Income tax and National Insurance Rates

The current rates and limits for Income Tax and National Insurance can be downloaded by clicking on link below.

Income Tax and National Insurance Rates and Limits (pdf)

What is Income Tax?
Self Assessment Income Tax Return
National Insurance Contributions

What is Income Tax?

There are currently eight taxes that are levied in the UK by central government. These are divided into two major categories, Direct and Indirect.

Direct Taxes
- Income Tax
- National Insurance
- Corporation Tax
- Capital Gains Tax
- Inheritance Tax
- Stamp Duty
Indirect Taxes
- Value Added Tax (VAT)
- Customs Duties (including duties on alcohol, petrol and tobacco

Between them, Income Tax and National Insurance amount to approximately 50% of the total tax collection.

Income tax is paid by Individuals (whether self-employed or employed), partners in a partnership, trusts and personal representatives, provided they are resident and domiciled for tax purposes (If you are not resident and/or domiciled there are rules that need to be understood, it is best to consult a qualified person). Most types of income are taxed under schedules. Each schedule has a set of rules used to determine the amount of income that is taxable.

Schedule A – Income from land and buildings
Schedule D Case I and II – Profits from trades or professions
Schedule D Case III – Interest Received
Schedule D Case IV – Interest on foreign securities
Schedule D Case V – Income from foreign possessions
Schedule D Case VI – A catch all e.g. ad-hoc commissions
Schedule E – Income from Office or Employment (Usually known as PAYE)
Schedule F – Dividends received from UK Companies

Making sure you compute the correct amount of taxable income under each schedule can be a complex area and it is always prudent to seek qualified advice. All resident individuals, regardless of age, are entitled to the Personal Allowance. The effect of personal allowance is that the first part of income in any year up to the amount of the allowance is free of tax.

Income Tax Self-Assessment Return

Most persons who are self-employed or are partners in a partnership will be expected to prepare a self-assessment tax return (Note that partnerships also have to additionally file a partnership statement) and pay the tax in two trances, one in July and the other in January. This is different to an employed individual who will have tax deducted each time they receive their salary or wages.

The usual timings for the self-assessment events are as follows. Revenue and Customs will send out forms just after the April tax year-end. Taxpayers will need to compute their tax liability and return their self-assessments by the 31st January following. Any outstanding tax liability is also payable by the 31st January. Also on 31st January a payment on account representing half the previous years tax liability is due and another on 31st July.

An example of payment profile for a self-employed tax payer
	Tax Year ended	Tax Liability	Payable on
			31 Jan 03	31 Jul 03	31 Jan 04	31 Jul 04	31 Jan 05	31 Jul 05	31 Jan 06	etc
		£	£	£	£	£	£	£	£	£
Year 1	05 April 02	2,000	2,000
Year 2	05 April 03	2,500	1,000	1,000	500
Year 3	05 April 04	3,000			1,250	1,250	500
Year 4	05 April 05	2,700					1.500	1,500	(300)
Year 5	05 April 06	3,100							1,350
	etc		3,000	1,000	1,750	1,250	2,000	1,500	1,050

There are penalties for the late deliveries of tax returns as well as penalties and interest on late payments of tax.

National Insurance Contributions

National Insurance contributions are paid both by self-employed and employed persons. Additionally a person who is neither employed nor self-employed may make voluntary contributions in order to qualify for social security benefits.

Rates of National Insurance contributions are given in the downloadable tables above.

There are currently four classes of national insurance contributions:

Class 1 – for employed individuals
Class 2 – for self-employed individuals
Class 3 – voluntary contributions for individuals not employed or self-employed
Class 4 – for self-employed individuals according to the level of their profits

Class 1

Provided an individual earns above a limit (known as the Earnings Threshold) then class 1 contributions are payable both by the employee (Class 1B) and the employer (Class 1A). The contributions are calculated as a percentage of the taxable earnings of the individual. There is an upper earnings limit above which the employee contributes at a lower rate. Certain benefits in kind (Company cars, purchased health care etc) can also attract class 1A contributions.

Class 2

Liability to class 2 national insurance is for a self-employed person. Class 2 has to be paid weekly usually by standing order as a fixed amount. A newly self-employed person must inform the HM Revenue & Customs within 3 months of becoming self-employed. It is possible to apply for a small earnings exception and not pay class 2 if annual earnings are below the level. Generally this may not be advantageous as benefits entitlement is affected.

Class 3

Class 3 contributions are paid voluntary by persons who are neither employed nor self-employed. There payment provides and entitlement to a state pension. The payment is made weekly as a fixed amount usually by standing order.

Class 4

Self-employed persons pay class 4 contributions based upon the level of their taxable profits. Class 4 is paid in addition to class 2. The contribution is calculated as a percentage of the taxable earnings. A smaller contribution rate is applied on earnings above an upper earnings limit.