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Taxable and non-taxable income
It is important to know what income is non-taxable and can be ignored for tax purposes. You only pay tax on your taxable income so you do not want to include any non-taxable income in your calculations. You do not have to tell HM Revenue and Customs (HMRC) about income which is non-taxable so you leave it off tax returns and any other forms HMRC sends you asking about your taxable income. When you are working out your taxable income you also need to know about tax allowances and tax reliefs.
The following types of income are non-taxable.
The following benefits are non-taxable, so you can ignore them for tax purposes:
- Attendance Allowance
- Bereavement payment
- Child Benefit. While Child Benefit is not taxable, if your household receives it and someone in your household has taxable income of over £50,000, they may have to pay extra tax from 7 January 2013. For more information, see Child Benefit and tax if you have a high income
- child dependency additions paid with Carer’s Allowance, Incapacity Benefit, State Retirement Pension and Widowed Parent’s Allowance
- Child Tax Credit
- Christmas bonus for pensioners
- Cold Weather Payments
- Council Tax Reduction
- Disability Living Allowance
- Employment and Support Allowance (Income-related)
- Guardian’s Allowance
- Health costs, including eye tests, prescriptions, travel under the Hospital Travel Costs Scheme
- Housing Benefit
- Income Support, unless you are on strike when you claim
- Industrial Injuries benefits including Disablement Benefit, Reduced Earnings Allowance, Constant Attendance Allowance and Exceptionally Severe Disablement Allowance
- Maternity Allowance
- One-parent Benefit, only available if your claim was made before April 1997
- Pension Credit
- Personal Independence Payment
- Return to Work Credit
- Severe Disablement Allowance, only available to claimants who were claiming before April 2001
- Social Fund payments including budgeting loans, funeral expenses payments and Sure Start Maternity grants
- Universal Credit
- War Disablement Pension, including allowances
- War Widow’s/Widower's pension
- Winter Fuel Payments.
Interest and income from savings and investments
Interest from the following types of savings and investments is non-taxable, so you can ignore it for tax purposes:
- Child Trust Fund
- National Savings and Investment (NS&I) Certificates
- Individual Savings Accounts (ISAs)
- Tax Reserve Certificates
- withdrawals from insurance policies or investment bonds of up to 5% of the amount originally invested.
Other income which is non-taxable
Other types of income which are non-taxable and can be ignored for tax purposes include:
- adoption allowances paid by a local authority or approved adoption agency
- Child Tax Credit
- childcare vouchers up to a value of £55 a week
- work-related training courses
- educational grants and student loans, including the parental contribution and scholarships
- Education Maintenance Allowance (there are separate allowances for England, Wales, Scotland and Northern Ireland)
- eye tests, prescription charges and help with other health costs
- fares to school
- Higher Education Student Support grant (there are separate grants for England, Wales, Scotland and Northern Ireland)
- HM forces – mess and ration allowances
- foster care receipts below specified limits
- bravery awards – annuities and additional pensions paid to holders of the Victoria Cross, George Cross and most other bravery medals are non-taxable
- holocaust victims – compensation
- home improvement grants from your Local Authority
- hospital patients’ travelling expenses under the Hospital Travel Scheme
- housing grants from your Local Authority
- compensation or damages awarded for personal injuries whether received in one lump sum or over a period and whether awarded by a court or out of court settlement
- interest up to the time of judgment awarded by a court on compensation or damages for personal injuries
- jurors’ financial loss allowance, if the juror is an employee
- life assurance policies – certain bonuses and profits
- long service awards to employees after 20 years of service, where the gift does not exceed £50 for each year of service and where the gift is tangible, for example a clock or shares in a company. A cash award is usually taxable unless it is a one-off payment which is not included in your contract of employment
- maintenance payments received from a spouse or civil partner
- miners’ free coal or cash in lieu of coal
- certain pensions. Voluntary pensions which are not connected to a past job and to which you contribute annually are tax-free. Disability pensions of members of the armed forces are tax-free. Any pension awarded to you as an employee on retirement because of an injury at work is tax-free
- German and Austrian annuities and pensions for victims of Nazi persecution
- lump sum pension payments (maximum 25% of the capital value up to a certain limit
- compensation and interest for mis-sold personal pensions taken out between 29 April 1988 and 30 June 1994 inclusive
- insurance benefits paid to you if you are sick, disabled or unemployed to meet your financial commitments, for example, benefits paid under mortgage protection insurance, permanent health insurance, payment protection (creditor) insurance and long-term care insurance
- strike pay and unemployment pay from trade unions
- premium bond prizes, winnings from the National Lottery and football pools, and from betting for example, horse racing
- purchased annuities – capital element of the amount you receive
- the first £30,000 of payments which are compensation for loss of a job, including statutory and contractual redundancy payments and, in certain cases, a lump-sum payment in lieu of notice.
If you have received a payment for loss of a job and are not sure whether it should be paid tax-free, you should consult an experienced adviser, for example, at a Citizens Advice Bureau. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB
- Rent a Room scheme – the first £4,250 of the income is tax-free
- repayment supplement in connection with interest paid on repayment of overpaid tax
- Thalidomide Trust payments to victims of thalidomide
- TV licence payment for the over 75s
- vaccine damage lump sum payments
- Scottish Government energy efficiency schemes, Warm Front Grant (England), Warm Homes (Northern Ireland), Energy Companies Obligation (ECO) (England, Wales and Scotland)
- Working Tax Credit.
