Money Advice Service

Unsure about Income Tax and National Insurance? Don’t know what the National Insurance threshold is? Unsure how the Personal Allowance applies to you? We explain how the tax system works and what to do if you think you’re overpaying.

Should I pay any Income Tax?

Income Tax is charged on most types of income, such as wages and salary from jobs, your profits if you run a business, pensions, rents you receive if you’re a landlord, and interest and dividends from savings and investments.

You don’t usually pay Income Tax on all of your taxable income. This is because most people qualify for one or more allowances. An allowance is an amount of otherwise taxable income that you can have tax-free each tax year.

Allowance or threshold 2017-18 2018-19 2019-2020
Personal Allowance1 £11,500 £11,850 £12,500
Income threshold for Personal Allowance1 £100,000 £100,000 £100,000
Marriage Allowance2 £1,150 £1,185 £1,250
Personal Savings Allowance £1,000 / £500 / £03 £1,000 / £500 / £03 £1,000 / £500 / £03
Dividend Tax Allowance £5,000 £2,000 £2,000

1 Reduced by £1 for every £2 above income threshold until it reaches £0.

2 20% of this allowance is given as a reduction in your tax bill (unlike the Personal Allowance and Age Allowance which are deducted from your taxable income before tax is worked out).

3 £1,000 for basic-rate taxpayers; £500 for higher-rate taxpayers; £0 for additional-rate taxpayers.

Most allowances are increased each year and increases apply from the start of the tax year, 6 April.

Jump down to ‘How much Income Tax will I pay?’ to find out what you’re liable for.

What is a Personal Allowance?

Everyone, including students, has something called a Personal Allowance – the amount of money you’re allowed to earn each tax year before you pay Income Tax. Your Personal Allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance, or smaller depending on your income or if you owe tax from a previous tax year.

The tax year runs from 6 April to 5 April, and for the 2018-19 tax year the standard Personal Allowance is £11,850. The government will increase this allowance to £12,500 in April 2019. This allowance can be set against any type of taxable income.

If you earn less than this, you normally shouldn’t have to pay any Income Tax.

The amount of the Personal Allowance you receive is set by the government and can change from one tax year to the next.

Check the most up-to-date Personal Allowance figures on GOV.UK.

The Personal Allowance if you earn over £100,000

For people earning over £100,000, the figure of £11,850 will be reduced by £1 for every £2 earnt. When someone earns £123,700, Income Tax is paid on everything earnt and there’s no tax-free allowance.

What is Income Tax used for?

Your Personal Allowance is taken off your earnings before you start paying Income Tax.

Income Tax is collected by HMRC on behalf of the government. It’s used to help provide funding for public services such as the NHS, education and the welfare system, as well as investment in public projects, such as roads, rail and housing.

How much Income Tax will I pay?

From April 2019, the standard Personal Allowance will increase to £12,500, with the higher rate tax threshold increasing to £50,000.

Income Tax is made up of different bands. This means that as your income increases so too does the amount of Income Tax you pay.

It’s an attempt to make paying Income Tax as fair as possible so that those who earn the most contribute more.

The table below shows the rates of Income Tax depending on how much you earn.

If you live in Scotland, the rates are different, so visit our Scotland Income Tax page.

Rate 2018-19 2019-20
0% £0 to £11,850. If you earn this much, you won’t pay any Income Tax. £12,500
Basic rate: 20% £11,851-£46,350. If you earn between these amounts per year, you pay 20%. Keep in mind that you only pay it on income above £11,850, so 20% tax is not applied to all the money you earn, just the top part. £12,501-£50,000
Higher rate: 40% £46,351 to £150,000. If you earn between these figures, you pay 40% Income Tax. Again, you only pay at 40% on income over £46,350, it’s not charged on everything you earn, just the bit that takes you above the threshold. £50,001-£150,000
Additional rate: 45% Over £150,000. This brings a 45% Income Tax rate for the amount you earn over £150,000 a year. Over £150,000

If you think you might have had Income Tax wrongly taken from your earnings, fill in the form from Her Majesty’s Revenue and Customs (HMRC) to have it paid back to you.

National Insurance

National Insurance contributions are a tax on earnings paid by employees and employers and help to build your entitlement to certain state benefits, such as the State Pension and Maternity Allowance.

Unlike Income Tax, National Insurance is not an annual tax. It applies to your pay each pay period (which might be monthly, weekly or some other period depending on your employer’s arrangements). This means if you earn extra in one month, you’ll pay extra National Insurance, but you won’t be able to claim the extra back even if your pay is lower during the other months of the tax year.

You begin paying National Insurance once you earn more than £162 a week (this is the figure for the 2018-19 tax year).

The National Insurance rate you pay depends on how much you earn:

  • 12% of your weekly earnings between £162 and £892
  • 2% of your weekly earnings above £892.

Your National Insurance contributions will be taken off along with Income Tax before your employer pays your wages.

Until April 1977, some older married women and widows who pay National Insurance contributions at the Married Women’s Reduced Rate could choose to pay a reduced rate of national insurance. You might still be paying the reduced rate if you opted for this before the scheme ended. The reduced rate is 5.85% of weekly earnings between £162 and £892 instead of the standard rate of National Insurance of 12% on earnings. As a result, your State Pension could be reduced and your ability to claim some contribution based benefits could be negatively impacted.

Employee’s National Insurance contributions stop once you reach State Pension age.

Find out more about your National Insurance contributions on GOV.UK.

What do you pay National Insurance on?

Both you and your employer must pay National Insurance contributions on your earnings – including holiday pay, sick pay and maternity pay – and, in most cases, any reward you get that can be easily converted to cash. But there are exceptions – for example, if part of your pay is shares in your employer’s company using a tax-approved share scheme.

Part of your pay may be in the form of benefits in kind. As an employee, there is no National Insurance on benefits in kind. However, with some exceptions, employers do have to pay National Insurance on the value of any benefits in kind that they provide you with.

What do National Insurance payments pay for?

Your National Insurance payments go towards state benefits and services, including:

  • the NHS
  • the State Pension
  • unemployment benefits
  • sickness and disability allowances.

This article is provided by the Money Advice Service.