imcome tax bands

How Does Income Tax Work in the UK: A Simple and Easy Guide

Income tax can be a complex and daunting subject, but it doesn’t have to be. Whether you’re a seasoned taxpayer or just starting to navigate the intricacies of the UK tax system, having the right guidance is essential. That’s where King & Taylor, your trusted expert accountants in Gravesend and Sittingbourne, come in. Our team of experienced tax advisors is here to simplify the world of income tax for you. Get in touch today.

What is Income Tax?

Income tax is a tax levied by the government on your earnings, which includes your salary, pension, and income from savings and investments. The amount you pay depends on your income level. You can read more about income tax on the government website here.

Tax Bands and Rates

In the UK, income tax is divided into different bands, each with its own tax rate. Please bare in mind that these often change so make sure you check for the latest information on the government website. As of 2023, the tax bands are as follows:

  • Personal Allowance: This is the amount of income you can earn tax-free. In 2023, the personal allowance is £12,570.
  • Basic Rate: Income above the personal allowance up to £12,571 to £50,270 is taxed at the basic rate of 20%.
  • Higher Rate: Income above the basic rate threshold up to £50,271 to £125,140 is taxed at the higher rate of 40%.
  • Additional Rate: Income above over £125,140 is taxed at the additional rate of 45%.
imcome tax bands

Impact of Tax Bands on Take-Home Pay: Understanding the Basics

Understanding how tax bands work can provide valuable insights into how they affect your take-home pay. Tax bands are essentially income ranges with corresponding tax rates. As your income increases, you may move into higher tax bands, which can have a direct impact on the amount of money you take home after taxes.


Let’s consider an individual named Sarah, who earns an annual income of £35,000. In the UK, for the tax year 2023, she’ll get taxed at the basic rate of 20%.

Now, let’s calculate Sarah’s income tax:

  1. Sarah’s income of £35,000 falls within the Basic Rate band.
    • She has her Personal Allowance (£12,570) tax-free.
    • The remaining income taxed at the Basic Rate is £35,000 – £12,570 = £22,430.
    • Tax on this income at the Basic Rate is £22,430 * 20% = £4,486 + national insurance (£2,691.60) = £7,175.80
  2. Calculate her take-home pay:
    • Sarah’s annual income before tax is £35,000.Subtract the income tax she owes (£7,175.80) from her annual income to find her take-home pay:Take-Home Pay = £35,000 – £7,175.80= £27,824.20.

So, for Sarah, her take-home pay after accounting for income tax is £27,824.20.

Understanding how tax bands work can help individuals like Sarah plan their finances effectively. It’s important to keep in mind that tax bands and rates can change from year to year, so it’s essential to consult the most recent tax information or seek advice from a tax professional to make accurate financial plans.

How does national insurance work?

National Insurance (NI) is a system of contributions in the United Kingdom that helps fund essential state benefits and services, including the National Health Service (NHS) and state pensions. There are different classes of NI contributions, such as Class 1 for employees and employers, Class 2 for self-employed individuals, and Class 4 for self-employed profits. The rates and thresholds for NI contributions can vary from year to year and are typically linked to income. Understanding your NI contributions is crucial, as they can affect your entitlement to state benefits and your future financial security, particularly in retirement. Self-employed individuals should be aware of their Class 2 and Class 4 NICs and their implications for their overall tax and benefit status.

How is Income Tax Collected?

Income tax is typically collected through the Pay As You Earn (PAYE) system. If you’re employed, your employer deducts the tax from your salary before paying it to you. This ensures a smooth and consistent collection of taxes throughout the year.

What Happens if I Get Taxed Too Much or My Tax Code is Wrong?

It’s not uncommon for individuals to face issues with their tax deductions, either due to errors in their tax code or other reasons. If you find that you’re being taxed too much or if your tax code appears to be incorrect, it’s important to take action to rectify the situation. Here’s what you should do:

1. Check Your Tax Code:

  • The first step is to check your tax code. You can find your tax code on your payslip, P60, or the annual tax summary provided by HM Revenue and Customs (HMRC). Ensure that it matches your circumstances, including your income and any allowances or deductions you’re entitled to.

2. Contact HMRC:

  • If you believe your tax code is wrong, or if you’ve been taxed too much, contact HMRC as soon as possible. You can do this by phone or through their online portal. Explain the issue and provide any necessary information to support your claim.

3. Claim a Tax Refund:

  • If you’ve overpaid taxes, you may be eligible for a tax refund. HMRC will review your situation and make adjustments to your tax code to ensure you’re taxed correctly moving forward. They’ll also refund any excess taxes you’ve paid.

4. Review Your Finances:

  • While waiting for HMRC to resolve the issue, it’s wise to review your finances and budget accordingly. If you’ve been overtaxed, you’ll have extra income once the issue is resolved, which you can use for savings, investments, or other financial goals.

5. Keep Records:

  • Maintain a record of all communications with HMRC, including dates and details of your conversations. This can be valuable if you need to follow up on your case or if there are any disputes in the future.

