Taxes on different forms of personal income provide the biggest source of revenue for government. In our latest forecast, we expect income tax to raise £188.5 billion in 2018-19. That would represent 24.3 per cent of all receipts and is equivalent to £6,600 per household and 8.9 per cent of national income.
The main reason that income tax is the biggest source of revenue is that personal income makes up the majority of total national income. There are many sources of personal income on which income tax is levied. These include: labour income (the wages and salaries of employees and earnings of the self-employed), income from investments (including interest on savings and the rental income from buy-to-let properties) and pensions income (from both the state pension and any occupational or private pensions).
Income tax is collected in a variety of different ways:
- for the majority of employees, it is paid via the pay-as-you-earn (PAYE) system. The amount of tax to be paid is calculated by the employer and transferred directly to the tax authorities (HMRC). This is also known as being deducted at source. It means the individual does not need to deal directly with HMRC and that the tax is paid promptly. We expect 84.4 per cent of income tax in 2018-19 to be raised through the PAYE system.
- for the self-employed and for those with more than one source of income, it is paid via the self-assessment (SA) system. The amount of tax to be paid is calculated by the individual and declared on a tax return sent to HMRC. Tax returns and associated payments are completed after the tax-year has ended – in most cases in the following January (so January 2018 for the 2016-17 tax year). We expect 16.1 per cent of income tax in 2018-19 to be raised via the SA system.
- other smaller sources of income tax include company income tax, non-SA repayments (for example, when employees have paid too much tax through the PAYE system), investigation settlements and some receipts that cannot be allocated to a particular source. Taken together, we expect minus 0.5 per cent of income tax in 2018-19 to be raised from these sources – i.e. we expect repayments to exceed other payments.
Some income tax has already been devolved to the Scottish Parliament and in future more will be devolved to the National Assembly for Wales. For more information see our webpages on fiscal devolution.
For most employees, National Insurance Contributions (NICs) are also deducted at source while the self-employed pay NICs via SA.