All about: UK income tax

The basic rate of UK income tax is 20% in 2011/12, but higher rates of 40% or 50% may apply to higher earners. Some tax deductions and allowances are available. Learn more in this article.

Income tax rates

UK income tax is charged on the income of individuals for each tax year, which ends on 5 April. The basic rate of income tax for the year 2011/12 is 20%. Where the taxable income for the year exceeds £35,000, the tax rate is 40% on the amount exceeding that sum, and a rate of 50% applies to any income above £150,000. UK residents pay income tax on their worldwide income while non-residents are taxed only on UK source income. Married couples and civil partners are taxed separately. Individuals resident in the UK or an EU member state are entitled to a personal allowance of £7,475 for 2011/12 (£8,105 for 2012/13). This allowance is restricted by £1 for every £2 that the income of the individual exceeds £100,000. Individuals aged over 65 receive a personal allowance of £9,940 and those aged over 75 receive an allowance of £10,090. These allowances are subject to restriction if income exceeds £24,000. UK dividends carry a tax credit of one-ninth that can be offset against the tax liability. Non-UK dividends received also carry a tax credit in most cases, subject to certain conditions. For 2011/12, a 10% ordinary rate of income tax applies to dividends received. This rate increases to 32.5% where the taxpayer is paying income tax at the higher rate and to 42.5% for taxpayers earning more than £150,000.

Employment and self-employment

Employees are taxed on salary and benefits in kind provided by the employer such as a company car or medical insurance. An employee’s income tax and national insurance contributions are deducted from salary at source under the Pay as you Earn (PAYE) system. The taxpayer is issued with a tax code which is used by the employer to compute tax due. Employers may use tax incentive schemes such as share option plans to reward employees. If a taxpayer is self-employed and runs a business, the taxpayer is assessed on profits earned in the accounting period ending within the tax year. Business partners are assessed on their share of the partnership profits.

Tax returns

Income tax returns are due by 31 January following the tax year. Two payments on account must be made if income tax is not collected at source, in January during the tax year and July following the end of the tax year. Interest applies where tax is paid late. Penalties may apply for late or incorrect returns. Source: HM Treasury website