What is income tax and how much will I pay?

Woman calculating her taxesImage source, Getty Images

Income tax is the government’s single biggest source of money.

There are not expected to be significant income tax changes in the Autumn Statement on 22 November, but measures already announced mean millions of people will end up paying more in tax.

What is happening to income tax thresholds?

Income tax is one way the government takes a proportion of the money people earn.

Income tax thresholds are the level of income at which people start paying tax or begin paying higher rates of tax.

Chancellor Jeremy Hunt has frozen the income tax personal allowance at £12,570 until April 2028. Most taxpayers do not pay any tax on income below this level.

He has also frozen the point at which people start paying higher tax rates.

It means that as wages rise, people will pay tax on a bigger portion of their earnings, and more people will move into higher tax brackets. This effect is known as fiscal drag.

The Office for Budget Responsibility – which independently assesses the government’s economic plans – estimates that freezing thresholds until 2028 will create an additional 3.2 million new taxpayers.

It says 2.6 million more people will pay higher rate tax.

The freezes are expected to raise £25.5bn more a year by 2027-28 than if the thresholds had increased in line with the CPI measure of inflation.

Which types of income do you pay tax on?

You pay income tax to the government on earnings from employment and profits from self-employment during the tax year, which runs from 6 April to 5 April the following year.

Income tax is also due on some benefits and pensions, the money you get from renting out property, and returns from savings and investments above certain limits.

These rules apply in England, Wales and Northern Ireland. Scotland has different tax rules to the rest of the UK.

What is the basic rate of income tax?

You pay the basic rate of income tax on earnings between £12,571 and £50,270 a year.

The basic rate is 20%, so a fifth of the money you earn between those amounts goes to the government in income tax.

What is the higher rate of income tax?

The higher rate of income tax is 40%, and is paid on earnings between £50,271 and £125,140.

Once you earn more than £100,000 a year, you start losing your tax-free personal allowance, which means you have to pay income tax of 40% on some of the first £12,570 of your earnings.

You lose £1 of your personal allowance for every £2 that your income goes above £100,000. If you earn more than £125,140 a year, you no longer get any tax free personal allowance.

What is the additional rate of income tax?

The additional rate of income tax is 45%, and is paid on earnings above £125,140 a year.

The government says about 629,000 people pay the additional rate of income tax.

What is National Insurance?

For employees, National Insurance (NI) is in many ways similar to income tax: a fixed percentage of the money you earn is deducted from your wages.

It is the second biggest source of money for the government, and applies across the whole of the UK.

Image source, Getty Images
Image caption,

National insurance rules are different for people over state pension age

It works on some of the same thresholds as income tax.

You do not pay NI on the first £12,571 you earn a year. It is then charged at 12% on earnings up to £50,271, and 2% on any money made above that.

Mr Hunt confirmed the main National Insurance thresholds will also remain frozen until April 2028.

NI is not paid by people over the state pension age even if they are still working.

Employers also have to pay NI contributions.

Who pays most in income tax?

For most families in the UK, income tax is the single biggest tax they pay. You can see that in the dark green bars in the chart below.

But poorer households tend to pay a bigger share of their taxes through taxes on the money they spend such as VAT and duties, rather than the money they earn. These “indirect taxes” are shown in the blue areas in each bar.

For the poorest fifth of households, VAT is the biggest single tax paid.

How is tax different in Scotland?

Some income tax rates are different in Scotland because of powers devolved to the Scottish Parliament.

These are the Scottish income tax rates from April 2023:

  • Tax-free personal allowance: £12,570 (reduced by £1 for every £2 earned above £100,000)
  • Starter rate of 19%: £12,571 to £14,732
  • Scottish basic rate of 20%: £14,733 to £25,688
  • Intermediate rate of 21%: £25,689 to £43,662
  • Higher rate of 42%: £43,663 to £125,140
  • Top rate of 47%: above £125,140

How high are UK taxes historically?

Total UK tax take . As a % of the size of the economy.  .

One way of measuring how high taxes are is to consider the amount of tax raised as a proportion of the size of the economy.

Under current plans, the amount of money the government takes in tax is forecast to rise to 37.7% of the size of the economy by 2027-28, up from an estimated 36.9% in 2023-2024.

By that measure, it would be the highest level of tax the UK has ever seen.

How do UK taxes compare with other countries?

If you look at the amount of tax raised as a proportion of the size of the economy in 2021 – the most recent year for which international comparisons can be made – the figure was 33.5%.

That puts the UK right in the middle of the G7 group of big economies.

Tax burdens in the G7. Tax revenue as a % of GDP 2021. The tax burden in the UK in 2021 was right in the middle of the G7 as a proportion of GDP. France, Italy and Germany were higher. Canada, Japan and the US were lower. .

France, Italy and Germany tax more, Canada, Japan and the US tax less.

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