Income Tax for Dummies

This is a plain English Guide to Income tax.

What is income tax?

This is tax paid on money you earn, It includes your salary, some state benefits, savings and pensions. If you are an employee benefits such as company cars are also taxed.

Please note the rates below are for the tax year 2009/10.

How much tax do you pay?

This depends on how much you earn.

All of us are entitled to earn up the the level of our personal allowance of £6,475 (for the tax year 2009/10) without being taxed. This is your tax free income that the taxman cannot touch.

Those of us who fall in the higher age bracket get a higher level of personal allowance:

  • Aged between 65 to 74 the personal allowance is £9,490
  • For people  aged 75 and over it is £9,640

There is also a blind person’s allowance, and married couple’s allowances based on age

After using your personal allowance, any income that you earn after £37,400 you will be taxed at 20% . Any income above £37,400 after using your personal allowance will be taxed at 40%.

Any interest paid on your savings, the first £2,440 above your personal allowance will be taxed at 10%.  However, if your other income (non savings) exceeds £2,440 after deducting your personal allowance, then any interest from savings will be taxed at the basic rate of 20%.

How is income tax paid?

If you are:

Employed: Tax will be collected through PAYE (Pay As Your Earn). If you receive a pension, your pension provider will collect the tax in the same way.

Self Employed: Tax will be paid through self assessment. You or your accountant will complete a self-assessment form to determine your tax bill.

Savings Income : Your bank will deduct tax from the interest you receive it.

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This entry was posted on Saturday, February 13th, 2010 at 2:08 am and is filed under Tax Advise. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

3 Responses to “Income Tax for Dummies”

  1. My wife and I separated last early last year, do we file separate income tax returns? « Income Tax Returns says on February 13th, 2010 at 1:48 pm :

    [...] Southside Accountants » Blog Archive » Income Tax for Dummies [...]

  2. Aziz says on February 13th, 2010 at 2:12 pm :

    Are you UK based? We give advise on UK tax law

  3. P11D says on June 27th, 2010 at 2:27 pm :

    The Government says the old tax system has failed to keep pace with the spiralling profits generated by the big miners. The miners believe the new tax is not a tax on “super profits” but on very mild profits.

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