Income Tax is one of the biggest sources of income for the government and is used to help fund government spending. HMRC (Her Majesty’s Revenue and Customs) is the government department responsible for collecting and managing taxes.
Your employer will deduct your income tax from your wages using a system called PAYE (Pay As You Earn). This will appear as a deduction on your payslip.
History of Income Tax
Income Tax was first introduced in 1798 by Prime Minister William Pitt to pay for the UK’s participation in the French Revolutionary War. It was abolished in 1801 but reintroduced in 1803 after the war with France resumed. One year after the Battle of Waterloo, Income Tax was again abolished in 1816. Prime Minister Sir Robert Peel reintroduced Income Tax in 1842 due to the government deficit.
What is Income Tax used for?
Government spending includes things like:
- Schools, colleges and universities
- Local Authorities
- Healthcare
- The Armed Forces
- State Pensions and other benefits
- Infrastructure
Each year the UK Government publishes a report entitled ‘Public Expenditure Statistical Analyses’ which details how Income Tax and National Insurance payments were used in public spending for that year. This report can be viewed on the UK Government website.
How is Income Tax Calculated?
The amount of tax you pay depends on your income and is calculated using a tax code. Which tax code they use depends on your personal circumstances. However, you may sometimes be taxed using an emergency tax code for reasons such as starting a new job or moving from self-employed to working for an employer. Don’t worry this will only be temporary and your employer should be able to help you fix this.
Everyone has a Personal Allowance which is a set amount of money you do not need to pay any tax on. If you earn less than the personal allowance you will not usually need to pay any income tax.
How do we pay Income Tax?
The majority of people have their income tax deducted from their wages by their employer. This is done using a system called Pay As You Earn (PAYE) and your employer will use your tax code to calculate how much tax you will pay.
Some people will pay income tax using a Self Assessment system. Self Assessments are used by people who are self-employed (work for themselves) or receive other income from property, tips and commission, any income from savings and investments or any foreign income.
