As with every other kind of tax, nobody enjoys paying Income Tax however it is an unavoidable part of life for those of us who are employed. Income tax is defined as ‘the percentage of the money earned from employment that has to be paid as tax’ and this percentage can vary greatly depending on a number of factors including your annual income, marital status and pension contributions.

The Income Tax Tier System

The payment of income tax works on a tier system so that the more you earn the more tax you pay. The first tier is tax free and is termed your personal allowance. This is the amount you can earn before you become liable for income tax and in the tax year 2008-09 the personal allowance was set at £6035. This figure has recently been increased by a small amount so that in 2009-2010 you get a personal allowance of £6475.

The second tier is commonly termed the ‘lower rate tax band’ or the ‘10% band’. This band applies to the first £2440 of your taxable earnings (2009-2010) and is obviously paid at a rate of 10% of your annual income. This rate applies to a lot of part time workers with relatively low incomes.

The next band or tier is the ‘basic rate band’ and it is this band that applies to the majority of working people. Until last year the basic rate for income tax was set at 22% however since the beginning of the 2008 financial year the rate has been reduced to 20%. This means that any income you earn between £2440 and £37,400 is liable for tax at a rate of 20%, after your personal allowance has been deducted. These figures, and in fact all of the figures quoted, are on the HMRC website and apply to the tax year 2009-2010.

The third tier in the Income Tax system is aptly named the ‘higher rate tax band’ or the ‘40%’ band. This rate applies to any earnings that are above £37,400 but in most general occupations this band doesn’t come into play. If you are lucky enough to earn over this threshold limit then this part of your income will be taxed at a rate of 40% – a subject that has been a bone of contention for many professional people for many years.

Annual Changes

Each year the personal allowance figures and the Income Tax bands tend to change slightly in accordance with the Budget. Generally, they increase by a small amount which means you can technically earn more at the lower tax rates. The current rates for singles, married couples and the over 75s are available on the HMRC website and it is important that you check them to avoid paying any unnecessary Income Tax.

In addition, it isn’t unusual to be issued with the wrong tax code if you are employed and this can also result in you paying to much tax – or even worse, not enough tax. Check with your local tax office to see you have the correct code, especially if you have recently changed jobs or have gotten married/divorced. Not paying enough Income Tax may leave you with an unwanted bill at the end of the financial year rather than a rebate for paying too much.