Almost everyone who works in the UK must pay two different taxes on the money that they earn; these are called Income Tax and National Insurance Contributions.

What is Income Tax?

Income Tax is a tax on your total personal income which you must pay from the money that you earn, whether you are employed or self-employed. You must also pay Income Tax on any money that you earn from savings, shares, pensions, rents or money that you receive from a trust, this why it is called Income Tax, because it is a tax on your ‘income’.

If you work for a company or individual in the UK you will be known as an employee, and your employer will take the money that you owe in tax every time that you are paid, they will then pass it on to the tax collector, called Her Majesty’s Revenue and Customs (HMRC). Income Tax is therefore deducted from your pay packet before you are paid. This system is known as Pay-As-You-Earn (PAYE).

If you have, or you are are planning to work for yourself by starting your own company, you will be classed as being self-employed. One of the advantages of being self-employed, in the UK, is that you will probably pay slightly less in tax than an employee, because many everyday costs, such as travel and work tools, can be claimed back from HMRC as business expenses.

Self-employed people must complete a form each year, called a Self-Assessment Tax Return, and pay the money that they owe in two main payments each year. However, you may find that you need to hire an accountant to do this for you.

How much will I pay?

The amount of income tax that you pay will be a percentage of the money you earn. As you earn more money, the percentage that you pay increases, this is known as a ‘progressive’ tax system. For example, every UK resident starts off each year with a tax-free allowance currently set at £6,475 per person in 2010. This amount will change in 2011 to £7,475.  After your tax-free allowance you will be charged 10% until you have earned a further £2,440 (this is known as the ‘Starting Rate’), then you will be charged 20% on all income between £2,440 and £37,400 (known as the ‘Basic Rate’), until finally you will be charged 40% on all income over £37,401 (known as the ‘Higher Rate’). The same rates also apply to income on savings and dividends (income from shares in companies).

How will I pay?

When you start working for an employer, they will organise your tax payments with HMRC, so really there is nothing for you to do, as your employer will take care of it. However, you will receive a payslip every time that you are paid and you should keep this somewhere safe for future reference. When you leave your job your employer will issue you with form, called a P45, this will state how much money you have paid in tax whilst working for them. If you plan to return home after this, you may find that you have paid too much tax and you are eligible for a ‘tax-rebate’ which means that you can claim back some money from HMRC (hooray!), you can do this by visiting their website and downloading a form, but make sure that you have your P45 otherwise it will be difficult for you to get your money back. 
  
By John Hillman  

USEFUL WORDS

deductions = the amount of money that is taken from your pay for taxes etc

gross = the total amount of pay received before tax is taken
net = the total amount of pay received after tax is deducted
expenses / outgoings = the money that you spend on things, especially living costs
contribution = the amount of money that you give to pay for something

GRAMMAR SPOT

 To be / get used to

Use used to + infinitive for repeated actions in the past that don’t happen now:

I used to pay more tax (but now I pay less)
I didn’t use to pay as much tax (but now I do)
Did you use to pay tax when you were a student?

Note: the negative and interrogative forms have use, not used

 
Use used to + infinitive to talk about past states:

Tom used to have large outgoings (but now he doesn’t)

Use be used to + noun or –ing form to say that you are familiar with something:
Marta is used to the British tax system now (she’s been in England a long time)
The employees are used to having deductions every month from their salaries (it happens every month)
I’m not used to paying so much tax! (this is unfamiliar, I pay less tax in my country)

MONEY IDIOMS

go halves = divide the cost between two people
go on a spending spree = spend a lot of money in one day
cost an arm and a leg = very, very  expensive
break even = neither gaining nor losing money
dirt cheap = very, very cheap
splash out on something = pay a lot of money for something special (e.g. a new dress or a meal)
pick up a bargain or two = buy some cheap things
dip into your savings = spend some of your saved money
save money for a rainy day = save money for a day when you don’t have much and you want to give yourself a treat
tighten our belts = spend less in order to save money
put £500 away for a holiday = save £500
pay through the nose for something = pay a lot of money (perhaps more than something is really worth)
a bit over the top = too much
it set us back a bit = it cost us quite a lot of money (more than we could really afford)