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What is Income Tax?
You pay income tax on any income you receive in a tax year over and above your Personal Allowance. Find out more about Income Tax on our accounting glossary.
Note: Income from dividends is taxed at a different rate.
The Scottish rate of Income Tax
Taxpayers in Scotland pay Income Tax in a different way to the rest of the UK. Find out more about the Scottish rate of Income Tax.
Example 1: How Martin works out his Income Tax as a sole trader
Martin is a freelance copywriter who is registered with HMRC as a sole trader. Every year he must pay Income Tax on profits above his Personal Allowance. He need to know three things in order to work out how much to pay:
- His profit: £25,070
- The Personal Allowance that applies to him: £12,570
- The Income Tax rate his profit is subject to: 20% basic rate
Martin deducts his Personal Allowance from his profit to work out his taxable income:
£25,070 - £12,570 = £12,500 taxable income
He then multiplies his taxable income by the applicable Income Tax rate (20%) to work out the tax he is due to pay:
£12,500 x 20% = £2,500 to pay to HMRC in Income Tax
Example 2: How Brianna works out her Income Tax as a limited company director
Brianna is the company director of a small IT consultancy business which is registered with HMRC as a limited company. She needs to know three things in order to work out how much Income Tax she needs to pay:
- Her income: £40,000 salary
- The Personal Allowance that applies to her: £12,570
- The Income Tax rate her salary is subject to: 20% (note: if Brianna was paid any dividends by the company, tax on these would be calculated at a different rate).
Unlike a sole trader’s Income Tax which is calculated on an annual basis, the Income Tax due on a limited company director’s salary is calculated each time they are paid under the PAYE scheme. Brianna’s salary is paid monthly through the company’s payroll so her Income Tax is calculated monthly.
In simple terms, HMRC will tax Brianna when her monthly salary goes over 1/12th of her Personal Allowance:
£12,570/12 = £1047.50 tax-free each month
Brianna will only pay tax on her salary above £1047.50 each month. As long as the company does this correctly, she will not have to pay any additional Income Tax on her salary after the end of the year.
How to pay Income Tax
| Online or telephone banking (Faster Payments) | Same or next day |
| CHAPS | Same day |
| Bacs | Three working days |
| Debit card | Same or next day |
| Business credit card (1.5% charge, personal credit cards are no longer accepted) | Same or next day |
| Cheque through the post | Three working days |
| Existing Direct Debit | Three working days |
| New Direct Debit | Five working days |
| PAYE tax code | N/A |
| At your bank or building society | Same or next day |
Note: If you’re self-employed, Income Tax is calculated annually on your Self Assessment tax return. The total amount of Income Tax due following completion of your return can be paid in the following ways:
Online or telephone banking: If you’re paying by online or telephone banking (Faster Payments, CHAPS or Bacs) details for the HMRC bank account you should pay your tax bill into can be found here.
Debit card or business credit card: If you are paying by debit or credit card you can do so by following the links from your HMRC online account.
Cheque: You can pay your Income Tax bill with a cheque made payable to ‘HM Revenue and Customs only’ followed by your Unique Taxpayer Reference (UTR) number. It should be posted along with your paying-in slip to HMRC, Direct, BX5 5BD – no street name, city name or PO Box is required.
Direct Debit: You can set up a Direct Debit from your HMRC online account. The first time you set up a Direct Debit for Self Assessment allow at least five working days the before you submit your return to ensure the payment is taken from your account in time. Thereafter allow for at least three days. Note that you have to set up a new direct debit every time you wish to make a payment and that payment on account requires a separate Direct Debit.
PAYE tax code: If you already pay tax through PAYE and owe less than £3,000 in total HMRC can automatically take what you owe through your tax code. This will be taken from your salary or pension in equal instalments over 12 months. To pay your Income Tax bill this way you must have completed your paper tax return before the 31st October or your online tax return by 31st December to be eligible. If you meet all three requirements but do not wish to pay in this way you should notify HMRC.
At your bank or building society: You can only pay your income tax bill at your bank or building society if you still get paper statements from HMRC and have the paying-in slip they sent to you in the post. Payments can be made by cash or cheque made payable to ‘HM Revenue and Customs only’ followed by your Unique Taxpayer Reference (UTR) followed by the letter ‘K’.
