The percentage of your income that you pay away in tax depends upon your total income - there is no single 'rate' that covers everyone. The method of calculation is, though, reasonably straightforward. Income tax rates change each year, but for this year the calculation is as follows.
Think of your earnings as a tower of children's building blocks. The lowest block is where your earnings start, and is up to £6475 high - and you pay no income tax at all on that figure - if that is all you earn: no tax to pay. The figure of £6475 is this year's 'personal allowance'
The next block is up to £37,400 high. All of your income sitting in that block is taxed at the 'basic rate' of 20%. For example, if your total earnings are £16,475 then you pay no tax on the first £6475 (which sits in the lowest block: your personal allowance). This leaves another £10,000 which sits in the 20% block, leading to a tax charge of £2000.
The next block - the third one up - is the higher rate which goes right up to £150,000, and earnings which sit in that block are taxed at 40%. If any of your income sits in that block you are known as a 'higher rate taxpayer'. If you earn more than this you will pay 50% on the extra.
Your personal allowance is in practise spread throughout the year, and the pay as you earn system (PAYE) is designed to equalise your tax across your weekly or monthly paydays.
Careful! This simple example by no means covers all of the possible options. Your personal allowance may be different if you have a disability, or are over 65 years of age, and it gets more complicated if you have income from investments or savings, for instance. And do not disregard National Insurance contributions, which are really a tax on income.
Follow this link for more information: http://www.direct.gov.uk/en/Nl1/Newsroom/PreBudgetReport2009/DG_183037
And the 'Why?' To run the country: police, prisons, armed forces, education, health services, politicans' expenses....
| 12.15.10 @ 22:55