Income Tax is a tax on money being received by an individual. The tax is raised by government to pay for centrally-provided services, such as health, education, defence and welfare.
In the UK, you are allowed to earn a certain amount of money before paying tax: this is known as a personal allowance. Above this amount, an individual pays tax at the basic rate (currently 20%): this is only applied to the amount that is above the personal allowance. There are higher rates of tax for higher earners.
Emily earns £1345 per month. How much will she pay in income tax each month? Assume that her personal allowance is £10,000 (over a year), that she pays tax at 20%, and that she earns the same each month.
£1345 per month = £16140 per year.
She pays tax on 16140 - 10000 = £6140
Tax at 20% = 6140 x 0.2 = £1228 over the year
Change back to monthly figures: 1228 ÷ 12 = 102.33
Answer: £102.33 per month
What percentage of her monthly income is Emily, above, actually paying in tax?
She is paying `frac(102.33)(1345)` x 100 = 7.6%.