Website of the UK government

What counts as 'taxable income'?

Taxable income includes:

Non-taxable income

There are certain sorts of income that you never pay tax on. These include certain benefits, special pensions and income from tax exempt accounts. These are ignored altogether when working out how much Income Tax you may need to pay.

• A full list of taxable and non-taxable income from HM Revenue & Customs (HMRC) (opens new window)

Tax-free allowances

Everyone who is resident in the UK for tax purposes has a 'personal allowance', which is an amount of taxable income you are allowed to earn or receive each year tax-free.

This tax year (2008-2009), the basic personal allowance - or tax-free amount - is £5,435. You may be entitled to a higher personal allowance if you are 65 or over.

If you are registered blind, or are unable to perform any work for which eyesight is essential, you can also claim the tax-free blind person's allowance.

Income Tax is only due on taxable income that's above your tax-free allowances.

• Personal and tax allowances
• Blind person's allowance - more from HMRC (opens new window)

Deductible allowances and reliefs that can reduce your Income Tax bill

If you're due to pay Income Tax, there are a number of deductible allowances and reliefs that can reduce your tax bill. These include, for example:

Unlike the tax-free allowances, these aren't amounts of income you can receive tax-free. Rather they are amounts that can reduce your tax bill.

• Allowances that can reduce your tax in retirement
• Giving money to charity
• Tax advantages of personal pensions

How much Income Tax you pay

After your tax-free allowance (and any deductible allowances and reliefs) have been taken into account, the amount of tax you pay is calculated using different tax rates and a series of tax bands.

Income Tax rates 2008-2009 by tax band and type of income

* If your earned income is less than the starting rate for savings limit (£2,320), your savings income will be taxed at the 10 per cent starting rate up to the limit, rather than the 20 per cent basic rate. The starting rate limit for savings creates an alternative tax band; it is not in addition to the basic rate limit.

Remember: the tax band applies to your income after tax allowances and any reliefs have been taken into account; you're not taxed on all of your income.

'Earned income' includes income from employment or self-employment, most pension income and rental income.

'Dividends' means income from shares in UK companies.

Savings and dividend income is added to your other taxable income and taxed last. This means you pay tax on these sorts of income based on your highest Income Tax band.

• More about tax on savings
• More about tax on UK dividends

How you pay Income Tax

If you're an employee or receive a company pension

If you're an employee your employer will deduct Income Tax from your wages throughout the year and send it to HMRC. If you receive a pension, your pension provider will deduct tax in the same way. This system of collecting Income Tax is known as Pay As You Earn (PAYE).

If you have complex tax affairs you may also have to complete a Self Assessment tax return (see below).

• Understanding your tax code
• Working and paying tax
• How your pension income is taxed

If you're self-employed

If you're self-employed you'll need to complete a Self Assessment tax return (an online or paper form) and pay any Income Tax you owe in twice yearly instalments.

• Tax for the self-employed

If you have complex tax affairs

If you have complex tax affairs (for example if you earn money from rents or investments above a certain level) you may need to complete a tax return, even if you're already on PAYE. But if you're on PAYE HMRC may still be able to collect some or all of your Income Tax this way.

For full details on who needs to complete a tax return read our related article 'Do you need to fill in a tax return'.

• Do you need to fill in a tax return?

Income Tax deducted 'at source' from savings income

Interest on most savings has 20 per cent tax deducted before you receive it. If you're a basic rate taxpayer you have no further tax to pay. If you're a starting rate taxpayer or a non-taxpayer you may be able to claim tax back. If you're a higher rate taxpayer you'll have more tax to pay.

• Tax on bank and building society accounts
• Getting tax-free interest on savings and claiming tax back

More useful links

• Check Income Tax rates and allowances on HMRC website (opens new window)
• Work out if you're employed or self-employed
• Taxpayer or non-tax payer in retirement?
• More on tax rates and allowances from HMRC (opens new window)
• More about civil partnerships (opens new window)