If you're a resident of the UK and you work to earn a living, either as an employee or self-employed, or derive an income through interest, dividends and the like, then you'll pay income tax.
But how much do you pay? That depends on a number of circumstances, including the level of income you receive.
In the UK, everyone is allowed to earn a set amount before income tax is liable. This level, which is set every year by the government, is known as the personal allowance. The personal allowance for the current tax year (2006/2007) is £5,035.
If you're aged 65 or over, the personal allowance is £7,280; if you're 75 and over, it is £7,420.
UK taxpayers are, of course, allowed certain deductions to be taken from gross income prior to the calculation of income tax liability.
Not least of these are the pension contributions we all make, whether employer-initiated or some personal pension scheme to which we contribute.
Then there are the legitimate expenses and costs incurred while carrying out our employment (employed/self-employed).
Whatever is left is then liable to income tax, at varying rates or bands, depending on the level of the earnings.
The lowest tax rate is 10%, applied to an income level up to £2,150.
The basic rate of income tax is 22%, applied to taxable income within the range £2,151 to £33,300.
Anything above £33,300 incurs the highest income tax rate, which is 40%.
That's the basics in a nutshell. However, there are variations.
For example, the basic rate of income tax when applied to investment income is slightly lower, at 20% - which is why, once again, we repeat the following warning.
Consult an independent financial adviser if you require advice on UK tax or on any other financial matter.
