state benefits you do not have to pay Income Tax on are:
i) Attendance Allowance
ii) Bereavement support payment
iii) Child Benefit (income-based - use the Child Benefit tax calculator to see if you’ll have to pay tax)
iv) Child Tax Credit
v) Disability Living Allowance (DLA)
vi) free TV licence for over-75s
vii) Guardian’s Allowance
viii) Housing Benefit
ix) Income Support - though you may have to pay tax on Income Support if you’re involved in a strike
x) income-related Employment and Support Allowance (ESA)
xi) Industrial Injuries Benefit
xii) lump-sum bereavement payments
xiii) Maternity Allowance
xiv) Pension Credit
xv) Personal Independence Payment (PIP)
xvi) Severe Disablement Allowance
xvii) Universal Credit
xviii) War Widow’s Pension
xix) Winter Fuel Payments and Christmas Bonus
xx) Working Tax Credit
4. Work out if you need to pay Income Tax
To work out if you should be paying Income Tax, follow these steps.
1. Add up all your taxable income, including taxable state benefits.
2. Work out your tax-free allowances.
3. Take your tax-free allowances away from your taxable income.
>> If there’s anything left, you’re a taxpayer. Contact the Income Tax helpline if you’re not already paying tax.
>> If there’s nothing left, you should not be paying tax and may be due a refund.
5. Check you're paying the right amount
You can see if you’re paying the right amount of Income Tax online. For the current tax year (6 April 2021 to 5 April 2022), you can:
>> check your Income Tax payments
>> work out how much income tax you should be paying
You can also:
>> check how much Income Tax you paid last year (6 April 2020 to 5 April 2021)
>> estimate how much Income Tax you should have paid in a previous year
If you cannot use these services, you can check you’ve paid the right tax by contacting HMRC or by getting help from an accountant.
There’s a different way to change a Self Assessment tax return.