Understanding Income Tax can seem complicated, but it is important in knowing where your money goes and how Income Tax thresholds apply to you.
You must pay Income Tax on your taxable earned income which exceeds your personal allowance.
If your earnings are £40,000 in 2022/2023 and you are eligible for the personal allowance of £12,570, you would need to pay tax on £27,340.
You pay Income Tax on the basic rate of 20 per cent of your taxable income which exceeds your personal allowance. The basic rate band for 2022/2023 is £37,700.
If you have an income which exceeds the basic rate limit, you will pay the higher rate of 40 per cent. The higher rate threshold for 2022/2023 is £50,270.
If your income exceeds the higher rate band limit, you will have to pay the additional rate of 45 per cent and this is for incomes over £150,000.
Be aware that this threshold will fall to £125,140 from April 2023 resulting in many more taxpayers paying the top rate of tax.
Income Tax reliefs
You might be able to enjoy Income Tax relief by reporting to HMRC the money you spend on things such as business expenses, if you are self-employed.
If you are taxed through PAYE, you may also receive Income Tax relief through getting tax back or repaid in another way, such as into a personal pension.
Some tax relief can be completed automatically, but for others, you may have to claim it through reporting information via a tax return.
Beyond the reliefs outlined above, depending on your financial and employment position, you may be able to structure your income in a more tax-efficient manner through other forms of remuneration, such as dividends.
Are you eligible for tax relief?
Tax relief applies to pension contributions, charity donations and maintenance payments.
You can also claim tax relief if you use your own money for travel and things you must buy for your job.
This is only an introduction to Income Tax and the various reliefs available and so you should seek tax advice tailored to your circumstances.
If you need advice on related matters, contact us today.
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