Finance > Tax (employee Focus)
What Is Tax?
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Generally, individuals pay tax on the following sources of income:
- Employment income
- Rental income from properties let out
- Interest from banks
- Dividends from companies
- Profits of those that are self-employed
We pay tax by reference to the “tax year”, which runs from 6 April to the following 5 April. For example, the 2022/23 tax year is the period from 6 April 2022 to 5 April 2023.
There are some types of income that we do not have to pay tax on, for example:
- Winnings on Premium Bonds
- Income from betting, gaming or lotteries
- Income from ISAs
- Scholarship awards
What Is the Tax on Your Payslip?
Most of us pay our tax through what you may have heard been referred to as PAYE (Pay As You Earn). This is a system which takes the tax we are due to pay before we receive our salary. Our employers will apply a tax code to our income which indicates how much tax to take away. The tax code is decided based on an estimate of the total employment income you will receive during the tax year.
How Is the Tax Calculated?
Firstly, individual’s have a “personal allowance”, which is essentially an amount of income that you do not pay tax on. For the 2022/23 tax year, this amount is £12,570.
In general, if individuals earn more than £100,000, this personal allowance is reduced. However, for the purposes of this article, we will assume this is not the case.
After the personal allowance is deducted, the next £37,700 of income is taxed at 20%. The next £99,730 of income is taxed at 40%. Any income received above £150,000 is taxed at 45%.
The table below summarises the tax bands and respective tax rates for the 2022/23 tax year.
| Band | Income | Tax Rate |
|---|---|---|
|
Personal Allowance |
Up to £12,570 |
0% |
|
Basic Rate |
£12,571 – £50,270 |
20% |
|
Higher Rate |
£50,271 – £150,000 |
40% |
|
Additional Rate |
Over £150,000 |
45% |
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What Are Tax Codes?
All full or part-time employees should have a tax code. Tax codes are used by your employer to calculate the tax and national insurance contributions (NICs) that is due each month.
Income Tax Rates and Bands
Income tax rates and bands are used to indicate the amount of tax you will be required to pay for your level of income.
Tax-Free Personal Allowance
Your personal allowance is the amount that you can earn before paying any income tax.