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What is income tax and how much will I pay?

2023-06-01 07:46:54 source:CBS News author:Press center5 click:367order

Income tax is the government's single biggest source of money.

On 6 April the point at which the highest earners start paying the top rate of tax came down, but other thresholds were left unchanged.

This means that millions of people will end up paying more in tax.

Chancellor Jeremy Hunt has frozen the income tax personal allowance at £12,570 until April 2028. Basic rate tax payers do not have to pay any tax on income below this level.

He has also frozen the point (threshold) at which people start paying higher tax rates.

It means that as wages rise, people will pay tax on a larger proportion of their earnings, and more people will move into higher tax brackets.

The Office for Budget Responsibility - which independently assesses the government's economic plans - estimates that freezing thresholds until 2028 will create an additional 3.2 million new taxpayers.

It says 2.6 million more people will pay higher rate tax.

The freezes are expected to raise £25.5bn more a year by 2027-28, than if the thresholds had increased in line with the CPI measure of inflation.

You pay income tax to the government on earnings from employment and profits from self-employment during the tax year, which runs from 6 April to 5 April the following year.

Income tax is also due on some benefits and pensions, the money you get from renting out property, and returns from savings and investments above certain limits.

These rules apply in England, Wales and Northern Ireland. Scotland has different tax rules to the rest of the UK.

You pay the basic rate of income tax on earnings between £12,571 and £50,270 a year.

The basic rate is 20%, so a fifth of the money you earn between those amounts goes to the government in income tax.

The higher rate of income tax is 40%, and is paid on earnings between £50,271 and £125,140.

Once you earn over £100,000 a year, you start losing your tax-free personal allowance, which means you have to pay income tax at 40% on some of the first £12,570 of your earnings.

You lose £1 of your personal allowance for every £2 that your income goes above £100,000. If you earn more than £125,140 a year, you no longer get any personal allowance.

The additional rate of income tax is 45%, and is paid on earnings above £125,140 a year. Before April that threshold was £150,000.

The government says about 629,000 people pay the additional rate of income tax.

For employees, National Insurance (NI) is in many ways similar to income tax: a fixed percentage of the money you earn is deducted from your wages.

It is the second biggest source of money for the government.

It works on some of the same thresholds as income tax.

You do not pay it on the first £12,571 you earn a year. It is then charged at 12% on earnings up to £50,271, and 2% on any money made above that.

Mr Hunt confirmed the main National Insurance thresholds will also remain frozen until April 2028.

It is not paid by people over the state pension age even if they are still working.

Employers also have to pay National Insurance.

For most families in the UK, income tax is the single biggest tax they pay. You can see that in the dark green bars in the chart below.

But poorer households tend to pay a bigger share of their taxes through taxes on spending: VAT and duties - the blue areas in each bar. Those are known as indirect taxes.

For the poorest fifth of households, VAT is the biggest single tax that is paid.

Some income tax rates are different in Scotland because of powers devolved to the Scottish Parliament.

These are the income tax rates from April 2023:

What income taxes will you pay in Scotland?

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