Glossary
Income Tax
A tax charged on the income you earn
Income tax is levied on what an individual earns. Employment income, business income, interest and dividends, and rental income are each calculated somewhat differently.
Most countries use progressive rates, where the rate rises with income. Crucially, the higher rate applies to the portion within each band, not to the entire income.
This is widely misunderstood. Moving into a higher bracket does not leave you worse off — only the additional income is taxed at the higher rate, so earning more still means taking home more.
Deductions and credits substantially change the actual bill. Dependants, pension contributions, medical costs and donations all reduce taxable income, and claiming them properly is where the difference lies.
It is also worth knowing that treatment varies by income type. In many countries, financial income above a threshold is aggregated with other income and taxed at a higher rate. Income beyond employment can create a separate filing obligation. Starting side work, letting property or trading foreign shares makes checking the filing thresholds the safe first step.