Your main source of income is likely to come from employment but, for the sake of tax, the government also class other earnings as income. Interest from saving accounts, dividends from shares, rental income, pension (if you're over 55), all count too. You can find the full list here

The good news?

On many of these other forms of income, the government offer a yearly tax free allowance: 

Interest from saving accounts... A Personal Saving Allowance allows you to earn between £500 to £1,000 interest tax-free (as long as you're not an additional-rate tax payer). Plus, if you're a low-earner there's a larger amount of relief up for grabs. Get the low-down here

Dividends from shares... You don't pay tax on the first £2,000. After that, the tax depends on your total dividend income. We have a guide for this. 

Rental income... The Rent a Room scheme allows you to earn up to £7,500 tax-free for letting out a room in your home. Yes, you have to be living there as well. 

Pension income... You get 25% tax-free, taken as a lump sum or over time. After that your withdrawals count as income and are taxed. 

How much will I pay?

After you've totted up your total income (including your salary) and deducted the tax-free allowances, you'll have to pay tax on income over £11,850. Here's the deal: 

Your IncomeBand NameTax Rate
Up to £11,850Personal Allowance*0%
£11,851 to £46,350Basic rate20%
£46,351 to £150,000Higher rate40%
Over £150,000Additional rate45%

*If you earn over £123,000 a year you don't get a Personal Allowance and all your income is taxed.

How can I reduce the tax I pay?

If you're over the Personal Saving Allowance on savings interest income you can open a Cash ISA. And, if you're over the dividend allowance you can open a Stocks & Shares ISA.  

For pension income you need to look into a tax-efficient payment plan. This is where one-off advice from a Financial Advisor could come in handy. Don't wait until you retire!

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