Tax Information
Everything you need to understand income tax, tax brackets, and how your salary is calculated
What is Income Tax?
Income tax is money you pay to the government based on how much you earn. It's one of the main ways governments fund public services like healthcare, education, roads, and infrastructure. Most people pay income tax automatically through their employer before they receive their salary.
The amount of tax you pay depends on several factors: how much you earn, which country you live in, your tax code, and any deductions or allowances you're entitled to.
How is Tax Calculated?
The Basic Formula
1. Start with your Gross Income (total earnings)
2. Subtract your Personal Allowance (tax-free amount)
3. Apply tax rates to each portion of remaining income
4. Result = Your Income Tax
Tax is calculated in bands or brackets. You don't pay the same rate on all your income. Instead, you pay different rates on different portions of your earnings. This is called a progressive tax system.
Example: If the tax-free allowance is £12,570 and you earn £30,000, you only pay tax on £17,430 (£30,000 - £12,570). The first portion might be taxed at 20%, and higher portions at higher rates.
Understanding Tax Brackets
Tax brackets divide your income into portions, with each portion taxed at a different rate. As you earn more, you move into higher brackets, but only the income within each bracket is taxed at that rate. Different countries use different approaches to structuring their tax brackets.
Fixed (Step) Tax Brackets
Used in: UK, USA, Denmark, and many others
| Tax Band | Income Range | Rate |
|---|---|---|
| Band 1 | €0 - €10,000 | 0% |
| Band 2 | €10,001 - €30,000 | 20% |
| Band 3 | €30,001 - €60,000 | 30% |
| Band 4 | Over €60,000 | 40% |
Each bracket has a fixed rate. If you earn €40,000, you pay 0% on first €10,000, 20% on next €20,000, and 30% on final €10,000.
Progressive Tax Rates
Used in: Germany and some other countries
| Zone | Income Range | Rate Range |
|---|---|---|
| Basic | Up to €12,348 | 0% |
| Zone 1 | €12,349 - €17,799 | 14% - 24% |
| Zone 2 | €17,800 - €69,878 | 24% - 42% |
| Zone 3 | €69,879+ | 42% |
Uses mathematical formulas to smoothly increase the tax rate within each zone. Rates gradually rise from 14% to 24%, then 24% to 42%.
Important: Moving into a higher tax bracket doesn't mean all your income is taxed at the higher rate. Only the portion that falls within that bracket is taxed at the higher rate. You never lose money by earning more!
Key Terms Explained
Gross Income
Your total earnings before any deductions (tax, National Insurance, pension, etc.)
Net Income / Take Home Pay
What you actually receive after all deductions have been taken
Personal Allowance
The amount you can earn each year without paying any income tax
Tax Code
A code used by your employer to calculate how much tax to deduct (e.g., 1257L)
Marginal Tax Rate
The tax rate that applies to your highest portion of income