Income tax is worked out by something called ‘tax bands’, which the government decides and can change in the future, which they’ll announce within a ‘budget’.
They’re a percentage (rate) that you’ll pay on part of your salary, and these parts are called a threshold.
That sounds confusing, let’s look at a table:
This shows that on the first £12,570 you earn, you’ll pay 0% in tax, nice! This is called your personal allowance.
After you earn more than £12,570 you’ll then pay 20% tax on the money after £12,570, so not your whole salary. This is called the basic rate.
And the basic rate goes all the way to £50,270, so you’ll be paying 20% tax on everything you earn between £12,570 and £50,270.
After £50,270, you’ll be paying 40% tax on everything you earn above that, called higher rate tax.
And then after £150,000, you’ll be paying 45% on anything you earn above that, and this is called additional rate tax.
Everyone gets a personal allowance of £12,570 each year – that’s how much you can earn and not pay any tax at all! Winning.
However, if your earnings hit £100,000 your personal allowance begins to reduce too - and quite rapidly. For every £2 you earn above £100,000 your personal allowance will reduce by £1, until all your personal allowance is gone. Which means if your earnings hit £125,140, you won’t have any personal allowance, and you’ll be paying tax on your whole salary.
National Insurance Contributions (NIC), is a bit easier than income tax. You still get your tax free allowance, called your personal allowance, which is £12,570, so you won’t pay national insurance on anything before you earn that amount.
After you earn £12,570, you’ll pay 13.25% – yikes! And that goes all the way up to £50,270 too, just like income tax. However, good news, after that, you’ll pay just 3.25% on everything you earn above that.
Your personal allowance is not reduced for national insurance, unlike income tax, you’ll always have that.
National insurance is technically measured in weeks, and here’s what it looks like:
If you earn a bonus you can potentially reduce how much you pay in tax – by paying it into your pension instead, as you get tax-free benefits on your pension payments. Learn more about this with our guide to how bonuses are taxed.
Don’t worry! If you’re employed your employer will handle everything for you, it will be taken from your wages before you get paid. When you get your payslip, you’ll see how much you’ve paid for that period.
If you’re self-employed, it’s a bit more complicated, but don’t stress, it’s still easy. You’ll have to work out how much you need to pay (well, HMRC will do it for you), and you’ll pay it through your Self Assessment (tax return) each year.
Income tax is something that most people have to pay in the UK (everyone who earns an income) – unfortunately you can’t avoid it!
But you are let off paying it, if you have a lower income (less than £12,570).
Income tax goes straight to the government to pay for all the spending they do, which can be on things like transport services, education in schools, national defence (like the army), our huge national debt, and lots more, even the royal family! If you want to see exactly how it’s spent, read the Annual Tax Summary.
National insurance (technically called National Insurance Contributions) is also something everyone has to pay (unless, you learn less than £12,570).
But instead of this money going towards anything the government wants to spend it on, it goes towards things that help other people. So, things like healthcare (the NHS), the state pension, and benefits, such as maternity allowance, job seekers allowance and lots more. You can learn more about how national insurance is used here.
It's a great idea to save for your future, most of us won't have enough to live comfortably when we retire – but we can change that with a private pension.
It's a pension you own (technically called a personal pension), and you decide how much you pay into it, you can pay into it whenever you want, and it's got some awesome benefits – you'll get tax-relief on whatever you pay into it!
That means the government will add a massive 25% of all the money you put into your personal pension, all automatically, and all for free. Great right?
And if you're a higher rate tax-payer, you can claim back some of the 40% tax you've paid, and the same if you're an additional rate tax-payer (45%).
Sound good to you? Check out the best private pension providers UK to learn more and find the best provider for you. You can also check out the best investment platforms UK if you'd like to manage your pension as an investment account too.