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imagine every single time you earn some hard-earned cash a grubby little mitt comes in and skims them right off the top well that's essentially what happens those grubby little mitts belong to hmrc so essentially you're being mugged by this little old deer [Music] today's video i'm going to explain exactly how the uk income tax system works don't hurt me [Music] hey welcome back to the channel this is that finance show with me tom morgan a uk-based financial planner and advisor remember like comment subscribe and come and chuck us a follow on instagram too so let's start with a bit of housekeeping first all the rates and numbers that i'm going to go through in this video are accurate at the time of filming you see the first thing you need to know is that instead of agreeing with the concept that romans came up with on when a year starts hmrc begin their confusion by saying that a tax year starts on april the 6th until april the 5th oh and hmrc stands for her majesty's revenue and customs they are the people in charge of collecting the tax so think of them as the queen's debt collectors if you will so although the basic concepts covered in this video will be correct the numbers and rates might be different depending on exactly when you are watching this video so make sure that you check what the rates are when you're sat watching this and hey if you're watching this way into the future look me up won't you i'm probably going to be some overweight middle-aged guy yelling at kids going past my house on their goddamn rocket shoes rocket powered shoes three two one oh gosh it's lit it's light it's lit go go go oh such a bad idea oh here we go oh christ and one more thing for all my scottish fans out there your income tax rates are different too you pay the scottish government so be sure to make sure you check out what those rates are i don't have any scottish fans [Music] oh jesus christ that's hot in the center of the earth in order to explain income tax to you i'm going to introduce you to your new favorite bands imagine buying a ticket to glastonbury only to find out that first up on the main stage is personal allowance and once they've warmed things up next up is basic rate most people are into them but they're not really that exciting they're a bit like coldplay next up we have higher eight some people know their stuff they're a bit of a niche sound and they tend to have a pretty middle class audience and then your headliners they arrived by limo and they'll only drink bottled water it is additional rate to be honest no one likes additional rate how do they get on the bill you see your earnings are split into bans and rather than just telling you that i thought for some reason i'd go into some self-indulgent nonsense about music in case it helps did it help well it's too late now how much income tax you pay depends on how much of your income is over the personal allowance and falls into each tax ban don't worry we're going to go through some examples the personal allowance is the amount of money that you're allowed to earn before you have to cough up any to list the current rate is 12 and a half thousand so if you earn less than that you don't have any tax to pay you get to keep it all back off liz next is the basic rate ban now this currently applies to any money over your personal allowance which is 12 and a half thousand and falls below 50 000. you'll pay 20 on any of your earnings in this band so for every 100 pounds that you earn liz wants 20 pounds of it next up is the higher rate band this is for all you big hitters and coldplay fans you'll pay 40 in this tax band for any income over 50 000 and below 150 000 so for every 100 pounds in this category liz wants 14. now guys and girls it's time for the real big fish real big fish do you remember then for any income over 150 000 you're gonna pay 45 on this so for every 100 pounds in here liz wants 45. i haven't got a fiver have you got a fiver anyone got a five um we'll do that plus five the common misconceptions is there's no point in earning any more money i'm just gonna pay more tax on it and not see any of it not true stick with me i'm going to go through some examples in a minute and show you the maths i got you but wait there's more but wait there's more the personal allowance will actually go down by one pound for every two pounds you earn over one hundred thousand pounds and it can go down to zero so what that means is if you earn over a hundred and twenty five thousand pounds a year you will actually lose your personal allowance entirely right enough confusion with the rules the easiest way to understand this is with the maths let's run through some very quick examples if you earn 20 000 a year you will pay nothing on the first twelve and a half thousand the personal allowance on the remaining seven and a half thousand pounds you will pay basic rate tax at twenty percent so you will pay fifteen hundred pounds in total income tax now if you're employed this is more than likely just going to be deducted from your monthly pay in a scheme called pay as you earn [Music] p-a-y-e-p-a-y-e so in this example 125 pounds a month will be taken from your monthly pay now let's say you earn 60 000 it would go like this well done you again you'll pay nothing on the first 12 and a half thousand your personal allowance we'll now look at your earnings up to that 50 000 threshold so 37 500 of your earnings will be taxed at 20 basic rate which is seven and a half thousand and then on the remaining 10 000 that sits in the higher rate band you'll pay 40 percent so 4 000. so if we add these figures together you'll get 11 and a half thousand pounds in total tax due and if you're employed and on a p-a-y-e scheme you'll be deducted about 958 pounds each month and few major players earning 200 000 pounds a year let's face it tom no one earning 200 000 pounds a year is watching some self-indulgent youtube video about income tax too busy on their yachts i expect firstly you've now lost all of your personal allowance so in effect you're going to pay tax on all of your earnings that serves you right yacht boy so it looks like this you'll pay 20 on the first 37 and a half thousand so 7 500. on the next 112 500 you'll pay 40 which is 45 000 and then 45 on the remaining 50 000 which is 22 and a half thousand that's a grand total in tax of 75 000. we now in truth there are lots of intricacies to the uk tax system there is extra personal allowance for example if you're blind and married couples can transfer a portion of their personal allowance between their partners and there's also something called the personal savings allowance dividends attacks at a completely different rate and income tax is not the full story anyway we haven't even touched on national insurance which is a whole nother thing altogether but i do have a top tip for you [Music] my top tip is pretty simple there are some great online calculators that will do all the heavy lifting on the maths for you there's absolutely loads of them but one that i like is the salary calculator and i'll pop a link in the description below should you want to take a look so really really quickly this is what it looks like if i wanted to put in that last example if i put 200 000 in that top box you'll notice as you scroll down you've actually got you can tell it if you're a resident in scotland you can put in your actual tax code tell it about your student loans pension contributions all these have an effect on your overall tax if you go to additional options at the end you can tell it about for example the blind person's allowance whether you're married and all these different intricacies that i briefly touched on if i leave all that blank let's just assume this is dead dead straight forward if i hit calculate it will essentially give us a breakdown of what the tax situation is it will also comment on national insurance as well if we click here on breakdown by the tax figure it will actually give you a breakdown of the maths that we just went through there so my tip is yes it's really really good to understand the system but there are some great tools that will save you a lot of heavy lifting right that's quite enough from me what are you even still doing here anyway get out there and earn some more money don't you know liz's corgis need some new slippers she's behind me again isn't she you