Previous Income Tax bands and rates
| 2023-24 | |
|---|---|
| Basic rate | 20% |
| Higher rate | 40% |
| Additional rate | 45% | 2022-23 |
| Basic rate | 20% |
| Higher rate | 40% |
| Additional rate | 45% | 2021-22 |
| Basic rate | 20% |
| Higher rate | 40% |
| Additional rate | 45% | 2020-21 |
| Basic rate | 20% |
| Higher rate | 40% |
| Additional rate | 45% | 2019-20 |
| Basic rate | 20% |
| Higher rate | 40% |
| Additional rate | 45% | 2018-19 |
| Basic rate (£1 - £34,500) | 20% |
| Higher rate (£34,501 - £150,000) | 40% |
| Additional rate (over £150,000) | 45% | 2017-18 |
| Basic rate (£1 - £33,500) | 20% |
| Higher rate (£33,501 - £150,000) | 40% |
| Additional rate (over £150,000) | 45% | 2016-17 |
| Basic rate (£1 - £32,000) | 20% |
| Higher rate (£32,001 - £150,000) | 40% |
| Additional rate (over £150,000) | 45% | 2015-16 |
| Basic rate (£1 - £31,785) | 20% |
| Higher rate (£31,786 - £150,000) | 40% |
| Additional rate (over £150,000) | 45% | 2014-15 |
| Basic rate (£1 - £31,865) | 20% |
| Higher rate (£31,866 - £150,000) | 40% |
| Additional rate (over £150,000) | 45% | 2013-14 |
| Basic rate (£1 - £32,010) | 20% |
| Higher rate (£32,011 - £150,000) | 40% |
| Additional rate (over £150,000) | 45% | 2012-13 |
| Basic rate (£1 - £34,370) | 20% |
| Higher rate (£34,371 - £150,000) | 40% |
| Additional rate (over £150,000) | 50% | 2011-12 |
| Basic rate (£1 - £35,000) | 20% |
| Higher rate (£35,001 - £150,000) | 40% |
| Additional rate (over £150,000) | 50% | 2010-11 |
| Basic rate (£1 - £37,400) | 20% |
| Higher rate (£37,401 - £150,000) | 40% |
| Additional rate (over £150,000) | 50% | 2009-10 |
| Basic rate (£1 - £37,400) | 20% |
| Higher rate (over £37,400) | 40% | 2008-09 |
| Basic rate (£1 - £34,800) | 20% |
| Higher rate (over £34,800) | 40% | 2007-08 |
| Starting rate (£1 - £2,230) | 10% |
| Basic rate (£2,231 - £34,600) | 22% |
| Higher rate (over £34,600) | 40% | 2006-07 |
| Starting rate (£1 - £2,150) | 10% |
| Basic rate (£2,151 - £33,300) | 22% |
| Higher rate (over £33,300) | 40% | 2005-06 |
| Starting rate (£1 - £2,090) | 10% |
| Basic rate (£2,091 - £32,400) | 22% |
| Higher rate (over £32,400) | 40% | 2004-05 |
| Starting rate (£1 - £2,020) | 10% |
| Basic rate (£2,021 - £31,400) | 22% |
| Higher rate (over £31,400) | 40% | 2003-04 |
| Starting rate (£1 - £1,960) | 10% |
| Basic rate (£1,961 - £30,500) | 22% |
| Higher rate (over £30,500) | 40% | 2002-03 |
| Starting rate (£1 - £1,920) | 10% |
| Basic rate (£1,921 - £29,900) | 22% |
| Higher rate (over £29,900) | 40% | 2001-02 |
| Starting rate (£1 - £1,880) | 10% |
| Basic rate (£1,881 - £29,400) | 22% |
| Higher rate (over £29,400) | 40% | 2000-01 |
| Starting rate (£1 - £1,520) | 10% |
| Basic rate (£1,521 - £28,400) | 22% |
| Higher rate (over £28,400) | 40% | 1999-00 |
| Starting rate (£1 - £1,500) | 10% |
| Basic rate (£1,501 - £28,000) | 23% |
| Higher rate (over £28,000) | 40% | 1998-99 |
| Lower rate (£1 - £4,300) | 20% |
| Basic rate (£4,301 - £27,100) | 23% |
| Higher rate (over £27,100) | 40% | 1997-98 |
| Lower rate (£1 - £4,100) | 20% |
| Basic rate (£4,101 - £26,100) | 23% |
| Higher rate (over £26,100) | 40% | 1996-97 |
| Lower rate (£1 - £3,900) | 20% |
| Basic rate (£3,901 - £25,500) | 24% |
| Higher rate (over £25,500) | 40% | 1995-96 |
| Lower rate (£1 - £3,200) | 20% |
| Basic rate (£3,201 - £24,300) | 25% |
| Higher rate (over £24,300) | 40% | 1994-95 |
| Lower rate (£1 - £3,000) | 20% |
| Basic rate (£3,001 - £23,700) | 25% |
| Higher rate (over £23,700) | 40% | 1993-94 |
| Lower rate (£1 - £2,500) | 20% |
| Basic rate (£2,501 - £23,700) | 25% |
| Higher rate (over £23,700) | 40% | 1992-93 |
| Lower rate (£1 - £2,000) | 20% |
| Basic rate (£2,001 - £23,700) | 25% |
| Higher rate (over £23,700) | 40% | 1991-92 |
| Basic rate (£1 - £23,700) | 25% |
| Higher rate (over £23,700) | 40% | 1990-91 |
| Basic rate (£1 - £20,700) | 25% |
| Higher rate (over £20,700) | 40% |
Note: All taxable income is defined as gross income less any allowances (such as the Personal Allowance) and reliefs available to the taxpayer.
Disclaimer: The content included on this page is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included on this page. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.