Pay As You Earn Taxes in the UK: Your Complete Guide
Navigate the intricacies of the PAYE Tax System in the UK with our comprehensive guide.
Welcome to your comprehensive guide to navigating the intricate landscape of the PAYE Tax System in the UK.
Whether you're a seasoned taxpayer or just starting your journey, understanding how Pay As You Earn (PAYE) works is crucial for managing your finances effectively.
In this article, we'll delve into the details of income tax rates, national insurance contributions, and essential tips to ensure you're on the right track with your taxes and tax rebate.
Let's dive in and unravel the complexities of the UK tax system together.
Read our complete guide to UK PAYE taxes below or download it here straight to your PC or smartphone.
4. National Insurance Contributions
8. Income Tax for Non-residents
10. Do I Need to File a Tax Return?
1. Intro
Most workers in the UK pay income tax through the PAYE (Pay As You Earn System) system. Your employer uses this to withhold income tax and national insurance contributions from your wages which are paid directly to HMRC (HM Revenue & Customs).
Tax Code
Your tax code is issued by HMRC and is used by your employer to work out how much income tax you should pay. This tax code changes every year and you may be paying the incorrect amount of tax if you’re on the wrong tax code. You’ll find this code on your payslip!
You are usually entitled to claim a rebate if you’ve paid too much.
The average UK tax rebate is £963
2. How Much Do I Pay?
The amount of income tax you pay depends on:
1. How much you earn over your Personal Allowance
2. How much of your income falls within each tax band
Tax-free Personal Allowance
The Personal Allowance is the amount of income you are entitled to receive free of tax each tax year. This amount changes each tax year. The standard personal allowance for the current 2024/25 tax year (this is the period from 6 April 2016 until 5 April 2025) is £12,570.
Your Personal Allowance may be higher if you claim Marriage Allowance or Blind Person’s Allowance or smaller if your income exceeds £100,000.
3. Income tax rates and bands:
|
BAND |
TAXABLE INCOME |
TAX RATE |
|
Personal Allowance |
Up to £12,570 |
0% |
|
Basic Rate |
£12,571 - £50,270 |
20% |
|
Higher Rate |
£50,271 - £125,140 |
40% |
|
Additional Rate |
Over £125,140 |
45% |
Note: If your gross income exceeds £100,000, your personal allowance is reduced by £1 for every £2 earned above £100,000.
4. National Insurance Contributions
Your employer will deduct National Insurance Contributions, which you will see on your payslip. National Insurance helps you qualify for certain benefits, including the state pension, and you'll pay it if:
- You are 16 or over
- You're an employee earning above £242 per week
- You're self-employed and make a profit of £12,570 or more per year
National Insurance Contributions are paid towards the cost of benefits including:
- Basic state pension
- Additional state pension
- New state pension
- Contribution-based jobseeker’s allowance
- Contribution-based employment and support allowance
- Maternity allowance
- Bereavement benefits
Note: The amount you pay depends on your employment status and level of income. As an employee, you pay Class 1 National Insurance Contributions.
Rates:
|
Weekly Pay |
Class 1 National Insurance rate |
|
Below £242 |
0% |
|
£242-967 |
8% |
|
Over £967 |
2% |
Note: You’ll pay less if you’re a married woman or widow with a ‘certificate of election’ OR if you’re deferring National Insurance contributions because you have more than one job.
You must tell HMRC if you:
- Change your personal details (name, address, etc)
- Become self-employed/stop being self-employed
Unemployed?
If you become unemployed or can’t work due to illness, you may be able to apply for National Insurance credits to fill any gaps in your contributions.
The average UK tax rebate is £963
5. Your Payslip Explained
Confused by all those terms on your Payslip? Below is a sample payslip explaining the most important terms and their meanings:
Get your Guide to PAYE Taxes in the UK
6. State Benefits
There are certain benefits you must pay tax on, and others are state-free.
