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.
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.
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 tax-free or covered by income tax allowances and reliefs.
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
- Employment income, commissions and bonus’
- Benefits in kind (‘perks provided by your employer)
- Some state benefits
- 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
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:
- Earnings below the personal allowance
- Your first £1,000 of self-employment income (trading allowance)
- The first £2,000 of dividend income (dividend allowance)
- Your first £1,000 of interest on savings
- Premium bonds or lottery winnings
- Income from a lodger under £7,500 (rent-a-room scheme)
- Child tax credits
- Maternity allowance
- Universal credit
- Some state benefits
You’ll pay tax no matter how old you are, even if you are a child. But there are different reliefs available which can help reduce how much you pay.
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).
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.
How You Pay Income Tax
You’ll pay income tax in two ways:
- PAYE (Pay as You Earn): if you are employed by someone, your employer will deduct tax every time they pay you. Your employer then pays you tax over to HMRC on your behalf
- Self Assessment: if you are self-employed or received other types of untaxed income, for example, rental income, then you’ll need to register for self-assessment and submit a tax return declaring your earnings along with a payment for the tax you owe.