What is income tax and how much will I pay?

Income tax is the government’s main source of funding.

It now appears likely that changes to income tax will be made in the Autumn Statement on 22 November.

Measures already announced by the government mean millions of people are paying higher taxes on more of their income.

Income tax is one of the ways the government takes some of the money people earn.

Income tax thresholds are the income level at which people start paying taxes or start paying higher tax rates.

Chancellor Jeremy Hunt has frozen the personal income tax allowance at £12,570 until April 2028. Most taxpayers pay no tax on income below this level.

It also froze the point at which people start paying higher tax rates.

This means that as wages rise, people pay taxes on more of their income and more people move into higher tax brackets. This effect is known as the fiscal drag.

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

It says 2.6 million more people will pay taxes at a higher rate.

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

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

Income tax is also due on certain benefits and pensions, on money you receive from renting property, and on savings and investment income 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 income between £12,571 and £50,270 a year.

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

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

Once you earn more than £100,000 a year, you also start to lose your tax-free personal allowance. This means you have to pay income tax of 40% on part of the first £12,570 of your income.

You lose £1 of your personal allowance for every £2 your income exceeds £100,000. So if you earn more than £125,140 a year, you no longer get a tax-free personal allowance.

The additional rate of income tax is 45% and is paid on all income above £125,140 per year.

The government says around 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 that is deducted from your salary.

It is the second largest source of government funding and applies to the whole of the UK.

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

You don’t pay NI on the first £12,571 you earn per year. It is then charged at 12% on earnings up to £50,271, and 2% on any money earned above this amount.

Mr Hunt also confirmed that key national insurance thresholds would also remain frozen until April 2028.

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

Employers must also pay NI contributions.

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

But poorer households tend to pay more of their taxes in taxes on the money they spend, such as VAT and duties, rather than on the money they earn. These “indirect taxes” are indicated in the blue areas of each bar.

For the poorest fifth of households, VAT is the main tax paid.

Some income tax rates are different in Scotland due to the powers given to the Scottish Parliament.

Here are the Scottish income tax rates from April 2023:

What income tax will you pay in Scotland?

One way to measure the level of taxes is to consider the amount of taxes collected in proportion to the size of the economy.

Under current plans, the amount of taxes collected by the government is expected to reach 37.7% of the size of the economy by 2027-2028, up from an estimated 36.9% in 2023-2024.

By this measure, this would be the highest level of tax the UK has ever seen.

Looking at the amount of taxes collected as a proportion of the size of the economy in 2021 – the most recent year for which international comparisons can be made – the figure was 33.5%.

This puts the UK right in the middle of the G7 group of major economies.

France, Italy and Germany tax more, while Canada, Japan and the United States tax less.