Sources of income
The different ways money comes in, and how they differ.
Income is just money coming in. For most people it starts with a job, but it can also come from working for yourself, a small side earner, savings, investments, a pension, or help from family. Knowing where your money comes from, and how reliable each source is, is the first step to managing it.
Where money comes in
Income is the money that comes in to you. For most people the main source is work, but it is worth seeing the full picture, because different sources behave in different ways.
There are three ways to earn from work. Employment means working for an employer, who pays you and usually sorts out your tax for you. Self-employment means working for yourself, running your own business or trade, where you find your own work and handle your own tax. A side-hustle is a smaller earner alongside work or study, like selling online or tutoring.
The difference matters most for tax. If you are employed, your employer takes your tax off before you are paid, so it happens automatically. If you are self-employed, nobody does that for you, so you have to work it out and pay it yourself.
Wages and salaries
People are usually paid in one of two ways. A wage is paid for the hours you work, often at an hourly rate, so it rises and falls with the hours you do. A salary is a fixed amount for the year, paid in equal monthly instalments, so it stays the same each month whether the month was busy or quiet.
A £24,000 salary, for example, is paid as £2,000 a month before deductions, every month. Someone on an hourly wage might earn more in a busy week and less in a quiet one.
Money that is not from a job
Not all income comes from working. Benefits are payments from the government to people who qualify for them. Regular gifts from family, like money from a parent while you study, count as income too. So does interest from savings, which the bank pays you for keeping money with them, usually monthly, quarterly or yearly.
Investment income is money your investments make: dividends, which are a share of a company's profits paid to people who own its shares, or rent from a property bought to let out, known as buy-to-let. Later in life, income often comes from a pension, which can be the State Pension, a workplace pension, or a private one.
Why the source matters
Some income is steady and some is not. A salary lands every month. A wage moves with your hours. Savings interest and investment income depend on how much you have and on rates that change. Knowing which of your income is reliable and which is not helps you decide how much you can safely spend and how much to keep back.
- 'A wage and a salary are the same thing.' They are both pay for work, but a wage moves with the hours you do, while a salary is a fixed yearly amount split into equal months.
- 'Only a job counts as income.' Benefits, savings interest, investment income, a pension and regular family support are all income too.
- 'If you work for yourself, tax is dealt with for you.' It is not. Employed people have tax taken off automatically; self-employed people have to sort out their own.
Key terms
- Wage
- Pay based on the hours you work, often at an hourly rate.
- Salary
- A fixed yearly amount, paid in equal monthly instalments.
- Self-employment
- Working for yourself and being responsible for your own tax.
- Side-hustle
- A smaller way of earning alongside work or study.
- Dividend
- A share of a company's profit paid to people who own its shares.
- Buy-to-let
- A property bought in order to rent it out for income.
Not examined
Check your understanding
- What is the difference between a wage and a salary?
- Name three sources of income that do not come from a job.
- Why does being self-employed change how you handle tax?
Show suggested answers
- A wage is pay for the hours you work, often hourly, so it changes with your hours; a salary is a fixed yearly amount paid in equal monthly instalments.
- Any three of: benefits, regular gifts from family, savings interest, investment income (dividends or rent), a pension.
- An employer normally takes an employee's tax off automatically, but a self-employed person has to work out and pay their own tax through Self Assessment.