What’s the Difference Between Income Tax and National Insurance?
Tax can seem like a confusing topic, but understanding the difference between Income Tax and National Insurance will help you to figure out if you’re paying the right amount and help you budget.
Simply put, Income Tax is a deduction that goes towards paying for all the services we use in our society, while National Insurance contributions are made to pay for certain state benefits, including State Pension and NHS Services.
Tax laws can seem complicated and get tricky, that’s why hiring an accountant is such a good idea. An accountant will help you understand how the tax system works for the self-employed, what type of taxes you need to pay, and when to pay them. The right accountant will even help you optimise your finances so you can keep more of what you earn.
If you’re looking for someone to guide you through the logistics and legalities of your business and be available to answer questions, get in touch with Joanna Bookkeeping today!
Income Tax
Income Tax is a form of tax that UK taxpayers pay the government on their income via HMRC. You’re not only taxed on your personal income but you might also be taxed on other income sources such as dividends from your limited company, or interest from savings over a certain amount.
Here are some examples of what you have to pay income tax on:
- The money you earn from being employed
- Profits you make if you’re self-employed
- Some (but not all) state benefits
- Most (but not all) pensions, including state pensions, company, and personal pensions
- Rental income
- Benefits you get from your job
- Income from a trust
- And more
The rate you pay depends on how much you earn. If you’re employed, your employer deducts tax from your wages before paying it to HMRC. Your employer will pass some of this money onto HMRC as PAYE (Pay As You Earn) tax.
If you’re self-employed, you will complete your self-assessment tax return online.
The amount of Income Tax you pay will depend on a few different things, including how much of your income is above your Personal Allowance, and how much of your income falls within each tax band.
You do not get a Personal Allowance on taxable income over £125,140. Also, tax bands differ if you live in Scotland.
What are the UK tax brackets?
| Band | Taxable income | Tax rate |
|---|---|---|
|
Personal Allowance |
Up to £12,570 |
0% |
|
Basic rate |
£12,571 to £50,270 |
20% |
|
Higher rate |
£50,271 to £125,140 |
40% |
|
Additional rate |
over £125,140 |
45% |
*The current tax year is from 6 April 2024 to 5 April 2025. Figures are relevant to this time period and change annually.
Oxford-based accountants
Looking for professional accounting services?
Find out what we can do for you.
National Insurance
National Insurance is a type of tax that UK taxpayers pay the government and is used to pay for certain state benefits, including:
- State Pensions
- Statutory Sick Pay (SSP)
- Maternity Allowance (MA)
- Unemployment Benefit
The class of National Insurance you are required to pay depends on your employment status and how much you earn and are as follows:
Class 1 – Employees earning more than £242 a week and under State Pension age, and payments are automatically deducted by your employer.
Class 1A or 1B – Employers make payments directly on their employee’s expenses or benefits.
Class 2 – Not required from 2024/2025 but you can choose to pay them voluntarily if your profits are below £6,725
Class 3 – Voluntary contributions, you can make payments to fill or avoid gaps in your National Insurance record.
Class 4 – Self-employed people earning profits of £12,570 or more a year.
*The current tax year is from 6 April 2024 to 5 April 2025. Figures are relevant to this time period and change annually.
Is your head spinning from all the tax-related information you’ve been researching lately?
We get it…And we know how easy it is to get lost in the details and lose sight of what’s important. That’s why our Oxford-based expert accountants make it their job to help you stay on top of your tax obligations. And if you’re not based in Oxford, no worries, we’re fully digital and offer our services to businesses all over the UK!
Contact our Oxford accountants for more help and advice.
Your Accountant in Oxford
Oxford Office
Joanna Bookkeeping
The Wheelhouse Angel Court
First Floor, Angel Court
81 St Clements St
Oxford
OX4 1AW
Connect
joanna@joannabookkeeping.co.uk
01865 591952
