Definition of income tax
This 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 2013/14 are the basic rate (20 per cent) on income up to £32,010, the higher rate (40 per cent) on income between £32,011 and £150,000 and the additional rate (45 per cent) on the excess. Savings income is subject to tax at 10 percent for income up to £2,790, (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. The basic rate limit for 2014/15 is due to be reduced further to £31,865 in conjunction with an increase in the tax-free personal allowance.
Special rates apply to dividend income: 10 per cent on dividend income in the basic rate band (again taking it as the top slice after earned and savings income), with 32.5 per cent on dividend income of between £35,001 and £150,000 and 37.5 per cent on dividend income 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% of income from April 2013 on reliefs which are not otherwise limited, but note that this does not apply to charitable donations.
Individuals who are resident in the UK are entitled to a personal allowance; i.e. a tax-exempt band. For individuals below the age of 65 this is £9,440 for 2013/14 and, following an announcement in Budget 2013,£10,000 for the 2014/15. Increased allowances are available for some people over the age of 65. But allowances for those born before 5 April 1948 reduce by £1 for each £2 by which income exceeds an income limit of £26,100 for 2013/14 reducing to a minimum of the lowest personal allowance (see Granny tax). These allowances gradually reduce to nil as an individual’s taxable income rises beyond £100,000. (Updated by PwC, March 20 2013)
income tax in the news
In the March 2013 UK Budget, chancellor George Osborne drew praise even from the more rebellious in his camp with his announcement that that he would raise the tax free personal allowance on income tax to £10,000 by next year and would cut £2,000 from corporation's tax bills.