What Is Income Tax? [Everything That You Should Know]

Income tax is one of the most important parts of the UK tax system. Nearly everyone who earns money in the UK will have to manage income tax at some point in their life, whether through employment, self employment, pensions, savings, or investments.

Despite how common it is, not everyone knows what kinds of income are taxed, how tax rates work, why their take-home pay changes, or what they can do to reduce their tax bill.

This guide explains what income tax is, how it works, and when you need to pay it, so you can stay compliant and avoid surprises.

Key points

• The UK tax year has fixed deadlines you need to track 📅
  The tax year runs from 6 April to 5 April, and your tax is based on income earned in that period. Key deadlines are 5 October for Self Assessment registration, 31 October for paper filing, and 31 January for payment.
• Income tax applies to more people than just employees 👥
  You may need to pay income tax if you are employed, self employed, a landlord, a freelancer, a company director, or earning from savings, pensions, or investments. If you have multiple income sources, HMRC combines them to calculate your total tax bill.
• Not all income is taxed the same 💰
  Taxable income includes employment earnings, business profits, rent, pensions, and investment income. Self employed people are taxed on profit after expenses, not total income.
• Income tax is charged in bands and collected differently depending on how you earn 📊
  The UK uses a tiered system from 0% up to 45%, depending on your income level. Employees usually pay automatically through PAYE, while self employed individuals and others with complex income have to use Self Assessment to report and pay tax directly to HMRC.
• Managing tax is easier when everything is automated 🚀
  Tracking income, expenses, deadlines, and tax estimates manually can be time-consuming and error-prone. ANNA helps you automate bookkeeping, calculate tax in real time, stay compliant with Self Assessment and Making Tax Digital, and keep everything organised in one place all year round.

What is income tax?

Income tax is a tax charged by the UK government on income you earn during a tax year. It’s one of the government’s main sources of revenue and is used to fund public services such as:

• The NHS
• Schools and universities
• Roads and transport
• Defence and emergency services
• Welfare and social support

Income tax is progressive, which means the rate you pay increases as your income grows. Not everyone pays it, and not all income is taxed the same way, but most people earning above a certain level will be liable for income tax each year.

🧠 Good to know

Income tax is separate from National Insurance, which is another deduction many people see on their payslip. Although both are based on earnings, they serve different purposes and are calculated differently.

The UK tax year

The UK tax year runs from 6 April to 5 April the following year.

Your income tax bill is calculated based on income earned during this period, regardless of when you receive the money or submit your return.

Key deadlines include:

• Registering for Self Assessment: 5 October
• Filing your tax return: 31 October
• Paying any tax owed: 31 January

Missing deadlines can result in penalties and interest, regardless of how much tax you owe.

Who pays income tax in the UK?

You generally pay income tax if you are a UK resident and earn taxable income above your tax-free allowance. UK residents are typically taxed on their worldwide income, while non-residents are taxed only on income earned in the UK.

People who may need to pay income tax include:

• Employees
• Self employed individuals and sole traders
• Company directors
• Freelancers and contractors
• Landlords
• People with income from savings, investments, or pensions

The Personal Allowance

If you earn income below the tax-free personal allowance (£12,570 for the 2026/27 tax year), you don’t have to pay any income tax. However, you may still need to report your income, even if no tax is due.

This typically applies if you are self employed, earn money from freelancing or side work, receive rental income, or have income that isn’t taxed through PAYE.

In these cases, reporting your income is about confirming your tax position. HMRC may require a Self Assessment tax return to show that your income falls below the threshold and that no income tax is owed.

If your income exceeds the Personal Allowance, only the portion above it is taxed.

Keep in mind that the Personal Allowance is reduced for higher earners. Once your adjusted net income exceeds £100,000, your allowance is gradually withdrawn. For every £2 you earn above £100,000, £1 of your allowance is removed.

This means that when your income reaches £125,140, your Personal Allowance is reduced to zero.

Income tax for people with multiple income sources

Many people earn income from more than one source, such as a job and freelance work, or employment and rental income.

Each source may be taxed differently, but all taxable income has to be combined when calculating your total income tax bill. This can push you into a higher tax band or reduce your allowances.

What counts as taxable income?

Taxable income is any income that HMRC considers liable for income tax. This includes:

• Employment income: This includes wages, salaries, bonuses, overtime, commissions, and tips. Benefits provided by your employer, such as a company car or private medical insurance, may also be taxable.
• Self employed income: If you are self employed, your taxable income is your business profit, not your total turnover. Profit is calculated as income minus allowable business expenses.
• Rental income: Income earned from letting out property is usually taxable. This includes rent from residential or commercial property, whether in the UK or abroad.
• Savings and investment income: Interest from savings accounts, dividends from shares, and income from investment funds may be taxable, depending on how much you earn and what allowances are available to you.
• Pension income: Most pension income is taxable, including payments from workplace pensions, private pensions, and the State Pension.
• Other Income: Other forms of taxable income can include freelance or casual work, foreign income, trust income, and some state benefits.

Not all income is taxable, and similar payments can be treated differently depending on the circumstances. For example, selling personal possessions is usually tax-free, but if you sell items regularly with the intention of making a profit, HMRC may treat it as taxable trading income.

Allowable deductions and tax reliefs

Income tax isn’t always charged on your full income. Certain deductions and reliefs can reduce the amount of tax you pay.

Allowable expenses

If you are self employed or earn rental income, you can deduct allowable expenses from your income before calculating tax. These are costs that are wholly and exclusively incurred for your business or property activity.

Common examples include:

• Office costs
• Travel expenses
• Professional fees
• Marketing and advertising
• Insurance
• Utility bills for business use

Keeping accurate records of expenses is essential, as HMRC may ask for evidence to support your claims. If you are self-employed or earn rental income, you should keep these records for at least five years after the filing deadline for the relevant tax year. Companies are typically required to keep records for six years.

Tax reliefs

Tax reliefs reduce the amount of tax you pay, often by giving you tax back on certain contributions or payments.

Common examples include:

• Pension contributions: Contributions to registered pension schemes qualify for tax relief. For example, if you contribute £80, HMRC adds £20 in basic rate relief. If you pay tax at the higher or additional rate, you can claim extra relief through your Self Assessment tax return.
• Charitable donations (Gift Aid): Donations to registered charities qualify for tax relief. The charity automatically claims basic rate relief, and higher-rate taxpayers can claim additional relief through Self Assessment.
• Marriage Allowance: If one partner earns below the Personal Allowance, they may transfer part of the allowance to their spouse or civil partner, reducing the overall tax bill.

You can claim tax relief automatically (through pension providers or charities), through your Self Assessment tax return, or by contacting HMRC.

Income tax rates and bands

Income tax in the UK is charged in bands, with different rates applying to different portions of your income. In other words, your income is split into layers, and each layer is taxed at the rate for that band.

For taxpayers in England, Wales, and Northern Ireland, the current income tax bands are:

• Personal Allowance: Up to £12,570 – taxed at 0%
• Basic rate: £12,571 to £50,270 – taxed at 20%
• Higher rate: £50,271 to £125,140 – taxed at 40%
• Additional rate: Over £125,140 – taxed at 45%

How income tax is collected

How you pay income tax depends on how you earn your income:

PAYE (Pay As You Earn)

If you are employed, income tax is usually deducted automatically through PAYE. Your employer calculates and deducts income tax from your wages before you are paid and sends it to HMRC on your behalf.

Your tax code tells your employer how much tax to deduct and reflects your Personal Allowance and any adjustments, such as taxable benefits, additional income, or tax reliefs.

💡 Did you know?

You can also estimate how much income tax you would pay under PAYE using ANNA’s Income Tax Calculator. It lets you enter your tax code and see a breakdown of your estimated tax in seconds.

Self Assessment

If you are self-employed, earn income that isn’t taxed through PAYE, or have more complex finances, you may need to file a Self Assessment tax return.

Under Self Assessment, you report your income to HMRC and calculate how much income tax you owe. You are then responsible for paying the tax by the deadline.

Self Assessment is common for:

• Sole traders
• Freelancers
• Landlords
• People with multiple income sources
• Company directors
• High earners

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA)

MTD for ITSA is the UK government’s newest system that will gradually replace traditional annual Self Assessment for many taxpayers.

Instead of submitting one tax return at the end of the year, affected individuals will need to keep digital records and send quarterly updates of their income and expenses to HMRC using compatible software. The aim is to make tax reporting more accurate and reduce the risk of errors and last-minute submissions.

The rollout was phased in from April 2026, starting with sole traders and landlords above the £50,000 income threshold. From April 2027, the threshold is expected to be lowered to £30,000, with further expansion to £20,000 in April 2028.

What happens if you don’t pay income tax?

Failing to pay income tax when you should can lead to penalties, interest, and enforcement action from HMRC. Penalties increase the longer you wait to pay your obligations.

Aside from missing your payment deadline, issues can also arise due to:

• Not registering for Self Assessment on time
• Filing a tax return late
• Underreporting income

If you realise you have made an error or missed a deadline, it’s always better to act quickly than wait.

Making income tax easier to manage

Income tax can feel complicated, especially when you are responsible for calculating and paying it yourself. Much of the stress comes from disorganisation, missing information, or not knowing where you stand until the deadline approaches.

This is where tax software can make a significant difference. Instead of manually tracking everything in spreadsheets or trying to calculate your tax at the last minute, tax software automatically records your transactions, categorises income and expenses, and estimates your tax in real time.

This helps you stay organised throughout the year and avoid surprises when it’s time to file.

How ANNA helps with income tax

ANNA is designed to take the confusion out of managing money and tax for UK freelancers, sole traders, and small businesses. It helps you stay organised all year round by bringing your finances and tax admin into one place.

With ANNA, you can:

• Handle Self Assessment automatically: Track your income and expenses in real time, with filings prepared and calculated for you. This includes both standard Self Assessment and MTD for ITSA, so whichever system applies to you, everything is covered in one place
• Get free MTD for ITSA support: Get your first year of MTD and your 2026/27 filing for free, helping you transition smoothly into the new reporting system.
• Capture and categorise expenses automatically: Record and sort all transactions without manual bookkeeping
• See real-time tax estimates: View exactly how much tax you owe at any time
• Save for tax with Smart pots: Set aside a percentage of your income automatically
• Keep compliant digital records: Store receipts and transactions securely for HMRC
• Send invoices and match payments automatically: Create, send, chase, and reconcile invoices with ease
• Use your built-in UK business account: Manage cards, transfers, and records all in one place
• Stay on track with reminders and 24/7 support: Receive deadline alerts and get help whenever you need it

By automating the routine parts of financial admin, ANNA helps reduce errors, save time, and make income tax feel far less intimidating, especially if you’re managing tax responsibilities on your own.

If you want to take the stress out of income tax, sign up with ANNA today and experience the benefits firsthand.