Income Tax in U.K

Income Tax in U.K was introduced in 1798 and it is the most important source of revenue of the UK government. This tax is based on an individual’s income. If the income of any individual, whether employee or businessman, crosses a certain limit then a tax will be imposed on that income.

Schedules for collecting Income Tax:

Income tax in UK is imposed on the basis of six schedules that have been formed according to the Income Tax law. Incomes, which are not included in these schedules are not liable to pay tax. These schedules are:

• Schedule A – Based on employee’s income
• Schedule B – Based on the incomes from land
• Schedule C – Based on the income from public securities
• Schedule D – Based on the commercial absorption of land
• Schedule E – Based on the business income
• Schedule F – Based on the dividend income

Calculations:

• Firstly, the annual incomes, that include social security benefits, interest payments from banks, wages, income by renting accommodation and pension, of an individual is added.
• Then, the tax relieves on the money spent over the year is deducted from the income. This gives the amount of taxable income.
• UK government provides certain tax allowances. Those allowances will also be deducted.
• Finally, the taxable income is multiplied by the rate of tax which gives the total amount of tax to be paid for that year. The tax rate is determined at the time budget preparation.
• Somebody may get the married couple’s allowance. In that case, the actual rate of married couple’s allowance should be deducted as well.

Tax Allowance:

Every individual in the United Kingdom has been given an income tax allowance and in the year of 2007-08 the amount of this allowance, for age below 65, is 5,225 pounds. For all, earnings up to this much amount are not liable for tax.

Exempted Investments and Incomes:

Several incomes and investments have been relieved from the scope of income tax. These types of Investments and Incomes are listed below:

• Investments:

  • Individual Savings Account: The upper limit of exemption for this type of account is 7000 pounds. Persons having an account balance under 7000 pounds are not required to pay tax on it.
  • UK Government Bonds: The profit earned from UK Government Bonds is excused from the scope of income tax.
  • Pension Funds: The tax calculation for this is same as the Individual Savings Account. Sometime the pension funds are fully relieved from taxation.
  • Insurance Bonds: The tax relief is given up to 5% of the investment, both on onshore and offshore Insurance bonds, for a year.
  • National Savings and Investments: Some investments through the National Savings scheme like the Index linked Certificates and Premium Bonds are kept out of taxation and the upper limit of this exemption for those are 15,000 pounds per issue and 30,000 pounds respectively.

• Incomes:

  • Interests from savings: In U.K, persons having National Savings Bank ordinary account gets tax exemption on their bank interest up to the first 70 pounds.
  • Social Security benefits: Social Security Benefits include income support, council tax benefit, Christmas bonus, maternity bonus etc.
  • Other Incomes: Educational allowances, compensation for personal injury, employment rehabilitation bonus etc are also exempted from income tax.