Definition of income tax
Income tax is a tax on the earned and unearned income of individuals and trusts. Income includes earnings from employment, profits from a trade carried on by an individual (either alone or in partnership), income from pensions, and investment income such as interest, dividends and rents. The rates of income tax for 2014/15 are the basic rate (20 per cent) on income up to £31,865, the higher rate (40 per cent) on income between £31,866 and £150,000 and the additional rate (45 per cent) on the excess. Savings income is subject to tax at 10 per cent for income up to £2,880, (treating savings income as the ‘top slice’ however if non-savings income is above this limit then the 10 per cent starting rate of savings will not apply), and thereafter at the rates and bands above.
Special rates apply to dividend income: 10 per cent where dividend income falls into the basic rate band (again taking it as the top slice after earned and savings income), with 32.5 per cent for the band between £35,001 and £150,000 and 37.5 per cent in excess of £150,000.
Various deductions can be claimed for income tax purposes such as certain losses, subscriptions to professional bodies and donations to charities. There is a cap of £50,000 or, if greater, 25 per cent of income from April 2013 on reliefs which are not otherwise limited, but note that this does not apply to charitable donations. See also personal allowance