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Understanding Income Tax

Income tax is paid to Her Majesty’s Revenue and Customs (HMRC) by everyone who draws a wage from a UK-based business. It is also paid by people who are not working but have an income from other sources, such as a pension or rent from properties that they own. It is also paid by people from other parts of the world that are habitually residing in the country.

The majority of income tax revenue is collected from people who are working in the UK or for firms that are based here. HMRC uses the Pay As You Earn (PAYE) system to collect this tax. People who are directly employed by a firm are taxed using this system and pay on a monthly basis.

It is an employer’s responsibility to ensure that its employees are in the system and that the necessary tax is deducted. Firms that fail to do this can be penalised by HMRC.

Others, such as the self-employed and sole traders, are responsible for ensuring that they contribute the right level of income tax, which they pay once a year.

How much income tax is paid varies; it is dependent on several factors, including age, annual income and health status. Each person is given a tax code that weighs up these factors. The tax code determines how much tax is deducted each month from a person’s wages or pension.

The employer uses the tax code to work out how much tax and national insurance to deduct from an employee each month. This amount is retained by the employer and sent to HMRC. In the case of someone whose income is from a pension, it is the pension provider that deducts the tax.

Those who are self-employed are also given a tax code. Every year, they fill out a tax return and tell the HMRC how much they have earned. HMRC uses this information to tell them how much tax to pay.

Posted by Louise
October 9, 2014

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