How is my tax collected?

Updated on 16 March 2017

In this section we look at different types of taxable income and the ways in which your tax is collected. This section only deals with UK sources of income. For more information on how foreign income is taxed, go to our 'migrants section'.

How is my tax collected?

Tax can generally be paid in two ways – either taken from you before you get the rest of the money, or you pay it direct to HM Revenue & Customs (HMRC). Sometimes it is a combination of the two – you might have some tax taken from the money before you get it and then have to pay the difference (or claim a refund) depending on your own tax situation.

If the person paying your income to you deducts tax from your income before paying you the income due to you, it is often known as having tax ‘deducted at source’.

This means you only receive the ‘net’ amount of income after tax, rather than the ‘gross’ amount before tax is taken off. When you are working out how much tax you are due to pay, you have to include the gross amount of your income, including any tax that has been deducted from the income before you received it.

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How is tax collected from my wages and salary?

HMRC ask employers to deduct tax from your wages or salary under the Pay As You Earn (PAYE) system.

There is more information on how tax is collected from your wages and salary in the 'employed section'.

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How is tax collected from my pensions?

Private and occupational pensions

HMRC ask pension payers to deduct tax from your pension income under the PAYE system.

There is more information on how tax is collected from your private and occupational pensions in the 'pensioners and tax section'.

The state pension

The state pension is taxable income, but you receive it gross. This means no tax is deducted at source from the state pension.

HMRC may collect any tax due on your state pension through the PAYE system, if you have a source of taxable earned income, such as a private pension or employment income. There is more information in our ‘pensioners and tax section’.

There is one exception to this, which is if you take a state pension lump sum (only available to those who reached state pension age before 6 April 2016 and deferred claiming it). In that case, some tax may be taken from the lump sum before you receive it.

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How is tax collected from my self-employment income?

If you are self-employed, you must normally complete a self assessment tax return each year. This is because it is not possible for HMRC to collect any tax on your self-employment income through deduction at source.

You only pay income tax on any taxable profits you make, that is, the excess of your self-employment income when compared with deductible business expenses.

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How is tax collected from my bank and building society interest?

HMRC used to ask banks and building societies to deduct tax at fixed rates from the income they pay to you. Before 6 April 2016, your bank or building society would normally take off income tax at 20% before they paid you your interest.

From 6 April 2016, banks and building societies do not deduct income tax from the interest income they pay to you. They pay you your interest gross. The interest is still taxable income and you may have to pay tax on it. You have to include this in your income when working out your tax.

If you have an Individual Savings Account (ISA) with a bank or building society, you will receive your interest tax free and you need not include the amount in your income when working out your tax. Interest from ISAs is not taxable income.

There is more information in our section on ‘savings and tax’.

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How is tax collected from my UK dividends?

Dividends are amounts paid by companies to shareholders of their shares and are a way of passing the profit of a company to its shareholders. Normally dividends are taxable income.

If you have an Individual Savings Account (ISA) that pays dividends, you will not need to include the ISA dividends in your income when working out your tax. Dividends from ISAs are not taxable income.

From 6 April 2016, you receive UK dividends gross – no tax is deducted at source. This means that the amount the company declares as a dividend and pays to its shareholders is the gross dividend. This is the amount you include in your taxable income, when you work out how much tax you have to pay. So, if the company pays you a dividend of £100, this is the gross dividend, which you must include in your tax calculation.

There is more information in our section on ‘savings and tax’.

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How is tax collected from my purchased life annuity?

Purchased life annuities and their tax treatment are explained in the 'pensioners and tax section'.

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How is tax collected from my rental property income?

Rental income is not taxed before you receive it, so if you receive rental income from letting out a property, you must normally tell HMRC. 

If you have a source of income from which tax can be deducted under the PAYE system, for example, a salary or a pension, you may be able to pay tax you owe on small amounts of rental property income through PAYE. You will still need to tell HMRC about it so that they can adjust your tax code to reflect the amount of rental profit you make.

If you either cannot pay tax on your property income under the PAYE system or do not wish to, you must complete a self assessment tax return each year.

You only pay income tax on any taxable profits you make, that is, the excess of your rental property income when compared with deductible rental expenses.

There is more information in our ‘property income section’.

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