What Is Income Tax?

Income Tax is a tax you pay on your earnings. It applies to income from:

• Employment (wages, bonuses, benefits)

• Self-employment (profits from sole trading or partnerships)

• Rental income

• Dividends and savings

• Pensions and other taxable sources

You pay Income Tax only on income above your Personal Allowance, which is currently £12,570 per year (2025/26).

👷 Employment vs. Self-Employment Tax

Employment Income

• Tax is deducted automatically through PAYE (Pay As You Earn) by your employer.

• You also pay Class 1 National Insurance.

• You receive a payslip showing gross pay, tax, and NI deductions.

 

Self-Employment Income

• You report income via a Self Assessment tax return.

• You pay:

  • Income Tax on profits after allowable expenses

  • Class 2 and Class 4 National Insurance

• You must keep records and submit returns annually.

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Income Tax Bands and Rates (2025/26)

• 0%: Income up to £12,570 (Personal Allowance)

• 20%: Income from £12,571 to £50,270 (Basic Rate)

• 40%: Income from £50,271 to £125,140 (Higher Rate)

• 45%: Income above £125,140 (Additional Rate)

Note: The Personal Allowance reduces if your income exceeds £100,000.

 

CIS Tax Deductions & Their Relationship to Income Tax

The Construction Industry Scheme (CIS) applies to subcontractors working in construction. Under CIS:

• Contractors deduct 20% or 30% from payments made to subcontractors.

• These deductions are advance payments toward the subcontractor’s Income Tax and National Insurance.

 

CIS Deduction Rates

• 20% – for registered subcontractors

• 30% – for unregistered subcontractors

• 0% – if the subcontractor has Gross Payment Status

 

How CIS Deductions Affect Your Tax Return

• CIS deductions are recorded by HMRC.

• When you file your Self Assessment, you declare your income and expenses.

• The CIS tax already deducted is offset against your final tax bill.

• If you’ve overpaid, you may be eligible for a refund.

 

Example: CIS & Income Tax in Action

Let’s say you earned £40,000 as a subcontractor and had £8,000 in allowable expenses.

• Taxable profit: £32,000

• Income Tax:

  • £12,570 tax-free

  • £19,430 taxed at 20% = £3,886

• CIS deducted at source: £8,000

• Result: You’ve overpaid tax and may be due a refund of £4,114

 

How TACS Supports You

• Register for Self Assessment and CIS

• Track and reconcile CIS deductions

• advice about allowable expenses

• File accurate tax returns

• Claim refunds and avoid penalties

• Understand tax bands and optimise allowances

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