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What is income tax? ๐Ÿ’ธ

What is income tax?

What is income tax? –

Introduction ๐Ÿ‘‹

Income tax is money that people have to pay to the government.

Disclaimer: This website provides information for guidance and educational purposes only. The Grown-Up School does not provide regulated financial advice. You can seek independent financial advice from a suitably qualified and regulated professional advisor. Check out our disclaimer policy for more information.

When you make money, you have to pay part of the money you make to the government. There are lots of different rules about how much money you need to pay.

If you don’t pay your tax on time, you could get fined and have to pay more money. The government will usually help you to pay your tax.

People have to pay income tax on money they make from things like:

  • Their jobs
  • Renting out their house
  • Selling things online
  • Having a savings account
  • Owning their own business

In really extreme situations where you don’t pay your tax, the government might do things like:

  • Taking your possessions and selling them
  • Take money from your bank account to pay what you owe
  • Take you to court
  • Close down your business

It is really important to understand the tax rules for where you live/work, so make sure to check your government website to find out what they are!

UK Tax Rules

https://www.gov.uk/income-tax

What does income tax pay for? ๐Ÿ’ธ

Whilst it can be really annoying that you have to pay money to the government, paying income tax does give you some really cool things in return! ๐Ÿ”

In the UK, income tax helps to pay for things like:

  • Free healthcare ๐Ÿง‘โ€โš•๏ธ
  • Police ๐Ÿ‘ฎ
  • Schools ๐Ÿง‘โ€๐Ÿซ
  • Fire services ๐Ÿง‘โ€๐Ÿš’
  • Roads ๐Ÿ›ฃ๏ธ
  • Railways ๐Ÿš„
  • Housing ๐Ÿ˜๏ธ

What is PAYE (Pay As You Earn)? ๐Ÿ’ฐ

If you have a job, you might’ve heard the term PAYE talked about a lot.

Are you a lazy person? ๐Ÿฆฅ

Great!

You’ll love PAYE (pay as you earn)! – It basically means that your employer:

  • does all the maths for you
  • calculates your income tax for you
  • sends your income tax payments to the government for you

They’ll then send you a “payslip”, to tell you how much tax they’ve paid on your behalf.

Whilst it’s great that your employer sorts out your tax for you, it’s really important to check that they’ve paid it accurately. ๐Ÿ•ต๏ธโ€โ™€๏ธ

What is a tax code? ๐Ÿคทโ€โ™€๏ธ

Your tax code decides how much income tax you pay.

For example, in the UK if your tax code is 1257L – this means that you can earn ยฃ12,570 before you have to start paying income tax.

Anything you earn over the ยฃ12,570 will be charged tax.

If you have a job, you can find out your tax code by looking at your payslips. ๐Ÿ“ƒ

It’s really important to check if your tax code is right. ๐Ÿ”

If your tax code is wrong, you could:

  • Pay too much income tax and be entitled to a “tax rebate”! ๐Ÿค‘
  • Pay too little income tax, and get a massive unexpected tax bill sent to you from the government! ๐Ÿ˜ข

What to do if your tax code is wrong (or you’re not sure if it’s right) ๐Ÿฅด

If you’re not sure what your tax code is supposed to be (or you think it’s wrong), you can:

What if I’m self-employed? ๐Ÿ‘ทโ€โ™€๏ธ

If you work for yourself, or own your own business, you’re considered “self-employed”.

Self-employed people:

  • Get paid by their customers ๐Ÿ’ธ
  • Don’t get payslips
  • Have to be SUPER organised and pay their income tax and national insurance tax themselves ๐Ÿ—ƒ๏ธ
  • Have to complete a form/questionnaire called a “tax return” every year, to pay their taxes ๐Ÿ“ƒ
  • Need to be very careful with their money, and set money aside to pay their tax bills
  • Can hire an accountant to help handle their taxes if they want to make life easier ๐Ÿฆฅ What is an accountant? ๐Ÿ‘ฉโ€๐Ÿ’ผ

Did you know? – Income tax was invented to pay for a war ๐Ÿช–

Income tax was introduced in the UK in 1799 to help pay for equipment and weapons in the French Revolutionary War!

Nowadays it usually pays for a lot nicer things – like schools, fire, police services, and in the UK it helps pay for the National Health Service.

You can learn more about income tax on these websites –

Money Saving Expert Income Tax Calculator:

https://www.moneysavingexpert.com/tax-calculator/

Wikipedia:

https://en.wikipedia.org/wiki/Income_tax

Investopedia:

https://www.investopedia.com/terms/i/incometax.asp

Conclusion ๐Ÿ‘

So that’s it!

Hopefully you’re feeling more confident about understanding income tax.

If you know any friends or family members who might benefit from learning about income tax, share this post with them!

Finally, don’t forget to check out our similar articles below!

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