Often tested
Paying tax: income tax and National Insurance
Tax and driving are both part of everyday life. Tax comes first here; for the rules on driving, see "Driving: licences and rules for your car".
Income tax
In the UK, you pay income tax on what you earn. Income that is taxed includes:
- wages from a job
- profits if you are self-employed
- benefits that are taxable
- pensions
- income from property, savings and dividends (payments from shares)
Income tax pays for government services, such as:
Roads
Education
Police
The armed forces
For most people, income tax is taken straight from their pay by their employer and sent to HM Revenue & Customs (HMRC), which is the government department responsible for collecting tax. The name for this system is Pay As You Earn (PAYE).
If you are self-employed, you pay your own tax through a system called self-assessment, which means filling in a tax return. Other people may need to fill one in too. If HMRC sends you a tax return, complete it and send it back as soon as you have all the information you need. For help, there is HMRC's self-assessment helpline, 0300 200 3310, and HMRC's pages on the UK government website (GOV.UK).
National Insurance
Almost everyone in the UK who is in paid work, including people who are self-employed, must pay National Insurance Contributions. The money is used for benefits and services provided by the state, for example the National Health Service (NHS) and the state retirement pension.
Employees have their National Insurance taken from their pay by their employer; self-employed people pay it themselves. People who haven't paid enough cannot get certain benefits that depend on contributions, such as Jobseeker's Allowance or a full state pension. Some people, such as part-time workers, may not get statutory payments such as maternity pay if they earn too little.
Your National Insurance number
Your National Insurance number is your own personal account number, and nobody else has the same one. It makes sure the tax and National Insurance you pay are recorded correctly against your name.
- Young people in the UK get their number just before their 16th birthday.
- People who are not UK nationals need a number to look for work, start work or become self-employed in the UK, but you can start work before you have one.
- To get one, phone the National Insurance number application line. You need permission to work in the UK first.
- Once you have applied, the Department for Work and Pensions (DWP) writes to you and invites you to an interview at Jobcentre Plus. The same letter says which papers you need to bring to show who you are.
Quiz
What is the name of the system in which employers deduct income tax from wages and send it straight to HM Revenue & Customs?
Under Pay As You Earn (PAYE), your employer takes off the tax for you. Self-assessment is how self-employed people pay their own tax; National Insurance is a separate payment that funds pensions and the NHS; and Jobseeker's Allowance is a benefit.
Quiz
Which TWO are funded by National Insurance Contributions, according to the handbook?
The split is: National Insurance pays for state benefits and services, for example the NHS and the state retirement pension, while income tax pays for roads, education, the police and the armed forces.