Income Tax and National Insurance

Unsure about Income Tax and National Insurance? Don’t know what the National Insurance threshold is? We explain how the tax system works and what to do if you think you’re overpaying.

Should I pay any Income Tax?

Income Tax, as its name suggests, is a tax on your income. Jump down to ‘How much Income Tax will I pay?’ to find out what you’re liable for.

What is a Personal Allowance?

Everyone, including students, has something called a Personal Allowance – the amount of money you’re allowed to earn each tax year before you pay Income Tax.

The tax year runs from 6 April to 5 April, and for the 2016-17 tax year the standard Personal Allowance is £11,000. If you earn less than this, you shouldn’t have to pay any Income Tax. From April 2017, the Personal Allowance rises to £11,500.

The amount of the Personal Allowance you receive is set by the government and can change from one tax year to the next.

Check the most up-to-date Personal Allowance figures on GOV.UK.

Marriage Allowance

If you or your partner were born before 6 April 1935 you might be eligible for Married Couple’s Allowance, which might reduce your tax bill by more than the Marriage Allowance. Find out more on GOV.UK.

From April 2015, married couples and those in civil partnerships can transfer part of their tax allowance to their partner, saving up to £220 in tax.

You might be eligible for this if:

  • You are married, or in a civil partnership.
  • One of you earns less than the Personal Allowance and the other is a basic rate taxpayer.
You can find more information on GOV.UK.

What is Income Tax used for?

Income Tax is collected by HMRC on behalf of the government. It’s used to help provide funding for public services such as the NHS, education and the welfare system, as well as investment in public projects, such as roads, rail and housing.

How much Income Tax will I pay?

Your Personal Allowance is taken off your earnings before you start paying Income Tax.

Income Tax is made up of different bands. This means that as your income increases, so too does the amount of Income Tax you pay.

It’s an attempt to make paying Income Tax as fair as possible, so that those who earn the most contribute the most.

The table below shows the rate of Income Tax you pay on anything over your Personal Allowance.

Rate 2016-17
Basic rate: 20% £0 to £32,000
People with the standard Personal Allowance start paying this rate on income over £11,000
Higher rate: 40% £32,001 to £150,000
People with the standard Personal Allowance start paying this rate on income over £43,000
Additional rate: 45% Over £150,000

The threshold for the 40% tax rate will rise to £45,000 in the 2017-18 tax year.

If you think you mighthave had Income Tax wrongly taken from your earnings, fill in the form from Her Majesty’s Revenue and Customs (HMRC) to have it paid back to you.

National Insurance

National Insurance contributions help to build your entitlement to certain state benefits, such as the State Pension and Maternity Allowance. You begin paying National Insurance once you earn more than £155 a week (this is the figure for the 2016-17 tax year).

The National Insurance rate you pay depends on how much you earn:

  • 12% of your weekly earnings between £155 and £827
  • 2% of your weekly earnings above £827

Your National Insurance contributions will be taken off along with Income Tax before your employer pays your wages.

Find out more about your National Insurance contributions on GOV.UK.

What do National Insurance payments pay for?

Your National Insurance payments go towards state benefits and services, including:

  • The NHS
  • Unemployment benefits
  • Sickness and disability allowances
  • The State Pension

The government froze age-related personal allowances in April 2013.

In the 2015/16 tax year this was restricted to individuals born before 6 April 1938. Individuals born on or after this date were entitled to the basic Personal Allowance instead.

However, due to increases in the basic Personal Allowance, this is now the same for everyone, irrespective of when they were born.

Did you find this guide helpful?