A Summary of Personal Income Subject to UK Income Tax
In the UK, Income Tax is charged on most types of income that an individual receives. The amount of tax due depends on your total taxable income, the type of income, and the allowances or reliefs available.
If your total income is below the Personal Allowance £12,570 for 2024/25, no Income Tax is due. However, once your income exceeds this threshold, different income categories, such as employment, self-employment, property, investments, pensions, and certain state benefits, may become taxable.
At the same time, there are many exemptions, allowances, and reliefs designed to reduce your tax liability, especially for small amounts of income, certain benefits, and specific investment products. These include personal allowances, marriage allowance, trading allowances, dividend allowances, and tax reliefs on pension contributions and charitable donations, among others. Taking advantage of these can help lower the overall tax payable and ensure that you are not overpaying on your earnings.
Earnings from Work
Income from employment or work-related activities is subject to UK Income Tax. Below we break down the main categories and what you need to know for each.
Salaries and Wages
This includes normal pay, overtime, holiday pay, and any back pay you may receive. HMRC considers all regular remuneration from your employer as taxable income, so it’s important to report these amounts accurately on your Self Assessment if applicable.
Bonuses, Tips, and Commission
Any performance-related bonuses, tips from customers, or commission payments are considered taxable, even if paid directly by a customer rather than through payroll. For example, if you work in hospitality or sales, ensure all tips or incentive payments are included in your declared income.
Benefits in Kind
Non-cash benefits provided by your employer, such as a company car (unless fully electric with exemptions), private medical insurance, or living accommodation, are generally taxable unless explicitly exempt. The rules around these benefits can be complex — HMRC provides guidance here.
Redundancy Payments
Certain redundancy payments are taxable, but any amount under £30,000 is generally tax-free. Payments above this threshold may attract tax, so it’s important to understand the breakdown of your redundancy package.
Severance and Termination Payments
Payments in lieu of notice (PILON), holiday pay for untaken leave, and bonuses or commissions due at the point of termination can be taxable. Like redundancy payments, amounts under £30,000 may be tax-free, but amounts above this are generally subject to Income Tax. Always check your employment contract and HMRC guidance to ensure correct reporting.
Certain Employed Income Types Are Exempt from Taxation
Work-Related Expenses
Expenses paid by your employer that are wholly and exclusively for your work are generally exempt from taxation. This can include business travel costs, uniforms required for your role, and professional subscriptions that are approved by HMRC. Keeping accurate records of these expenses is essential to demonstrate they are legitimate and work-related.
Trivial Benefits and Non-Cash Awards
Genuine non-cash awards of trivial value, such as staff meals or refreshments, and small seasonal gifts under £50 (excluding cash or vouchers), are usually exempt from Income Tax. These benefits are intended to reward staff without creating a significant tax liability, but they must meet HMRC’s criteria for triviality and non-cash form.
HMRC-Exempt Benefits
HMRC exempts certain work-related benefits from taxation, including free or subsidised meals in a staff canteen, one mobile phone per employee, parking at or near your workplace, work-related training, certain relocation expenses (up to £8,000), protective clothing or uniforms, and eye tests or glasses needed solely for computer screen use. These exemptions are designed to cover essential work-related costs and provide relief from unnecessary tax burdens.
Redundancy, Severance, and Compensation Payments
Statutory Redundancy and Ex-Gratia Payments
Statutory redundancy payments or ex-gratia payments under £30,000 are generally exempt from Income Tax. Payments related to injury or disability arising from employment are also usually exempt. Employer pension contributions made as part of a settlement may fall under this exemption as well.
Compensation for Loss of Office
Genuine compensation for loss of office, including approved settlement agreement sums, may be tax-free up to £30,000. This mirrors the treatment of redundancy payments and ensures employees are not unduly taxed on amounts designed to compensate for termination. PILON, holiday pay for untaken leave, and contractual bonuses can also be considered, depending on the specifics of the agreement.
