Unsure about Income Tax and National Insurance? Don’t know what the National Insurance threshold is? Unsure how the Personal Allowance applies to you?
We explain how the tax system works and what to do if you think you’re overpaying.
Should I Pay Any Income Tax?
Income Tax is charged on most types of income, such as wages and salary from jobs, your profits if you run a business, rents you receive if you’re a landlord, and interest and dividends from savings and investments.
You don’t usually pay Income Tax on all of your taxable income. This is because most people qualify for one or more allowances. An allowance is an amount of otherwise taxable income that you can have tax-free each tax year.
Allowance or Threshold
Allowance or Threshold | 2023-24 | 2024-2025 |
Personal Allowance* | £12,570 | £12,570 |
Income Threshold for Personal Allowance* | £100,000 | £100,000 |
Marriage Allowance** | £1,260 | £1,260 |
Personal Savings Allowance | £1,000 / £500 / £0*** | £1,000 / £500 / £0*** |
Dividend Tax Allowance | £1,000 | £500 |
*Reduced by £1 for every £2 above income threshold until it reaches £0.
**20% of this allowance is given as a reduction in your tax bill (unlike the Personal Allowance and Age
Allowance which are deducted from your taxable income before tax is worked out).
***£1,000 for basic-rate taxpayers; £500 for higher-rate taxpayers; £0 for additional-rate taxpayers.
Most allowances are increased each year and increases apply from the start of the tax year, 6 April.
What is a Personal Allowance?
Everyone, including students, has something called a Personal Allowance – the amount of money you’re allowed to earn each tax year before you pay Income Tax. Your Personal Allowance may be larger if you claim Marriage Allowance or Blind Person’s Allowance, or smaller depending on your income or if you owe tax from a previous tax year.
The tax year runs from 6 April to 5 April, and for the 2024-25 tax year, the standard Personal Allowance is £12,570.
If you earn less than this, you normally shouldn’t have to pay any Income Tax. The amount of the Personal Allowance you receive is set by the government and can change from one tax year to the next.
The Personal Allowance if You Earn Over £100,000
For people earning over £100,000, the figure of £12,570 will be reduced by £1 for every £2 earned. When someone earns £125,140, Income Tax is paid on everything earned, and there’s no tax-free allowance.
What is Income Tax Used For?
Your Personal Allowance is deducted from your earnings before you start paying Income Tax.
Income Tax is collected by HMRC on behalf of the government. It’s used to help fund public services such as the NHS, education, and the welfare system, as well as investment in public projects, such as roads, rail, and housing.
How Much Income Tax Will I Pay?
From April 2024, the standard Personal Allowance remains £12,570, with the higher rate tax threshold increasing to £50,270.
Income Tax is made up of different bands. This means that as your income increases, so does the amount of Income Tax you pay. It’s designed to make paying Income Tax as fair as possible so that those who earn the most contribute more.
The table below shows the rates of Income Tax depending on how much you earn. If you live in Wales, income tax rates are set by the Welsh Government and are currently the same as for England and Northern Ireland for the 2023-24 tax year.
Rate | 2024-25 |
0% | £0 to £12,570. If you earn this much, you won’t pay any Income Tax. |
Basic rate: 20% | £12,571 - £50,270. You will pay tax at 20% on income above £12,570 up to £50,270. |
Higher rate: 40% | £50,271 - £125,140. You will pay Income Tax at a rate of 40% on income above £50,270 up to £125,140. |
Additional rate: 45% | Over £125,140. You will pay Income Tax at 45% on income above £125,140 |
If you think you might have had Income Tax wrongly taken from your earnings, fill in the form from Her Majesty’s Revenue and Customs (HMRC) to have it paid back to you.
National Insurance
National Insurance contributions are a tax on earnings paid by employees and employers and help to build your entitlement to certain state benefits, such as the State Pension and Maternity Allowance.
Unlike Income Tax, National Insurance is not an annual tax. It applies to your pay each pay period (which might be monthly, weekly, or some other period depending on your employer’s arrangements). This means if you earn extra in one month, you’ll pay extra National Insurance, but you won’t be able to claim the extra back even if your pay is lower during other months of the tax year.
Your National Insurance contributions will be deducted along with Income Tax before your employer pays your wages.
What Do You Pay National Insurance On?
Both you and your employer must pay National Insurance contributions on your earnings – including holiday pay, sick pay, and maternity pay. In some cases, tax is payable on the cash value of a taxable benefit in kind you receive from your employer. A benefit in kind is a non-cash perk provided by your employer. But there are exceptions – for example, if part of your pay is shares in your employer’s company using a tax-approved share scheme.
Part of your pay may be in the form of benefits in kind. As an employee, there is no National Insurance on benefits in kind, though Income Tax may be payable. However, with some exceptions, employers do have to pay Class 1A National Insurance contributions on the value of any benefits in kind that they provide you with.
What Do National Insurance Payments Pay For?
Your National Insurance payments go towards state benefits and services, including:
The NHS
The State Pension
Unemployment benefits
Sickness and disability allowances
Voluntary ‘Class 3’ National Insurance Contributions
Class 3 voluntary National Insurance contributions are designed to fill in any gaps in your National Insurance record to get a higher State Pension.
To receive the full new State Pension, which is payable to people who have reached their State Pension age on or after 6 April 2016, you’ll need to have 35 qualifying years of National Insurance contributions.
Anyone with less than this will receive a reduced State Pension. To receive the new State Pension, you need to have a minimum of 10 qualifying years.
If you don’t have 35 qualifying years, you may want to consider paying Class 3 voluntary contributions to boost your pension entitlement.
In 2024-25, Class 3 contributions are payable at a weekly rate of £17.45. This is a flat rate you can pay each week.
You may not always be able to pay Class 3 contributions (or Class 2) for a tax year. It’s important to find out whether you can make payments towards any gaps, how much you will need to pay, and what benefit (if any) you would get by making a voluntary payment before deciding whether to pay any voluntary National Insurance Contributions (NICs).
Voluntary ‘Class 2’ National Insurance Contributions
If you’re self-employed or have been working abroad, you may be able to pay voluntary Class 2 contributions instead.
Class 2 NICs are currently flat-rate weekly contributions of £3.45 per week in 2024-25. You’ll need to pay them for every week or partial week of self-employment in a tax year if your profits for the entire tax year are £6,725 (the Small Profits Threshold) or more in 2023-24.
Payment of Class 2 contributions is voluntary for self-employed people with profits below the Small Profits Threshold. Paying Class 2 NICs even if your profits are lower can still help you build contributory entitlements to benefits.
This can be a specialist area and it’s best to take advice based on your individual personal circumstances.
For initial advice about Accounting and Taxation, call our team on 0203 488 7503, 01992 236 110, or contact us by email at welcome@walshwestcca.com or via our website www.walshwestcca.com, and we will help you.
Comments