Tuesday 27th Feb, 2024
What is Tax and National Insurance?
Personal taxation, which includes Income Tax and National Insurance, can seem very complicated, especially for anyone at the start of their working life. This is intended as a brief introduction to the topic. For those needing more specific details of the UK’s current tax situation, fortunately there are some excellent websites to help you find out more.
Income Tax
This is the single biggest source of funding for the UK Treasury, making up around a quarter of total tax revenue. It is collected by HMRC and used to help fund a wide range of public services including the NHS, education, welfare support and investment in roads, railways and housing.
Income tax is charged on most forms of income, including wages and salaries from work, profits or income from self-employment, pensions, investments and income from renting out property. However, some savings products (such as ISAs) and many state benefits are not subject to tax.
Each person is allowed to earn up to a certain level of income (£12,570 in 2023-24) tax-free. This is called your Personal Allowance. As a result, only about three-fifths of adults have a high enough income to pay income tax.
Other allowances may be given which also reduce your overall tax bill. For example, basic rate taxpayers can earn up to £1,000 interest or dividend on savings tax-free every year. Private pension contributions and money given to charity, within certain limits, can also be deducted from your total taxable income. Marriage allowance or Blind Person’s allowance are other examples.
After deducting the allowances, the amount of income left is your Taxable Income for the year. The tax year runs from 6 April one year to 5 April the next. Income tax is not paid at the same rate on all your income. There are different income bands, with tax paid at the Basic rate (20%), Higher rate (40%) or Additional rate (45%), so that as your income increases, so does the amount of Income Tax you pay.
Most people have their tax deducted from their main wages automatically through the Pay as you Earn (PAYE) system. Others may need to pay their annual tax bill direct to HMRC. Some have to complete an annual Tax Return, listing all their sources of income, so that HMRC can check whether they are paying the correct level of tax. If too much has been paid, it can be reclaimed. If asked for a Tax Return, it’s important to send it back by the deadline or you may get a fine.
National Insurance
As well as Income Tax you may also have to make National Insurance contributions (NICs). NICs are the UK’s second biggest tax, raising about 20% of all tax revenues.
They are paid by employees and self-employed people on their earnings, and also by employers on the earnings of their workforce. You normally start paying NICs when you turn 16 once your earnings reach a certain level (called the lower earnings threshold). People over the State Pension age do not pay NIC on their earnings.
NICs help to build your entitlement to certain state benefits, including Maternity Allowance and the State Pension when you retire. For State Pension, you’ll need at least ten qualifying years of contributions to get any amount, and at least 35 years to receive the full amount.
If you don’t work, for example if you are a carer or claim benefits due to ill health or unemployment, you may be able to get National Insurance credits. And you can choose to make voluntary contributions to fill gaps in your record.
Just like Income Tax, NICs are normally paid automatically from your wages through PAYE, so you don’t need to do anything.
Find out more:
This article is for general information only and does not constitute financial, legal, or any other form of advice.
Updated 26/02/2024
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