What is Income Tax and who pays it?

In 2021/22, the UK Government raised over £915 billion a year in receipts – income from taxes and other sources.

It is the highest level since the 1980s and is equivalent to around 39 per cent of the size of the UK economy, as measured by Gross Domestic Product (GDP).

The majority of receipts come from three main sources, which are Income Tax, National Insurance contributions (NICs) and Value Added Tax (VAT). Together they raised around £530 billion in 2021/22, with Income Tax receipts alone totalling £225 billion.

What is Income Tax?

Income Tax charges are based on income with the higher rates applied to higher incomes.

It is levied on total income whether from earnings or investments including pensions, although some deductions and allowances apply.

Income Tax is charged on most types of income. The most common way is on your wages and salary from work through PAYE.

But you also need to pay Income Tax on:

Interest and dividends from savings and investments
Rent received if you are a landlord
Your profits if you run a business, which is Corporation Tax (CT), essentially an Income Tax for companies, and you hit your tax threshold as soon as your business starts making a profit

You don’t usually pay Income Tax on all your taxable income. This is because most people qualify for one or more allowances and everyone is entitled to the yearly personal allowance, which is £12,570 in 2021/22. For those who earn over £100,000, the £12,570 allowance will be reduced by £1 for every £2 earned over the £100,000 limit.

There is no tax-free allowance when your annual income reaches £125,140.

Current Income Tax rates are: