What Counts as Taxable Income in the UK?

Does the thought of ‘taxable income’ send you into a state of worry? If so, you are not alone! It’s common for many self-employed people to feel confused about what is taxable income in the UK. However, once you get to grips with it all, you’ll understand it like a pro! For example, not all types of income are taxable. In this guide, I’ll walk you through the essentials so you can find out what is classed as taxable income by HMRC and what doesn’t count.

Updated 2 November 2021

Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.

1. What is Taxable Income?

Taxable income is the income that you must pay tax on in the UK. That said, not all types of income are taxable; some are non-taxable, tax-free or covered by income tax allowances and reliefs. When you work a regular job, tax is usually charged on your income and earnings, but when you’re self-employed, you need to pay your taxes differently. In short, this means HMRC bill you on your profits, and not your gross income.

2. What Counts as Taxable Income?

You might initially find it overwhelming to understand how self-employed income tax works but it’s not so problematic once you delve deeper. Here are some common types of taxable income:

  • Self-employment profits
  • Gross salary including commissions and bonus’
  • Bank interest
  • Investment income
  • Rental income
  • State Pension
  • Carer’s Allowance
  • Local authority payments to foster carers
  • Jobseekers Allowance
  • Statutory Sick Pay
  • Cash in hand earnings
  • Dividends

3. What Does Not Count as Taxable Income?

It may seem like a lot of your precious earnings are taxable, but fortunately, that’s not the case. It’s good to be familiar with the rules of being self-employed when you first start off. Listed below are some examples of income not considered taxable:

4. How to Declare Taxable Income?

Taxable income must be declared to HMRC. If you are employed and have no other forms of income, then your employer will do this for you on your behalf under the rules of PAYE – you’ll notice that your payslip contains a deduction for income tax made on your behalf. Your employer knows how much to deduct by using your tax code (the most common tax code is 1257L, previously 1250L).

If you are registered as self-employed or have received income that you haven’t paid tax on, then you’ll need to declare this to HMRC; most likely using a self-assessment tax return form.

There is a common misconception that if you earn below the personal allowance you do not need to let HMRC know about your earnings. However, this is incorrect. Everyone must declare their taxable income whether they need to pay tax or not so HMRC has an understanding of what you are earning and how.



About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek and money nerd helping financial DIY-ers organise their money so they can hit their goals quicker.