Taxes 101: What You Need To Know
ELIGABILITY
“Tax is paid by anyone living and working within the UK. The types of tax you pay will depend on your specific circumstances but regardless of your nationality you are likely to encounter a tax to the government in some form or another.”
INCOME TAX BANDS
The level of income tax paid depends on how much of your income falls into each band. The current tax bands are as follows:BandTaxable incomeTax ratePersonal AllowanceUp to £12,5000%Basic rate£12,501 to £50,00020%Higher rate£50,001 to £150,00040%Additional rateover £150,00045%
“Therefore, if you earn £60,000 a year, you will not pay any tax on the first £12,500 (personal allowance), then pay 20% on your earnings between £12,501 and £50,000, and then 40% on the final £10,000 of your salary. However, it is important to note that this are different if you live and pay tax in Scotland.”
PERSONAL ALLOWANCE
“Currently the personal allowance is £12,500. This means you will not pay any tax on the first £12,500 you earn. If you are married, you can also reduce the amount of tax you pay as a couple by utilising the marriage allowance. This allows you to transfer £1,250 of your personal allowance if you earn less than the £12,500 threshold if your partner’s income is between £12,501 and £50,000. However, should you be in the fortunate position to earn over £100,000 a year, your personal allowance goes down by £1 for every £2 you earn above £100,000, which will result in you having no tax-free personal allowance if you earn £125,000 a year.”
PAYE
“PAYE stands for Pay As You Earn – where your income tax and national insurance contributions are automatically deducted from your wages. This system makes it easy and straightforward to pay your taxes as you do not have to do the calculations yourself. This is all based on a tax code that HMRC provides and tells your employer how much to take from your wage. It is vital you understand your tax code. If it is incorrect you may end up paying too much or too little tax, and will have to spend valuable time re-calculating your tax position and speaking with HMRC.”
TAXABLE BENEFITS
“This very much depends on what benefits you receive and you should check with your employer if you’re unsure what does or doesn’t get taxed. There are many benefits that fall under the taxable category, with medical insurance being a common example. If you receive any taxable benefits and already complete a tax return, you will need to enter their value into this, even if the tax has been deducted through the PAYE system. Your employer will also send off details to HMRC so they will be aware of which benefits you have received and the tax payable, meaning you can’t get away with not declaring them. If all your tax affairs are handled by PAYE, however, the benefits may be taxed by being offset against your personal allowance, meaning you might have a slightly different tax code to what you have become accustomed to.”
P11Ds & P45s
“A P11D form is sent to HMRC by your employer outlining the cash value of any of your taxable benefits or expenses you receive at work. It is important to check this form as it will allow you to check you have paid the correct tax through the year. A P45 is provided to you by a former employer when you leave a job and details your salary and the taxes paid to date in that specific tax year. It is a vital document when you change jobs, as your new employer will use it to ensure the correct tax code is attributed to you. If you do not have it, you may be provided with an emergency tax code and as a result pay too much tax. It is also important to keep the relevant parts for yourself should you be required to fill out a tax return or wish to claim benefits.”
Related
IF YOU’RE SELF-EMPLOYED…
“If you are self-employed the onus falls on you to pay the correct level of tax and national insurance on your income. The first step you should take is to determine your employment status and inform HMRC. You’ll receive the same personal allowances, although this is based on your profits rather than ‘income’ – think of it as your total income minus any business-related expenses.”
“You’ll also pay national insurance depending on your level of profit – this is done in a tier system with the contributions being introduced at just under £6,500.” The self-employed pay either Class 2 National Insurance or Class 4 National Insurance contributions, with the breakdown as follows:Class 2£3.05 a weekClass 49% on profits between £9,501 and £50,000
2% on profits over £50,000
“Meanwhile, employees of a company have their national insurance contributions automatically deducted from their salary.” They pay Class 1 contributions, which are broken down as follows:Your payClass 1 National Insurance rate£183 to £962 a week (£792 to £4,167 a month)12%Over £962 a week (£4,167 a month)2%
“For self-employed people the simplest way to pay tax is through a self-assessment tax return. However, it would be beneficial to get some professional help, either through an accountant or a financial adviser who can provide guidance and help calculate exactly how much you owe.”
