What is capital income tax?

How does income tax work?

Everyone in the UK has a tax-free personal allowance of £12,570 (unless you earn over £100k*).

This means you pay no tax on any earnings up to £12,570.

Anything you earn over £12,570 is taxed in a “bracket” - let’s have a look at these:

Earnings

£12,571 - £50,270 = 20% tax rate (basic rate)

£50,271 - £150,000 = 40% tax rate (higher rate)

£150,001+ = 45% tax rate (additional rate)

A lot of people think this means if you get a pay increase from £49k to £51k you will now pay 40% on everything. This is incorrect - you would pay 20% on anything from £12,570 - £50,270 and 40% on the additional £730.

*If you do earn over £100k you lose £1 of this tax-free personal allowance for every £2 over £100k that you earn - so once you earn £125k you have no personal allowance.

You may have a different personal allowance based on other factors; marriage allowance etc. If you would like more information on personal allowances contact us.

National Insurance

Yes - this basically is a second ‘income tax’ disguised under another name. However, it benefits you - by paying National Insurance you gain ‘qualifying years’ which lead to you earning a state pension.

‘Qualifying years’ are where you earn over £242 a month - you need 10 years to receive state pension and 35 to receive full state pension.

This is based on weekly earnings but let’s have a look at the rates here:

Earnings per week NI Rate

to £242 0%

£242 - £967 8%

£967+ 2%

Again, this is based on brackets, so if you earned £1,000 a week you would pay nothing on the first £242, you would pay 8% on the next £725 and 2% on the last £33.

Looking at both of these examples we will work out a simple tax bill:

Earnings - £20,000

IT @ 0% - £12,570 = £Nil

IT @ 20% - £7,430 = £1,486

NI @ 0% - £12,570 = £Nil

NI @ 8% - £7,430 = £594.40

Total tax bill = £2,080.40

How do I pay this?

In the UK we have a system called PAYE (Pay as You Earn). If you are employed by any business you will be paid through this system. It automatically calculates how much tax you pay on each payday and takes this from your wages.

This prevents people from spending the money they would then need to pay back to the taxman at a later date. On your payslip you will see deductions for tax (PAYE) and NI as well as any other deductions - ie: pension contributions.

Was this useful? If there is anything which you feel we have missed or that you would like to learn more about please contact us.