Some social security benefits and pensions
The following social security benefits and pensions are taxable:
- Bereavement Allowance
- Carer's Allowance
- Employment and Support Allowance – contributory and youth
- Incapacity Benefit – except for the first 28 weeks (higher rate) and those who were receiving the former Invalidity Benefit at 12 April 1995 for the same incapacity (long term)
- Income Support paid to people who are on strike
- industrial death benefit pensions
- Jobseeker’s Allowance – both contribution-based and income-based up to a taxable maximum
- State Pension
- Widowed Mother’s Allowance
- Widowed Parent's Allowance
- Widow’s Pension.
Additions for dependent children paid with any of the above benefits are not taxable. An addition for a spouse or civil partner is taxable.
The following earned income is taxable:
- expenses paid by your employer when those expenses are not totally and necessarily incurred in doing your job including travelling expenses between your home and your place of work, and expenses incurred for the care of a member of your family, such as child minding costs
- certain foreign earnings
- payments in lieu of wages, such as payments made by a liquidator when your company has been wound up and employees are owed earnings
- permitted work, as part of a treatment programme under medical supervision
- profits from self-employment
- protective awards which may be ordered by an industrial tribunal if your employer has not given a trade union the statutory notice of redundancies or a payment which may be made to you as an ex-employee from the redundancy funds if your employer goes into liquidation
- redundancy or leaving payments over £30,000
- retainers. For example a payment made to you for a period when you do not carry out any actual work, such as payment made to you as an employee of the school meals service during school holidays
- Statutory Adoption Pay
- Statutory Maternity Pay
- Statutory Paternity Pay
- Statutory Sick Pay
- non-cash vouchers that are liable for Class 1 National Insurance Contributions
- wages and salaries including backdated pay awards.
Occupational pension paid by a former employer
An occupational pension paid to you, as an employee by your former employer, counts as your income and is generally taxable. There are some circumstances when the income is not taxable, for example:
- if you have retired early following an accident at work, work-related illness or war injuries, the excess pension paid to you above the normal early retirement pension is not taxable
- if you work outside the UK as an employee, and so do not pay UK tax.
The law on tax and occupational pensions is complicated and an experienced adviser should be consulted for further details. For example, you can contact The Pensions Advisory Service (TPAS), which provides free, confidential advice on occupational pensions.
For more information about TPAS, see Further help and information in Workplace pensions.
The rules on pension lump sums are complicated and an experienced adviser should be consulted for details, for example, a Citizens Advice Bureau. To search for details of your nearest CAB, including those that can give advice by email, click on nearest CAB.
Interest on savings
Interest on savings counts as taxable income on the date when it is credited to your account. It is not apportioned over the period when it builds up. The following types of interest on savings are taxable:
- interest paid on savings in most bank and building society accounts, and paid by local authorities, and from UK companies and UK government stocks (gilts). This has tax deducted at source, before the interest is paid to you. If you are a non-taxpayer, you can arrange to have the interest paid in full. You should obtain a form from the bank or building society in order to do this. More information about tax on bank and building society accounts is available at www.hmrc.gov.uk
- interest on National Savings and Investments (NS&I) products is taxable in most cases but some are free from tax. For more information, go to the NS&I website at www.nsandi.com
- income from Credit Union savings, whether paid as 'dividends' or interest. Both are treated as savings interest for tax purposes. Credit Unions don't deduct tax from the interest or dividend before they pay it to you, so you will need to tell HMRC about this income, unless your income is too low to pay tax at all
- interest and dividends from UK unit trusts
- dividends paid on shares. For more information about taxation of share dividends, see the GOV.UK website at www.gov.uk.
Other types of income which are taxable
The following other types of income are taxable:
- taxable gains on life insurance policies
- income from trusts and settlements
- profits from the sale of some goods and property
- profits from renting part of a property, property letting including second homes and from furnished holiday lettings. Rental income from lodgers up to a certain limit is entitled to tax relief under the Rent a Room scheme
- profits on motor mileage allowances paid to volunteer drivers, for example, drivers for the hospital car service or other volunteer organisations
- purchased annuities – the income element of the amount you receive.
For more information about taxable income, you should consult an experienced adviser, for example, at a Citizens Advice Bureau. To search for details of your nearest CAB, including those that can give advice by email, click on nearest CAB.
Tax allowances and tax reliefs
In addition to having income that is not taxable at all, there are tax-free allowances that you take off your taxable income to reduce the amount on which you have to pay tax. This is because nearly all taxpayers living in the UK on a day to day basis are entitled to personal tax allowances which are deducted from their taxable income. These allowances give taxpayers a certain amount of taxable income on which they pay no tax.
For more information about personal allowances, see Income tax allowances and amounts.
Some taxpayers may be able to claim reliefs against income tax as well as allowances. Reliefs against income tax are amounts that are allowed against your tax bill because you have had to make certain outgoings, commonly in connection with your work. You can use the reliefs to reduce the amount of your taxable income so that you have less tax to pay.
For more information about tax reliefs, see Tax reliefs.