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Income tax for employees

Income tax: what it is and who pays it

By Ian Robinson

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Income tax: what it is and who pays it

Discover what income tax is used for and what types of income aren't taxed.

We've all seen a big chunk of our monthly earnings disappear in tax each month, but how much are you paying and why is it deducted?

Income tax is an annual charge on your earnings and income from other sources, such as savings, pensions and investments. It is collected by Her Majesty’s Revenue & Customs (HMRC), formerly Inland Revenue.

Use the Which? online tax calculator : our easy-to-use and jargon-free tax calculator offers personalised tax tips, and you can submit the form directly to HMRC.

Income tax: what's it used for?

Income tax is the main source of government revenue, raising over £150bn a year. 

The next highest contributions come from National Insurance (£18bn) and VAT (£17bn). After this, fuel duties, and alcohol and tobacco duty are government’s biggest earners.

Tax-free income

Some forms of income are tax-free, regardless of how much you receive from other sources. 

These include: lottery winnings and premium bond prizes, income received under the rent-a-room scheme, most insurance policy payouts, redundancy payments (below £30,000), tax credit and pension credit.

Tax-free personal allowance

Not all income you receive is taxed. Individuals have an annual personal allowance, which is an amount of income they can keep tax-free. 

  • For most people it is £11,500 for 2017-18 (£11,000 for 2016-17)
  • If your income is above £100,000 you lose allowance, at the rate of £1 for every extra £2 you earn. 
  • If your income is above £123,000 in 2017-18 (£122,000 in 2016-17), you get no tax-free allowance and are taxed on everything you earn. 
  • Last updated: April 2017
  • Updated by: Gareth Shaw

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