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Basically… income tax is a levy on the annual earnings of a person or business.

It’s the single most important source of revenue for the Treasury, accounting for about a quarter of total tax revenue.

The tax was first introduced by former prime minister William Pitt in 1799 to help pay for the Napoleonic wars.

It was abolished in 1816 but reinstated in 1842 – and has remained a part of the British tax system ever since.

What do I pay income tax on?

If you’re employed, you’ll pay tax on your annual income if you meet the earnings threshold (more on that later).

Self-employed people pay income tax on their profits, including from services sold through websites or apps.

Income tax can also be levied on other earnings including:

• Some state benefits
• Most pensions, including state pensions, company and personal pensions and retirement income
• Rental income, unless you’re a live-in landlord
• Job benefits
• Income from a trust
• Interest on savings over your savings allowance

How much do I have to pay?

The amount of income tax you pay each year depends on how much of your earnings is above your personal tax allowance, and how much falls within each tax band.

Currently, the personal allowance sits at £12,570 – that’s the amount of income you don’t have to pay tax on.

The threshold has been frozen since April 2022 and is set to remain at the current level until 2028 under plans announced by the Conservatives (Labour have not made any noises about changing this).

Combined with inflation, frozen tax thresholds can lead to something called “fiscal drag” – sometimes referred to as a “stealth tax” – when more people are dragged into paying tax for the first time or paying a higher level of tax.

We’ve more on that in a previous post from our Basically series…

Different tax bands determine what proportion of your income will be taken as tax each year (these are for England, Wales and Northern Ireland):

• Personal allowance – if you earn up to £12,570 you’ll pay no income tax
• Basic rate – you pay 20% tax on earnings between £12,571 and £50,270
• Higher rate – for earnings between £50,271 and £125,140, it’s 40%
• Additional rate – income of £125,141 or more attracts a 45% tax rate

Scottish income tax bands differ slightly, with the addition of a starter rate, intermediate rate and top rate. Outside of the basic rate, the proportions also differ. You can read more about these on the Scottish government website here.

How is the tax paid?

The majority of people will pay income tax through PAYE (Pay As You Earn) – the system employers and pension providers use to deduct income tax and national insurance contributions before wages hit bank accounts. This money goes directly to HMRC.

The amount paid is determined by a tax code – more on those in our explainer here…

If you’re self-employed earning more than £1,000, or you’re a very high earner, you’ll likely have to pay tax through self-assessment which is done once a year.

Self-assessments are also needed if you earn over £2,500 from other untaxed income, such as tips or renting out a property.

What does the government spend income tax on?

As we mentioned previously, income tax is the biggest sources of revenue for the government, with the Office for Budget Responsibility predicting it’ll raise a whopping £302.7bn in the 2024-25 tax year – up from £279.2bn the previous year.

It’s not known exactly how the income tax portion of its revenue is spent, but overall, about two-thirds of the government’s “day-to-day” spending goes on public services, such as the NHS, schools and prisons.

Around a quarter of all spending is on social security, such as Universal Credit and the state pension.

Read other entries in our Basically series…