What is Income Tax?

Income tax is a tax levied by governments on the wages, salaries, business profits and other earnings of individuals and corporations, usually charged at progressive rates that rise with the amount of income.

Income tax is the largest revenue source in most developed economies. Individuals pay tax on employment income, self-employment profits, pensions, rental income and (in some jurisdictions) investment income. The tax is calculated on taxable income — gross income minus allowable deductions and personal allowances — and applied through brackets that charge higher marginal rates on higher slices of income.

In Switzerland, income tax is levied at three levels: federal (up to 11.5%), cantonal and municipal — total marginal rates range from about 22% in Zug to 45% in Geneva. Germany applies a continuous progressive formula from 14% to 45% plus solidarity surcharge. France uses five brackets from 0% to 45% with a family-quotient system. Italy charges IRPEF at 23%, 35% and 43%, plus regional and municipal add-ons.

Withholding at source means employers deduct an estimate from each paycheck; the annual tax return reconciles the actual liability. Self-employed taxpayers usually pay quarterly instalments. Maximising deductions (pension contributions, mortgage interest, childcare, professional expenses) and using credits is the legal route to a lower bill.

Example

A single employee in Berlin earning EUR 70,000 gross owes roughly EUR 15,600 in federal income tax plus EUR 860 solidarity surcharge — an effective rate of about 23%, even though the top marginal slice is taxed at 42%.

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Related terms

Payroll Tax

Payroll tax is the broad term for taxes and social contributions calculated on wages — including pension, health, unemployment and family-allowance contributions — typically split between employer and employee and remitted by the employer.

Withholding Tax

Withholding tax is an amount that the payer (employer, bank, custodian) deducts from a payment to a beneficiary and remits directly to the tax authority on the beneficiary's behalf, as a prepayment of the beneficiary's eventual tax bill.

Tax Deduction

A tax deduction is an expense or contribution that you can subtract from your gross income before calculating taxable income, reducing your tax bill by the deduction multiplied by your marginal tax rate.

Tax Return

A tax return is the annual declaration filed with the tax authority that reports your income, deductions, credits and tax already paid, used to calculate your final tax liability and any refund or top-up due.

Frequently asked questions

What is taxable income?+

Gross income minus deductions and personal allowances. Only this amount is run through the tax brackets.

When do I pay income tax?+

Through paycheck withholding if employed; via quarterly instalments and an annual return if self-employed.

Are investment gains income tax?+

Some countries (DE, FR, IT) tax investment income inside income tax; Switzerland taxes only dividends and interest, not private capital gains.