Tax-free and taxable
income
It is often difficult to know if a source of income is taxable
or not.
This section gives you a breakdown of the most common
types of tax-free and taxable income.
However in the world of tax nothing is entirely straightforward,
and in some rare circumstances even generally tax-free sources can
be taxable. Therefore we suggest that you seek further advice from
a tax adviser about your particular situation.
You can read through this information sheet, or go directly to
the sections you want to read by clicking on these links:
Generally tax-free income
Welfare Benefits
Benefits in respect of children
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Other benefits
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Other non-savings income
- Adoption Allowances
- Compensation, damages or interest (up to the time of judgement)
for personal injuries (whether received in one lump sum or over a
period) and whether awarded by a court of out of court
settlement
- Compensation for loss of employment - the first £30,000. This
includes redundancy payments both statutory and in some cases pay
in lieu of notice. (Any payment over the £30,000 limit is
taxable)
- Compensation and interest for mis-sold personal pensions taken
out between 29 April 1988 and 30 June 1994 inclusive
- Educational grants or scholarships
- Employer sponsored courses - up to £15,000
- Foreign pensions and lump sums paid under overseas pension
schemes in certain circumstances - 10% of the pension or lump
sum
- Foreign social security benefits - a large number are
exempt
- Foster care receipts below specified limits
- Friendly societies - any gains on qualifying insurance
policies
- Gallantry awards - annuities and additional pensions paid to
holders of the Victoria Cross, George Cross and most other
gallantry medals are free from tax
- German and Austrian annuities and pensions for victims of Nazi
persecution
- HM Forces - mess and ration allowances
- Holocaust victims - compensation paid by banks on frozen
accounts
- Home improvement grants from the local authority
- Insurance benefits paid to a person who is sick, disabled or
unemployed, to meet her/his financial commitments. These include
benefits paid under mortgage protection insurance, permanent health
insurance, payment protection (credit) insurance and long-term care
insurance
- Jurors' financial loss allowance, when the juror is an
employee
- Life Assurance policies - certain bonuses and profits
- Long service awards where the gift does not exceed £50 for each
year of service and is a tangible gift, e.g. a clock or shares in a
company (for service of 20 years or more). A cash award is usually
taxable unless it is a one-off payment that is not in the contract
of employment
- Lottery, football pools and other betting winnings, e.g. from
horseracing
- Lump sum pension payments (maximum 25% of the capital value up
to the trivial commutation limit - £18,000 for 2012/2013 to
2015/16)
- Luncheon vouchers of up to 15p per working day
- Maintenance payments following divorce or separation
- Miners' free coal or cash in lieu of coal is tax-free under an
HM Revenue and Customs (HMRC) concession
- Pensions including voluntary pensions which are not connected
to a past job and to which the taxpayer contributes annually are
tax-free. Disability pensions of members of the armed forces are
tax-free. Any pension awarded to an employee on retirement because
of an injury at work is free of tax
- Premium Bond prizes
- Purchased annuities - capital element of amount received
- Rent a Room Scheme - the first £4,250 of income
- Repayment supplement in connection with overpaid tax -
interest
- Sickness and unemployment insurance policies - benefits
paid
- Strike pay and unemployment pay from trade unions
- Thalidomide Trust payments to victims of thalidomide
- Wounds and disability pensions
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Some savings and investments income sources
- For certain people who have come from abroad or whose parents
did not 'belong' to the UK when they were born (in tax terms this
means not domiciled in the UK) there may
be exemption from tax if income arising abroad is not brought to
the UK
- Government Savings Certificates income
- Individual Savings Accounts (ISA) income
- Insurance policies or investment bonds - withdrawal tax free up
to 5% of the amount originally invested
- National Savings (NS&I) Certificates income
- Personal Equity Plans (PEP) income, unless you withdraw more
than £180 interest
- Save As You Earn schemes - interest and terminal
bonuses
- Shares or share options issued under HMRC approved employer
schemes
- Income from certain UK Government stocks (gilts) where the
person receiving the money does not normally live in the UK
- Tax-exempt special savings accounts (TESSA) interest, unless
the account was closed within five years of opening
- Tax Reserve Certificates interest
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Commonly taxable income
Earned income
Main sources
- Benefits in kind e.g. company cars (over £8,500 earnings
(including benefits) per year). In certain circumstances benefits
are taxable for those earning less than £8,500
- Bonus or commission, including tips
- Pensions from occupational pensions
- Private pension income or pensions from personal pension plans
or retirement annuity policies
- Profits from self-employment
- Wages and salaries (including holiday pay)
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Other sources of earned income
- Backdated pay awards
- Expenses not totally and necessarily incurred to do the job
made by the claimant's employer including:
- Travelling expenses between the claimant's home and place of
employment
- Expenses incurred for the care of a member of the claimant's
family, such as childminding costs
- Non-cash vouchers that are liable for Class 1 national
insurance contributions
- Payment in lieu of remuneration, such as a payment made by a
liquidator when a company has been wound up and employees are owed
earnings
- Permitted work
- Protective awards which may be ordered by an industrial
tribunal if an employer has not given a trade union the statutory
notice of redundancies, or a payment which may be made to an
ex-employee from the redundancy funds if an employer goes into
liquidation
- Redundancy/leaving payments over £30,000
- Retainers - i.e. a payment made for a period when no actual
work is carried out, such as payment made to employees of the
school meals service during school holidays.
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State benefits
Note that additions for dependant children with any of the above
benefits are not taxable, but an addition for a spouse or civil
partner is taxable.
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Savings and investment income
- Bank, building society or local authority interest
- Dividends from shares
- National Savings & Investments (NS&I) - interest on
most products
- Property letting - most income (including rent a room
where income is over £4,250 per year and second homes).
- Purchased annuities - income element
- Taxable gains on life assurance policies
- Trust/settlement income
- UK companies - interest
- UK Government stocks (gilts) interest
- UK unit trusts (both interest and dividends)
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Other non-savings income
- Motor mileage allowance profits paid to volunteer drivers
- Pre-owned assets
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