What income is taxable?
You do not have to pay tax on all your income. In tax terms, some income is called ‘taxable’ – you have to pay tax on it, and some is ‘non-taxable’, ‘not taxable’, ‘exempt’ or ‘tax-free’ – you do not have to pay tax on it.
If you want to know whether different types of income are taxable or not, we suggest you visit our page with more general information in the ‘Tax essentials’ section of our website. If you want to know whether different state benefits and tax credits are taxable or not, we suggest you visit our section on ‘Tax credits and benefits’ on the LITRG website.
This page deals only with income that you get from an employer. We look at whether or not the different parts of your employment package are taxable. Income does not have to be in monetary form – it can be payment in kind.
The following list includes income that is normally taxable.
- Wages and salaries – this includes holiday pay. It does not matter how your employer pays you, provided that they operate Pay As you Earn (‘PAYE’) correctly – cheque, cash in hand or bank transfer are all possible. It does not matter how frequently you are paid – it can be monthly, weekly, daily, or at irregular intervals. It does not matter whether you receive the same amount each payday or a variable amount, dependent on the number of hours you work. Your employer must give you a payslip each payday, either electronically or in hard copy.
- Benefits in kind, which might also be called ‘perks’ of your job. This includes things like company cars and private medical insurance. Until 6 April 2016 the tax treatment of benefits in kind sometimes depended on whether you earned £8,500 a year or more.
- Bonuses, commission and tips – if your employer pays you a bonus or commission, you must pay tax on it. Usually, your employer operates PAYE, just like on your wages or salary. If you receive tips from customers, you have to pay income tax on them, but you may not have to pay National Insurance contributions (‘NIC’). The way in which you work out your tax on tips depends on who the tips are given to and who decides how to share the tips. There is more information on the tax and NIC position of tips on GOV.UK.
- Backdated pay awards
- Expenses not totally and necessarily incurred to do the job made by the claimant's employer including:
- travelling expenses between the claimant's home and place of employment
- expenses incurred for the care of a member of the claimant's family, such as childminding costs
- Vouchers that can be exchanged for cash, goods or services
- Payment in lieu of remuneration, such as a payment made by a liquidator when a company has been wound up and employees are owed earnings
- Protective awards, which may be ordered by an Industrial Tribunal if an employer has not given a trade union the statutory notice of redundancies, or a payment which may be made to an ex-employee from the Redundancy Funds if an employer goes into liquidation
- Redundancy/leaving payments over £30,000
- Retainers – a retainer is a payment made for a period when no actual work is carried out, such as payment made to employees of the school meals service during school holidays
- Statutory employment benefits, such as statutory sick pay, statutory maternity pay and statutory paternity pay.
The following list includes income that is normally tax-free.
- Redundancy payments or compensation for loss of employment up to £30,000, subject to certain rules. This is a complex area, and it is essential to seek further guidance.
- Employer sponsored courses
- Long service awards where the gift meets certain criteria – the gift must be a non-cash award; the award must mark at least 20 years of service by the employee; the employer must not have made another long-service award to the same employee within the previous 10 years; the award must be worth no more than £50 per year of service.
- Reimbursement of expenses, wholly and necessarily for your employment, which you have personally incurred in the first instance.
If your employment package contains types of income that we do not cover in the ‘Employed’ section, then your tax affairs could be quite complicated. You may need to contact HMRC or get advice from a tax adviser.
For more information on various different types of non-employment related taxable and tax-free income, you may find these sections of our website helpful:
- Tax essentials – What income is taxable?
- Self-employment (on the LITRG website) – How do I work out my taxable profits?
- Tax credits and benefits (on the LITRG website) – State benefits
There is more information on the taxation of savings income in the ‘Other tax issues’ section of the LITRG website.