TAX RETURNS
“The government says you must submit a tax return if you are self-employed and earn more than £1,000. You should also prepare a tax return if you have any undeclared income, i.e. money earned that is not from your wage or pension. For example, if you own a second home and rent it out, the income you receive from this will be liable to tax. Likewise, any savings or investments that are not covered by the available allowances, or where you have exceeded the allowances, will need to be declared to HMRC and the relevant tax paid.”
SUPPLEMENTARY INCOME
“As mentioned previously, HMRC will not necessarily be aware of where you have supplemented your income. Indeed, in the gig economy, some people will have multiple jobs or be looking to make some money from a hobby. Make sure you know what allowances are available to you as this will affect the level of tax you pay. However, do not assume HMRC won’t be aware of extra income you are earning. The penalties for submitting inaccurate or fraudulent tax returns can be very significant, so it is important not to lie about your income streams.”
CAPITAL GAINS TAX
“Capital gains tax is a tax on the profits you make when you sell something that has gone up in value. You will pay capital gains tax on personal possessions worth £6,000 or more, a property that is not your primary residence and shares that are not held within an ISA. However, as with income tax, you have a capital gains tax allowance, meaning you do not need to pay tax on any profits from disposing personal assets up to £12,300. If, however, you believe you have breached the allowance then you will need to submit the details in your tax return – though if you are selling a second home this needs to be alerted to HMRC within 30 days of the selling date. You can also tell HMRC of a capital gain in real time too through its Capital Gains Tax service.”
STAMP DUTY
“When buying a property, you need to be aware of the costs associated with Stamp Duty. The current threshold for when stamp duty becomes payable is £125,000, however, like with income tax, there are different bands depending on the price of the property.” The various rates are as follows:Property or lease premium or transfer valueStamp duty rateUp to £125,000ZeroThe portion from £125,001 to £250,0002%The portion from £250,001 to £925,0005%The portion from £925,001 to £1.5m)10%The portion above £1.5m12%
NB: There are suggestions that stamp duty could be temporarily axed to aid in the UK economic recovery from coronavirus.
TAXABLE SAVINGS
“Relatively recent legislation means for the vast majority of people they will no longer be paying tax on their savings. The personal savings allowance means for a basic rate taxpayer you can earn £1,000 of interest on your savings before you have to pay tax on it. If you are a high rate taxpayer then it is reduced to £500, while if you are an additional rate taxpayer then you do not have an allowance at all. However, with savings rates at very unattractive levels, people should not forget to use their ISA allowance, where they can shelter £20,000 each year from tax.”
INHERITANCE TAX
“In its simplest form, inheritance tax is a tax on the value of the property, money and possession left by someone who has died. As with nearly all taxes, there is a threshold where you will pay no tax if the value of the possessions is under this – for inheritance tax this is £325,000. Likewise, if you leave everything above the £325,000 threshold to your spouse, civil partner or charity, then there is also no tax to pay. If you give your home to your children then the threshold is increased to £500,000, while any unused threshold can also be transferred to partner when you die. For any possessions that exceed the threshold a 40% rate is applied, although this is paid by the estate and not by the person receiving the possessions. There are ways to reduce an inheritance tax charge – however these can be complicated, so seek financial advice.”
TAX REFUNDS
“While we all wish we were eligible for a tax refund, it’s not always a simple process. Should you complete a self-assessment tax return and work out how much you owe, HMRC will process this and depending on the information provided to them, give you with a refund for the relevant amount. Be aware that you have a four-year time limit from the end of the tax year to claim overpaid tax.”
USEFUL RESOURCES
“The best place to start is online, where the government has a lot of information about the allowances and various taxes. It’s also important to sign up to online services through HMRC for access to your personal tax account and self-assessment form. However, if you are in the position to do so, seek professional help through a financial adviser. Tax can be incredibly complicated and often time-consuming, and an adviser will guide you through the system, as well as ensure you are making full use of your allowances.”
For more information, visit the HMRC website here
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