Understanding personal taxes - income tax and national insurance

There are two main types of personal tax that you may have to pay on what you earn:

  • Income Tax, which is a tax on what you earn from employment, self-employment, investments etc
  • National Insurance

If you're employed, then your employer takes care of all this. But if you're self-employed it's your responsibility. Of course, reporting what you earn happens on your tax return ( see the related article below).

Income Tax

For Income Tax, everyone has a personal allowance, which is the amount they can earn without paying tax.  For 2020/21 for most people it is £12,500.

If self-employment is your  only source of income, you can make up to £12,500 before you need to start paying Income Tax.

If you’re making over £1,000 from your self-employment though, you’ll still need to register with HMRC, but probably won’t have to pay tax if you’re making below the threshold - unless you have other sources of income that use up your personal tax allowance.

National Insurance

There is another type of tax which is often overlooked –  National Insurance.

This has different – and lower – thresholds than income tax. Even if you’re below the Income Tax personal allowance threshold, you may need to pay National Insurance. It’s important and could even affect your pension.

National Insurance will be calculated when you submit your tax return.

For more details on National Insurance for self-employed people, see the related article below.

Other taxes to know about

Tax on interest and dividends

If you earn a lot on interest and dividends, you may also have to pay tax on them. They can be tagged using untied.

Capital gains taxes

High value things you own are known as "capital assets". If they increase in value and you sell them, then you may have to pay tax on the gain that you have made.

There are some exemptions and reliefs - the main one being that your main home is not subject to capital gains tax.

Capital gains are reported on your tax return. Contact untied if you need help with this.

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