A few years back, in The Schmidt Report, we featured a series where we looked at taxes one by one, explaining the basics of how they worked, and setting out some ways of reducing liability to that tax. This proved very popular, and so we are running an updated series now, both to take account of changes since, and for the sake of our new readers. And we are starting with the great granddaddy of them all: income tax.

All developed and European-style countries have an equivalent to income tax, but what a lot of people don't appreciate is that it was originally introduced as a temporary tax. The villain of the piece was Pitt the Younger, who, in 1799, decided that the Government needed a lot more money to pay for the Napoleonic Wars. During the nineteenth century, the tax lapsed, but was then re-introduced, and has been with us ever since. An odd feature of income tax is that it is 'annual', which means it has to be re-awarded to the Crown, by Parliament, every year. Unfortunately, this is just a formality these days!

Until Gordon Brown decided to mess things up properly, the rate structure of income tax, inherited from Sir Geoffrey Howe's reform in the mid-1980s, was very simple. There is a basic rate of tax, which is now 20%, and a higher rate of tax, payable on gross income of just over £40,000 a year, of 40%. The new addition to this simple structure is a 50% rate, which applies over about £157,000, and an extraordinary effective 60% rate that applies for the first £15,000 or so of a person's income over £100,000. We'd say that politicians should leave the system alone, were it not for the fact that the Revenue, left to its own devices, could easily make things even worse!

The above rates apply to most sorts of income, but dividends from companies have their own effective set of rates. Here it's best to forget about the rates the textbooks tell you about, since these are difficult to use in practice, involving as they do the deduction of an entirely mythical 'tax credit' as part of the calculation. It's easier to think of the effective rate of tax paid based on the net dividend received. For a 40% taxpayer, then, the effective tax rate is 25% of the net dividend received. A 50% taxpayer pays 36.1 recurring per cent. If total income, including the dividends, is within the basic rate band, dividends are tax-free.

For those whose income goes over a limit, it's therefore necessary to decide which part of your income is dividends and which is other sorts. (This stupid and unnecessary complication is one of the first things that the new Office of Tax Simplification should have been looking at.) The way it's done is by assuming that the dividend is the highest layer of a person's income (except for capital gains, of course, which are even higher).

A feature of the tax thresholds, like the personal allowance which is going up to just over £8,000 next year under the announcements just unveiled, is that, if your income isn't big enough to exhaust your basic rate threshold, or your personal allowance as the case may be, any unused threshold is not carried forward but is lost.

Therefore, a lot of pre-year-end income tax planning, for those who are, to some extent, in control of the timing of their income, is devoted to making sure that the personal allowance and/or basic rate threshold is fully utilised this year, rather than, say, carrying the income over to next year where it may be within higher rates of income tax.

Another feature of income tax that is used a lot for planning is the fact that individuals each have their own separate personal allowance and lower tax bands. The old system, under which husbands' and wives' income was taxed together, was abolished in 1990, so it is now regarded by most people as legitimate to spread income between husband and wife, to avoid one having unused allowances or basic rate thresholds and the other paying higher-rate tax.

The simplest circumstance in which you can do this is where you have income from investments. By putting the investments into joint names, you can spread the income around to use everyone's reliefs. For those whose income is earned, this can be much more difficult, or indeed impossible in the case of a PAYE employee of a large and inflexible organisation. Some get round the problem, though, by putting their income through a personal service company, which, subject to being able to avoid the dreaded IR35 (of which we have written elsewhere), is both allowable and sanctioned by case law.

And it's not just one's spouse. Children in the household, providing they have passed their eighteenth birthday, can also be brought in on the income-spreading act. The allowances etc. of children under eighteen can't be used for this purpose, without a bit of complicated manoeuvring, because of the 'settlements on children' rules, which have the effect of taxing the parents on income they have diverted to their minor children.

The most common way of getting round the settlements on children's rules is making use of the grandparents' generosity. If grandparents give investments direct to their grandchildren, rather than to their children, this is not caught by the settlements on minors' rules, and the children's allowances etc. are available against the income received.

The most common ways of taking a significant chunk out of your income for the purpose of saving income tax are the following:

Again, like most countries, UK income tax is only chargeable on UK income, and the non-UK income of UK residents. Non-UK income of a non-UK resident is excluded, for obvious reasons.

In the UK, unlike most other jurisdictions, though, there is a further relief for people who are resident here but not domiciled in this country. 'Domicile' is a peculiar concept of the law of the UK, and denotes, basically, where your father came from, in most circumstances. So if you are of non-UK extraction, you can, where appropriate, make use of the 'remittance basis'.

What this means is that, on a claim, you can avoid paying tax on your non-UK income if you don't remit that income here. This even applies where you have deliberately set things up so that the income is non-UK, for example by moving assets abroad. If you are a long-term resident in the UK, though, this comes at a cost of the £30,000 'remittance basis charge'.

It is important to remember that, for income tax purposes, all the time you are non-domiciled as a matter of law you will be able to tap into the income tax benefits - and it's quite easy, if you really go about it, to avoid changing your domicile.

So that's a very rapid thumbnail sketch of income tax. Next month, we'll be looking at a less mainstream, and often more easily avoidable, tax: capital gains tax.