There are, as the old saying goes, two things that are certain in life: death and taxes. Given that the average UK worker spends several thousand pounds a year in tax, it is important that you are aware of your rights and responsibilities. Tax can be a confusing area. Thankfully, TheTaxGuide is here to help you navigate the intricacies of the UK tax system.
There are two main levies that taxpayers in the UK have to pay: income tax and National Insurance Contributions (NICs). If your income in any tax year exceeds the personal allowance threshold, you will pay income tax on the amount you earn above that limit. Similarly, NICs are paid by anyone whose earnings exceed the weekly, monthly, or annual National Insurance Lower Earnings Limit.
If you are an employee, you will almost certainly pay tax through the Pay As You Earn (PAYE) system. This means that your tax payments are taken directly from your wage packet.
2. What if I’m self-employed?
Self-employed people also pay both income tax and NICs – but they pay them in a different way. The self-employed are required to complete an annual Self Assessment tax return, which asks for details of income and expenditure. Completing the form can be daunting, so TheTaxGuide has compiled a step-by-step guide to help you through the process.
Once you have completed your Self Assessment, you may be required to pay a bill. There are two payment deadlines during the year. The first is on January 31st – the day on which your Self Assessment is due. The second is July 31st. On this date you need to make a ‘payment on account’ against your next bill. We have put together a primer that explains the payment on account, and how to reduce it.
3. What about savings and investments?
The tax implications of savings and investments are complicated and often misunderstood. It is true that there are many ways in which you can minimise the amount of tax you pay on your savings – or even eliminate the tax burden altogether. ISAs are a particularly popular product for tax-efficient saving, for example.
But you should understand that tax may be charged on your savings and investments. For example, you might suffer a tax liability when you sell shares, receive dividends, earn interest in a bank or building society account, or receive income from an investment held abroad.
4. What are tax credits?
Tax credits are payments made by the government to certain qualifying groups. As the situation currently stands there are two tax credits available: the Child Tax Credit and the Working Tax Credit.
Your entitlement to tax credits will depend on your circumstances. TheTaxGuide offers information on those payments, along with guidance on repayment claims. You should note, however, that the government is considering introducing a ‘universal credit’ system, which could see individual tax credits phased out.
5. I’ve paid the wrong amount. What can I do?
Incorrect tax payments are a sad fact of life – and they can also be difficult to rectify. Since the installation of HM Revenue and Custom's new computer system, millions of taxpayers have received letters telling them they have paid the wrong amount. We have put together a guide to help you deal with tax demand letters, explaining how to respond – and outlining the circumstances in which you might not have to pay the bill.
You should also make sure that you understand your tax code, as an inaccuracy in this piece of information is one of the most common causes of overpaid tax.
6. What about students?
There is a common misconception that students don’t have to pay tax. In fact, if you earn more than the personal allowance, you will have to pay like everyone else. But income tax for students can be confusing, particularly if you have found yourself being taxed when you should not be. We have compiled a guide to student tax, including some tips to help you get back the money you might be owed.
7. Is there a tax on pensions?
Sadly, your tax liabilities don’t necessarily stop when you finish working. Pension income is also taxable – and many retirees find that they still end up with a tax bill at the end of each year. TheTaxGuide is here to help you navigate the pension jargon, from defined benefit schemes to group personal pensions, and ensure that you understand both the tax you might have to pay in retirement – and the significant tax relief available on pension contributions while you are still in work.
It’s not just individuals who pay tax. Businesses have a range of tax responsibilities, and these can quickly become complex and confusing. Incorporated companies have to pay corporation tax on their profits. In addition, firms might have to pay Capital Gains Tax. If they employ people, they may also have to make National Insurance Contributions on their employees’ behalf.
There are ways, however, in which firms can cut their tax liabilities. In addition to the deduction of expenses from their income, they might also consider the small business rates relief scheme to minimise their business rates bill.
Businesses also need to consider the implications of VAT. If a firm’s turnover exceeds a certain threshold, it will be required to register for the tax. In addition, businesses sometimes choose to register voluntarily before they reach that threshold – either in order to save money or to give the impression of size.
11. Do I need an accountant?
In many cases, tax responsibilities can become overwhelming. Many people consider taking on an accountant, either because they don’t have time to deal with their tax affairs or because they want to get on with other, more enjoyable things!
With taxes seemingly constantly on the rise, many people are understandably keen to reduce the amount they end up paying into the Exchequer. Thankfully, there are many perfectly legal ways in which you can cut your tax bill.
Tax is an important and complicated area. If you are unsure about your responsibilities, you should contact HMRC or a professional advisor. In addition, you should remember that everybody’s circumstances are different.