A guide to understanding income tax

Income tax is applied in different ways, depending on the actual income source. Here's a precis on how income tax may affect you...

Each year the government assesses your taxable income and applies the applicable tax rates to calculate the amount of income tax you should pay.

If you are employed, you would normally be charged income tax "at source", which means that your employer automatically deducts the income tax from your pay check and repay it to HMRC, so you don't have to physically send payment to HMRC.

Employees are charged income tax monthly or weekly, depending on their employer's pay run. You would only be asked from HMRC to make any additional payment if you underpaid income tax in a particular tax year and HMRC feels that they will not be able to recoup that amount via future employments.

However, in most cases, HMRC would make adjustments to the following year's tax code to reflect the amount you owe from previous years so they can increase your level of income tax until the debt is fully repaid

Income tax and Self Employment

Self employed individuals are expected to pay their income tax (and national insurance contributions) on account every January and July with any additional tax due by 31st January following the end of the tax year.

Income tax and Pensions

Income tax is also levied on pensions, because pensions are considered a "taxable income". Pension income is commonly taxed at source every time you draw it.

Income Tax and Interest Savings

Interest on savings tax is usually taxed at sourced by the bank or building society when the interest on your savings is credited to your account.

Income tax and Dividends earned from investments

Dividend income is only taxed at source at 10% with any additional tax due, depending on your total annual income, which is calculated when a tax return is submitted to HMRC. If you are a higher rate tax payer, any tax be due on estimated dividends for future years will need to be paid on account every 6 months, by January 31st and July 31st.

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