Guest post by Vlad
That there are two certainties in life, being death and taxes, is an extremely well-worn phrase by now – but no less true as a result. We are taxed in numerous ways in the UK, whether via our payslip or at the counter at our local newsagent. But we often take this taxation for granted, particularly when other institutions handle our tax obligations on our behalf.
If you are a new member of the workforce, and confused about the amount leaving your wages each month in service of tax and National Insurance, you might be looking to know more about the UK’s tax system. Alternatively, you might be a new entrant to the approximately 3 million sole proprietorships that make up the UK’s freelancer ecosystem, and wondering how exactly your next tax return will shake out. Here are some essential things to understand about Income Tax works in the UK.
Income and Your Personal Allowance
The first thing you need to understand is that a key portion of your income will be protected from taxation, via something called your Personal Allowance. This allowance is a set amount that the government may change from time to time; as of the 2022-23 tax year, it is £12,570.
Your Personal Allowance means that it is only the money you earn above £12,570 that is taxed. There are additional allowances and relief systems you might benefit from, but seeking independent advice may be the best route to charting a safe, legal and equitable course through tax planning. This should only be considered if you are freelance, and earning a large amount of annual income.
What is Taxed and What Isn’t?
As touched upon above, any amount above your Personal Allowance is taxable. But this money is not tax equally. Instead, there are ‘marginal rates’, that describe different rates of tax for different bands of earnings. The base Income Tax rate is 20%, and this is applied to any money earned between £12,571 and £50,270.
If you earn above £50,270, the money you earn above that rate is taxed at 40%. Here is where many people get confused, so it bears repeating; marginal tax rates only apply to the money within their bracket. If you were to earn £60,270 in a year, then: £12,570 of that would not be taxed at all; £37,700 would be taxed at 20%; and £10,000 taxed at 40%.
Paying for National Insurance
This isn’t all you are liable to pay from your income, though. There are also National Insurance contributions, which go towards state benefits and impact your eligibility for a State Pension when you reach the State Pension age.
There are four ‘classes’ of National Insurance rate, which apply to different cases depending on your employment. Class 1 NI payments are for employees and employers, and constitute 13.25% of your weekly pay above £242 and below £967 – with a 3.25% rate above that. Class 2 NI is a flat £3.05 per week, paid by self-employed people, and Class 4 NI payments are 9% on freelance profits above £9,569.