Benefits you pay tax on:
- State Pension
- Jobseeker’s Allowance
- Carer’s Allowance
- Incapacity Benefit (from the 29th week you get it)
- Bereavement allowance
- Widow’s Pension
- Widowed Parent’s allowance
- Pensions paid by the Industrial Death Benefit scheme
- Employment & Support Allowance (contributions based)
Tax-free state benefits:
- Working tax credit
- Child tax credit
- Housing benefit
- Guardian’s Allowance
- Pension credit
- Winter fuel and bonus scheme
- Disability Living Allowance
- Employment and Support Allowance (income related)
- Maternity Allowance
7. Marriage Allowance
To be eligible for this allowance, your partner must earn between £12,571 and £50,270 a year before tax and you must not earn anything or your income must be under £12,570.
If you or your partner was born before 6 April 1935, you may benefit more from Married Couple’s Allowance.
8. Income Tax for Non-Residents
The Statutory Residence Test can help you determine whether you are resident or not for tax purposes. Non-residents only pay tax on their UK income - they don’t normally pay UK tax on their foreign income.
Residents pay UK tax on all their income, no matter whether it’s from the UK or abroad. However, there are special rules for UK residents whose permanent home ‘domicile’ is abroad.
Non-residents usually don't pay tax on:
- State Pension
- Interest from UK Government securities ‘Gilts’
9. Living Abroad
You may be taxed on your income in the UK and in the country you reside in. However, the country you’re resident in may have a double taxation agreement with the UK in which case you may not have to pay tax in both jurisdictions. Make sure you check if your country has a double taxation agreement with the UK.
Depending on a double taxation agreement you can:
- Apply for partial or full relief before you’re taxed
- Apply for a refund after you’ve been taxed
Taxback can also help you determine this when applying for your UK tax back.
Get your Guide to PAYE Taxes in the UK
10. Do I Need to File a Tax Return?
Most employees in the UK pay tax through their company’s payroll system and are not required to file a Self-Assessment tax return.
Reasons you may need to file:
- You’re self-employed
- You’re in partnership or a company director
- You’re a higher rate taxpayer with annual income of £150,000 or more
- You have investment income of £10,000 or more
- You have capital gains in excess of the exempt amount (£12,570 for the 2024/25 tax year)
- You earned foreign income
- You have rental income
- You have a tax liability but no PAYE source of income
Note: You should tell HMRC if you think you need to file a tax return, however sometimes HMRC issues tax returns for completion based on information from third parties (e.g. employers of expatriates).
If you're unsure whether you should file a tax return or not, you can contact Taxback.
11. Leaving Employment
If you leave your job your employer must give you a form called a P45. This is a document which shows your gross pay and the amount of the tax which was deducted at source from your pay during the tax year.
It shows your:
- Tax code and the PAYE (Pay As You Earn) reference number of your employer
- National Insurance number
- Leaving date
- Earnings in the tax year
- How much tax was deducted from your earnings
Your employer will submit this information directly to HMRC on the last date that they pay you. If you do not get a P45, you should request one from your employer and keep it safe, as you may need it to claim back any overpaid PAYE income tax. HMRC may not be able to refund any tax refund due without it.
It’s important to have a P45 if you start a new job and it may also help you if you want to claim a tax rebate.
12. Getting a Tax Rebate
1 in 3 people who work in the UK are entitled to a tax rebate and there are several reasons why.
You may be able to claim a tax rebate if you:
- Arrive or leave the UK during the tax year
- Work less than the full tax year
- Have been working on a casual basis
- Had more than one job during the tax year
- Are a student working in the holidays
- Sent a tax return and paid too much tax
- Overpaid tax on pension payment
- Bought a life annuity
- Live in one country and earn income in another
Get your Guide to PAYE Taxes in the UK
13. Claiming Your Rebate
The average rebate is a whopping £963 so it's always worth your time to apply! To apply for a UK tax rebate you will need either your P45 or P60 and details of any work-related expenses.
No time like the present! You can find out now if you’re due a tax rebate by using our online tax calculator or email info@taxback.com for more info.
The average UK tax rebate is £963
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