How is my tax collected?
In this section we look at different types of taxable income and the ways in which your tax is collected.
Tax can generally be paid in two ways – either it can be taken from you before you get the rest of the money, or you pay it direct to HMRC. Sometimes it is a combination of the two – you might have some tax taken from the money before you get it and then have to pay the difference (or claim a refund) depending on your own tax situation.
If the person paying your income to you deducts tax from your income before paying you the income due to you, it is often known as having tax ‘deducted at source’.
This means you only receive the ‘net’ amount of income after tax, rather than the ‘gross’ amount. When you are working out how much tax you are due to pay, you have to include the gross amount of your income, including any tax that has been deducted from the income before you received it.
This section only deals with UK sources of income. For more information on how foreign income is taxed, go to our residence and domicile section.
HMRC ask employers to deduct tax from your wages or salary under the Pay As You Earn (PAYE) system.
There is more information on how tax is collected from your wages and salary in the employed section.
Private and occupational pensions
HMRC ask pension payers to deduct tax from your pension income under the Pay As You Earn (PAYE) system.
There is more information on how tax is collected from your private and occupational pensions in the employed section.
The state pension
The state pension is taxable income, but you receive it gross. This means no tax is deducted at source from the state pension.
HMRC may collect any tax due on your state pension through the PAYE system, if you have a source of taxable earned income, such as a private pension or employment income. There is more information in our employed section.
There is one exception to this, which is if you take a state pension lump sum (only available to those who reached state pension age before 6 April 2016 and deferred claiming it). In that case, some tax may be taken from the lump sum before you receive it.
If you are self-employed, you must normally complete a Self Assessment tax return each year (unless your trading income is less than £1,000 per annum). This is because it is not possible for HMRC to collect any tax on your self-employment income through deduction at source. There is more information on how tax is collected if you are self-employed on our main LITRG website.
You only pay income tax on any taxable profits you make, that is, the excess of your self-employment income when compared with deductible business expenses.
Banks and building societies do not deduct income tax from the interest income they pay to you. They pay you your interest gross. The interest is still taxable income and you may have to pay tax on it. You have to include this in your income when working out your tax. You can read about the rate of tax you will pay on your savings income on our page What tax rates apply to my savings income?.
If you have an Individual Savings Account (ISA) with a bank or building society, you will receive your interest tax free and you need not include the amount in your income when working out your tax. Interest from ISAs is not taxable income.
Dividends are amounts paid by companies to shareholders and are a way of passing the profit of a company to its shareholders. Normally dividends are taxable income.
If you have an Individual Savings Account (ISA) that receives dividends, you do not need to include the ISA dividends in your income when working out your tax. Dividends from ISAs are not taxable income.
You receive UK dividends gross – no tax is deducted at source. This means that the amount the company declares as a dividend and pays to its shareholders is the gross dividend. This is the amount you include in your taxable income, when you work out how much tax you have to pay. So, if the company pays you a dividend of £100, this is the gross dividend, which you must include in your tax calculation.
There is more information on our main LITRG website on the page Savings and tax.
Property income is not normally taxed before you receive it, so if you receive rental income from letting out a property, you must normally tell HMRC (unless it falls within the £1,000 property allowance).
If you have a source of income from which tax can be deducted under the PAYE system, for example, a salary or a pension, you may be able to pay any tax you owe on your property income through PAYE. Your tax code will be adjusted to reflect the amount of rental profit you make.
If you either cannot pay tax on your property income under the PAYE system or do not wish to, you must complete a Self Assessment tax return each year.
You only pay income tax on any taxable profits you make, that is, the excess of your property income when compared with deductible rental expenses.
There is more information on our main LITRG website in our rental income section.