What is Income Tax?

Income tax is one of those things most people know they pay but far fewer truly understand. I see this every day in my work. People notice tax coming off their payslip or see a figure on their Self Assessment return, but they are often unclear about what income tax actually is, how it is calculated, or why their bill looks the way it does.

In this article, I want to explain income tax in clear, plain English. I will cover what income tax is, what income it applies to, how the UK income tax system works, and why two people earning similar amounts can pay very different tax bills. Everything here is based on current UK rules and real world experience rather than theory.

What Income Tax Is

Income tax is a tax charged by the UK government on money you earn.

It applies to most types of income, whether that income comes from employment, self employment, property, investments, or pensions. The amount of income tax you pay depends on how much you earn, the type of income you receive, and any allowances or reliefs you are entitled to.

In simple terms, the more taxable income you have, the more income tax you are likely to pay. However, the system is layered and not all income is taxed in the same way.

What Income Tax Pays For

Income tax is one of the main ways the government funds public services.

The money collected helps pay for things such as:

• The NHS
• Schools and education
• Roads and transport
• Policing and public safety
• Welfare and benefits
• Local government services

While people often focus on the personal cost, income tax is a core part of how the UK economy functions.

What Counts as Taxable Income

Income tax does not only apply to wages.

From my experience, many people are surprised by how many different income types fall within the income tax system.

Common types of taxable income include:

• Salary and wages
• Self employed profits
• Rental income from property
• Dividends from shares
• Pension income
• Certain state benefits
• Tips commission and bonuses

Some income is tax free, such as ISA interest or certain benefits, but most regular earnings fall within income tax rules.

The Personal Allowance

Most people are entitled to a personal allowance.

This is the amount of income you can earn each tax year before you start paying income tax. For many people, this is £12,570, although it can change and may be reduced for higher earners.

Income up to the personal allowance is taxed at zero percent. Once income goes above this level, income tax starts to apply.

One of the most common misunderstandings I see is people thinking all their income is taxed. In reality, the allowance shelters part of it.

Income Tax Bands and Rates

Income tax in the UK works on a banded system.

Different portions of your income are taxed at different rates, rather than your entire income being taxed at one rate.

Broadly speaking, there are:

• A basic rate band
• A higher rate band
• An additional rate band

As your income increases, the excess above each threshold is taxed at a higher rate.

This means someone earning just over a threshold only pays the higher rate on the amount above it, not on everything they earn.

How Income Tax Is Collected

Income tax is collected in different ways depending on how you earn money.

If you are employed, income tax is usually deducted automatically through PAYE. Your employer calculates and pays it to HMRC on your behalf.

If you are self employed, a landlord, or have other untaxed income, income tax is usually paid through the Self Assessment system. You calculate the tax due and pay it directly to HMRC.

Some people are taxed through a combination of both systems.

Why People Pay Different Amounts of Income Tax

Two people earning the same amount can pay very different income tax.

This is something I explain to clients frequently. Differences arise because of:

• Allowances and reliefs
• Pension contributions
• Gift Aid donations
• How income is structured
• Whether income is taxed through PAYE or Self Assessment
• Other income sources

Income tax is not just about how much you earn, it is about how that income fits into the wider tax system.

Income Tax and Self Assessment

If you complete a Self Assessment tax return, income tax is one of the main figures being calculated.

Self Assessment brings together all your income for the tax year and applies the relevant tax rules. This is why people often receive a larger bill than expected, especially if some income has not been taxed at source.

From my experience, many Self Assessment shocks happen because people assume tax has already been dealt with when it has not.

Common Misunderstandings About Income Tax

There are a few misunderstandings I see repeatedly.

One is the belief that moving into a higher tax band means all income is taxed at that higher rate. Another is assuming that income tax and National Insurance are the same thing. They are separate taxes with different rules.

I also see people confuse income tax with other taxes such as VAT or Capital Gains Tax. Each applies in different situations.

How an Accountant Helps With Income Tax

An accountant’s role is not just to calculate income tax, but to explain it and make sure it is correct.

In my work, I help people by:

• Explaining how their tax bill is calculated
• Checking allowances and reliefs
• Making sure income is reported correctly
• Advising on planning where appropriate
• Helping avoid overpayment or penalties

Understanding income tax gives people confidence and control over their finances rather than feeling at the mercy of a system they do not understand.

Key takeaways

Income tax is a fundamental part of life in the UK, but it does not need to be confusing.

At its core, it is a tax on income you earn, applied in bands, with allowances that protect part of that income from tax. The complexity comes from the variety of income types and the rules that sit around them.

From my experience, once people understand how income tax actually works, they feel far more comfortable with their payslips, tax returns, and financial decisions overall.