Taxable income

What is taxable income?

Taxable income is the part of your income that you pay tax on. In many countries, including the UK, not all income is taxable. Allowances or exemptions cover some of it and help reduce how much tax you owe.

How is taxable income calculated?

In simple terms, you add up your total income from all sources, not just your salary, and then subtract any tax-free allowances you’re entitled to.

The most common of these is the Personal Allowance. It lets you earn a set amount before you start paying tax. This allowance is applied automatically, so you don’t need to claim it.

What counts as income?

You might receive income from many places. These could include:

• Employment (full-time or part-time)

• Self-employment or freelance work

• Renting out property

• Interest from savings

• Dividends

• Pensions

All of these contribute to your total income. Once you subtract your allowances, what’s left is your taxable income. That’s the amount HMRC uses to work out your tax bill.

How can you reduce what you owe?

Beyond the Personal Allowance, you might qualify for other reliefs that lower your taxable income, depending on your circumstances.

Here are a couple of examples:

• If you’re self-employed, you can you can deduct allowable business expenses or use the Trading Allowance, which gives you a tax-free amount without needing to record detailed costs or keep receipts.
• If you earn money from renting out a room in your own home, you can claim the Rent a Room Allowance, which lets you earn up to £7,500 a year without paying tax on it.
• And many others, see a longer list of tax-free allowances here. 

Understanding what taxable income is helps you stay compliant while making the most of the allowances available to you. By knowing what’s taxed and what isn’t, you can avoid overpaying and feel more confident managing your income throughout the year.