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Few can escape the clutches of income tax. Unless you don't work and have few savings, it is unavoidable. The general rule is that if you earn in excess of your personal allowance, then you will pay income tax on it. It is also levied on many sources of income beyond what is earned at work - savings, dividends on shares and company profits to name a few. From letting a second property - to receiving the jobseekers' allowance - all are taxable. What's more, any individual who hides earned incomes or a profit they are earning is committing a criminal offence - so it is well worth knowing what the rules are. If you are uncertain about your liabilities, you should contact either your local Inland Revenue office, or an accountant experienced in personal taxation matters. There are some areas where tax is not payable. These include student loans, grants (including those to access funds), scholarships, many research awards, housing benefit and allowances from partners and spouses. Gifts are also free from income tax, as are profits from gambling. Tax is collected at source for those working for an employer through the pay as you earn (PAYE) system. Your tax code will reflect the extra tax. The self-employed complete a tax return and send the Inland Revenue a cheque. The amount you can earn before paying tax varies depending on the allowance set by the chancellor at the most recent budget. For the tax year 2006/2007 personal allowance is £5,035; for the over-65s it is £7,280; for the over-75s it is £7,420. On the first £2,150 you earn, you pay tax at 10%. For the tax year 2006/2007, from £2,150 to £33,300 it is 22%; and more than £33,300 you pay at 40%. But, for example, you only pay higher-rate tax of 40% on the amount you earn above £33,300 - not on everything you earn. The effect of the personal allowance means the 22% tax bracket now starts on earnings of £7,185. A typical worker will cross the higher-rate threshold when earnings reach £38,335. All this can seem pretty complex and most people working for an employer do not have to worry about allowances or what tax they pay. If you pay too much, the Inland Revenue will also reimburse you or adjust your tax code. But it is worth remembering that children also have personal allowances. They can have interest on savings paid with no tax deducted by filling in form IR85, which is available from their bank or building society. There are many rules and regulations concerning income tax. For example, pensions in payment are taxable once you earn more than the age-related personal allowance, which means that most pensioners with a company pension, as well as the state pension, find themselves paying income tax. But pension contributions get tax relief, which is a very important tax concession, especially for higher-rate taxpayers. The contribution is paid net of 22% tax (i.e. £78 paid but £100 invested) and the difference between basic and higher rate is reclaimed via your tax return with an adjustment to your tax code.
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