income tax

A compulsory tax on employment and investment income.

In most countries income tax is progressive on successive slices of income, so that the more you earn the higher the incremental rates of tax you pay.

In the UK, everyone is allowed to make a certain amount of income before any tax is payable. Known as the 'personal allowance', the amount increases with age, and for the year 2004-2005 the figures are:

• Under 65: £4,745
• 65-74: £6,830
• 75 and over: £6,950

If your income in a tax year is below these thresholds, you are not liable for income tax. In some circumstances, where tax has been deducted at source, you will be able to reclaim tax already paid.

For earnings above your personal allowance, your income tax liability will go up in bands and vary according to whether the income is from employment, share dividends or interest. The lowest rate is 10% and the highest is 40%.