Self-Employment and Business Income
Profits from self-employment, including sole traders and partnerships, are subject to UK Income Tax. Any income earned from bartering — goods or services received in exchange for work — must be valued at market price and declared as income. Casual work, such as “odd jobs” or side hustles like gardening, tutoring, online sales (if trading in nature), and gig economy work such as Uber or Deliveroo, must also be reported if they meet the criteria for taxable trading income.
It is important to note that even small amounts of casual work can be taxable if they exceed the thresholds set by HMRC, so accurate record-keeping is essential. Self-employed individuals are responsible for reporting profits correctly on their Self Assessment tax return.
Income Types Exempt from Taxation
Certain types of self-employed income may be exempt from taxation under specific conditions. The exemptions help simplify small-scale or hobby activities that are not intended to generate profit. Below we break down the main categories:
Trading Allowance
If your total trading income from self-employment is under £1,000 in a tax year, you may qualify for the trading allowance. This means you do not have to pay tax or submit a Self Assessment return for these earnings, provided you are not claiming expenses. This allowance is particularly helpful for small-scale or one-off trading activity.
Bartering Exemptions
Genuine personal swaps that are not part of a business, such as exchanging furniture with a friend, are generally exempt from taxation. One-off private exchanges without any commercial or trading intent are also excluded. HMRC only requires bartering to be declared if it forms part of your trade or business income.
Casual Work Exemptions
If your casual work or side hustle generates total trading income under £1,000 in a tax year, it is covered by the trading allowance and no tax return is required. This is useful for occasional work such as tutoring, gardening, or gig economy tasks.
Hobby Income
Income from hobbies where there is no profit motive, such as occasionally selling personal items at a loss, is generally not taxable. HMRC distinguishes between hobbies and business activities, so sporadic sales of personal belongings do not fall under self-employment income.
Property Income
Income from property includes rental income from letting out a property and certain types of furnished holiday lets. After deducting all allowable expenses, this income is subject to UK Income Tax. Properties that do not meet the criteria for furnished holiday lets are taxed as normal rental property, even if partially furnished.
It’s important to understand the conditions for furnished holiday lets (FHL), such as availability to let for at least 210 days per year and actual lettings for at least 105 days per year. Properties failing these conditions are treated as standard rental properties for tax purposes.
Income Types Exempt from Taxation
Certain property income may qualify for exemptions or reliefs under HMRC rules. These allowances can reduce the taxable amount of income, helping small-scale landlords and holiday-let owners manage their tax liability.
Property Allowance
The property allowance allows you to earn up to £1,000 per year in rental income without paying tax, provided you are not claiming any other allowable expenses. This simplifies tax reporting for small-scale lettings or part-time rental activity.
Rent-a-Room Scheme
If you let out a furnished room in your main home, you can earn up to £7,500 per year tax-free under the Rent-a-Room scheme. This allowance is designed to encourage homeowners to rent out spare rooms without the burden of complex tax calculations. You can choose to use the scheme or calculate your profits traditionally, depending on which is more beneficial.
Furnished Holiday Lets Reliefs
Furnished Holiday Lets (FHL) can access more generous tax reliefs than normal rental properties. These include capital allowances for certain furnishings and equipment, as well as potential Capital Gains Tax reliefs such as Business Asset Disposal Relief or Gift Hold-Over Relief. Meeting the FHL conditions is crucial to benefit from these tax advantages.
Investment Income
Investment income covers earnings from savings, dividends, and certain types of trust income. These income types are generally subject to UK Income Tax, depending on allowances, exemptions, and the specific nature of the income source.
Savings income includes interest from banks, building societies (excluding ISAs), bonds, credit unions, peer-to-peer lending, and certain National Savings & Investments (NS&I) products unless specifically exempt. Dividends from UK or overseas companies are taxable if they exceed the annual allowance. Additionally, some discretionary or interest-in-possession trust income is taxable, often at special trust rates.
