How does UK income tax return work?

In the UK, income tax as a salaried employee is a tax withheld at source.

This system has been in place since 1944. France has now followed the same model for certain employees since 2020.

Withholding of income tax: Pay As You Earn (PAYE)

A large majority of employees pay their income tax through the Pay As You Earn - PAYE system. This system - used by employers and pension providers - allows income tax and national insurance contributions to be deducted before salary or pension is paid.

It is your tax code which indicates to your employer the amount to be withheld or the non-taxable base. This tax code is in most cases the amount of the non-taxable base for the tax year followed by a letter indicating your situation as an employee in the tax year.

Salary tax rate

The rates and allowances in force are reviewed each year by the government - in March when the budget is announced.

A tax-free base of £12,500 (fiscal year 2020/2021) is applicable in the majority of cases. This tax-free base is called personal allowance.

The tax-free base varies according to age and amount of income. The tax-free base is reduced by £1 for every £2 over the £100,000 limit and can go down to 0.

People born before April 6, 1948 can get a higher tax base.

Tax year 2020/2021: tax rate on taxable income

The current tax year runs from April 6, 2020 to April 5, 2021.

Threshold/ rate

Taxable base

Rate

Non-taxable threshold (Personal allowance)

£12,500

0%

Basic Rate (Basic Rate)

£12,501 to £50,000

20%

Higher Rate (Higher Rate)

From £50,001 to £150,000

40%

Additional Rate (Additional Rate)

Over £150,000

45%

If you are a salaried director of a company and are paid a regular salary, you may have to file an annual income tax return in addition to your withholding tax.

For more information and advice, do not hesitate to contact an accountant.