6. Seek Professional Advice:

  • If your tax situation is complex, or if you’re having difficulty resolving the issue with HMRC, consider seeking professional advice from a tax advisor or accountant. They can provide expert guidance and ensure that your tax affairs are in order.

7. Avoid Future Issues:

  • To prevent future problems with your tax code, keep HMRC informed of any changes in your circumstances, such as changes in employment, income, or personal details. This will help ensure that your tax code remains accurate.

Remember that HMRC is there to assist taxpayers, and they will work to correct any tax code errors or overpayments. It’s essential to act promptly and provide accurate information to facilitate the resolution process. By staying informed and proactive, you can ensure that your tax affairs are in order and that you’re not paying more tax than necessary.

Self-Employed Individuals and Paying Taxes

Self-employed individuals have a unique responsibility when it comes to paying taxes in the United Kingdom. Unlike employees who have taxes deducted automatically from their paychecks through the PAYE (Pay As You Earn) system, self-employed individuals are responsible for calculating and paying their taxes independently. Here’s what self-employed individuals need to know about paying taxes:

1. Self-Assessment Tax Return:

  • Self-employed individuals are required to complete a self-assessment tax return each year. This tax return reports your income and expenses, and it calculates the amount of income tax and National Insurance contributions (NICs) you owe. If you are self employed and need some advise on financial planning, we have a useful blog post here.

2. Keeping Accurate Records:

  • It’s crucial for self-employed individuals to keep meticulous records of their income and expenses throughout the tax year. This includes invoices, receipts, and bank statements.
  • Accurate records not only help with tax calculations but also provide evidence in case of an audit.

3. Tax Deadlines:

  • Self-employed individuals must adhere to specific tax deadlines. The deadline for filing your online tax return and paying any tax owed is usually by midnight on January 31st following the end of the tax year.
  • Failure to meet these deadlines can result in penalties, so it’s essential to be aware of them and plan accordingly.

4. Payments on Account:

  • In addition to the tax due by January 31st, self-employed individuals may be required to make “payments on account” towards the following year’s tax bill.
  • Payments on account are typically due by January 31st and July 31st each year.
  • These payments are based on your previous year’s tax liability and are designed to spread your tax payments more evenly throughout the year.

5. National Insurance Contributions (NICs):

  • Self-employed individuals are also responsible for paying Class 2 and Class 4 NICs. Class 2 NICs are flat-rate contributions, while Class 4 NICs are based on your profits.
  • NICs are typically paid alongside your income tax through the self-assessment process.

6. Tax Deductions and Allowances:

  • Self-employed individuals are entitled to claim various tax deductions and allowances to reduce their taxable income. This includes business expenses, capital allowances, and the ability to claim certain reliefs.

7. Seeking Professional Assistance:

  • Many self-employed individuals choose to work with an accountant or tax advisor to ensure accurate tax calculations and compliance with HMRC requirements.
  • Professional advice can help you maximize allowable deductions and minimize your tax liability.

8. Payment Methods:

  • HMRC offers multiple methods for paying your taxes, including online banking, direct debit, and payment by debit or credit card. It’s important to choose the method that suits you best.

9. Budgeting for Taxes:

  • Since self-employed individuals don’t have taxes deducted at source, it’s essential to budget for your tax liabilities throughout the year. Set aside a portion of your income for tax payments to avoid financial strain come tax time.

Self-employed individuals face unique tax responsibilities, but with proper record-keeping, timely filing, and potentially seeking professional guidance, they can navigate the tax system effectively and ensure they meet their tax obligations accurately and on time.

Tax Allowances and Deductions

The UK tax system offers various allowances and deductions to help reduce your tax liability. These can include:

  • Marriage Allowance: If you’re married or in a civil partnership and one partner earns less than the personal allowance, you may be able to transfer some of it to your partner.
  • Tax-Advantaged Savings: Certain savings and investment accounts offer tax benefits, such as ISAs (Individual Savings Accounts).
  • Pension Contributions: Contributions to a pension scheme can be made before tax, reducing your taxable income.

Tax Credits and Benefits

Depending on your circumstances, you may be eligible for tax credits or benefits. These are designed to support individuals and families with specific needs, such as Working Tax Credit or Child Benefit.

Keeping Records

It’s important to keep accurate records of your income and expenses, especially if you’re self-employed. This will help ensure you pay the correct amount of tax and can provide evidence in case of an audit.

Software like Quickbooks makes it easier to keep track of income and expenses.

Key Tax Deadlines

In the UK, tax deadlines are crucial. Missing deadlines can result in penalties. Make sure you’re aware of key dates for filing self-assessment tax returns and paying any tax owed.

Understanding Income Tax in the UK

In conclusion, understanding income tax in the UK is fundamental to managing your finances effectively. We hope this simple and easy guide has shed light on the key aspects of income tax, tax bands, and deductions. At King & Taylor, your expert accountants in Gravesend and Sittingbourne, we are committed to helping you navigate the intricacies of the UK tax system. If you have any questions about tax or accounting, whether you’re an individual or a business owner, don’t hesitate to get in touch with us. We’re here to provide expert guidance and tailored solutions to ensure your financial well-being and compliance. Remember, the right knowledge and professional support can make tax season less daunting and more rewarding.