Income Types Exempt from Taxation
Certain investment income may be exempt from taxation, either through specific allowances or by HMRC rules:
- ISA income and gains (Cash ISA, Stocks & Shares ISA, Lifetime ISA, Innovative Finance ISA).
- Savings income below the Personal Savings Allowance or Starting Rate for Savings.
- The first £500 per year of dividends (2024/25) is tax-free under the Dividends Allowance.
- Dividends held inside a pension are exempt from immediate taxation.
- Premium Bond prizes and certain NS&I products with tax-free status (e.g., NS&I Index-linked Savings Certificates, though no longer widely available).
- Lottery or betting winnings.
- Gains on UK government gilts (“Qualifying Corporate Bonds”).
- Some trust distributions may carry a tax credit or be covered by allowances. Income within bare trusts is taxed as if received directly by the beneficiary, so amounts within their allowances could be tax-free.
Its always worth contacting a professional to check you are correctly defining your income as exempt or not. Not only will a professional save you money on your tax liability but they could also mitigate the chance of you making mistakes on your return. Mistakes on your tax return can result in heavy penalties.
Potential Tax Benefits
Some benefits and allowances you receive may either be partially or fully exempt from UK Income Tax. Understanding which benefits are taxable and which are exempt can help you plan your finances and ensure compliance with HMRC rules. Below we break down the main benefits and their treatment for tax purposes.
Carer’s Allowance
A benefit for people providing care to someone for at least 35 hours per week. This allowance is considered taxable income, so it must be included on your Self Assessment if you are required to file. More info can be found here.
Jobseeker’s Allowance (JSA)
Income-based JSA is exempt from taxation, while contribution-based JSA may be taxable. Note that income-based JSA is largely replaced by Universal Credit for most claimants. Guidance is available here.
Employment and Support Allowance (ESA)
The taxable part of ESA must be reported on your Self Assessment if applicable. This varies depending on the type of ESA and your circumstances. Full guidance can be found here.
Income Types Exempt from Taxation
Certain benefits are fully exempt from taxation. These exemptions ensure support reaches recipients without reducing their disposable income. The main exempt benefits include:
Disability Living Allowance (DLA)
A non-taxable benefit for people with disabilities who need help with mobility or daily living costs.
Personal Independence Payments (PIP)
A replacement for some DLA claimants, PIP is designed to help with additional costs caused by long-term health conditions or disabilities. It is not taxable.
Attendance Allowance
Paid to those over State Pension age needing care due to illness or disability. Fully exempt from Income Tax.
Industrial Injuries Disablement Benefit
Compensation for work-related injuries or occupational diseases. Non-taxable.
Universal Credit
Income-based support to help with living costs. Payments are exempt from Income Tax.
Housing Benefit & Council Tax Reduction
Benefits to help pay rent or council tax are fully exempt from taxation.
Child Benefit
Generally exempt from tax, although the High Income Child Benefit Charge may apply if you or your partner earn above £50,000.
Income-based JSA
This benefit is fully exempt, as it has largely been replaced by Universal Credit for most claimants.
A Summary of Personal Income Subject to UK Income Tax
UK Income Tax covers a broad range of income sources, but the system includes numerous allowances and exemptions to ensure that not all income is taxed equally. Understanding which income is taxable, and which reliefs apply, is essential for accurate reporting and avoiding unnecessary tax bills.
Most earnings, pensions, property profits, and investment returns are taxable, but often reduced by allowances such as the trading allowance, savings allowance, dividend allowance, and Rent-a-Room relief.
Certain income streams are entirely exempt from taxation, particularly ISA income, state disability benefits, and Premium Bond prizes. Special rules also apply to redundancy payments, pension lump sums, and furnished holiday lets, which may attract partial exemptions or reliefs.
If you receive overseas income and are a UK resident, it may also be taxable depending on your residency and domicile status. It is important to understand these rules to prevent double taxation and ensure compliance.
Careful planning and awareness of your allowances, exemptions, and reliefs can help you reduce your overall tax liability and ensure you only pay what is required by law.
