Navigating the UK tax system can feel like wading through treacle, but it doesn’t have to be that way. This guide aims to simplify the basics for individuals, helping you understand your obligations and potentially save some hard-earned cash.
Understanding the Basics:
The tax year in the UK is from April 6th to April 5th. The majority of people pay income tax via the PAYE (Pay as You Earn) system. This involves your employer taking tax off your pay before you get it. Even so, you may still have to submit a Self-Assessment tax return if you have other sources of income.
1. Income Tax:
- Personal Allowance: This is the amount of income you can earn before paying any income tax. For the current tax year, it’s typically £12,570. This allowance can be reduced depending on your income.
- Tax Bands: Income above your Personal Allowance is taxed at different rates depending on which tax band it falls into:
- Basic Rate (20%): Applies to income within a certain threshold.
- Higher Rate (40%): Applies to income above the basic rate threshold. Additional Rate (45%): Applies to very high incomes.
- National Insurance: This is a separate tax that contributes to social security benefits like pensions and unemployment support. It’s also deducted from your earnings.
2. National Insurance Contributions (NICs):
NICs pay for state benefits, such as the State Pension. They are charged on employment status and income level:
a) Class 1: Employee and employer
b) Class 2 & 4: Self-employed
c) Class 3: Optional contributions to make up gaps in NI records
3. Value Added Tax (VAT):
VAT is a tax on goods and services, usually included in the price. The standard VAT rate is 20%, with reduced rates of 5% and 0% for specific items such as energy bills and essential food items.
4. Capital Gains Tax (CGT):
CGT applies when you sell assets like property (excluding your main home), shares, or valuable items at a profit. The tax-free allowance for 2023/24 is £6,000, with tax rates of 10% (basic rate taxpayers) and 20% (higher rate taxpayers) for most assets.
5. Inheritance Tax (IHT):
IHT is charged at 40% on estates worth more than £325,000. However, allowances such as the Residence Nil Rate Band (RNRB) can reduce liability.
6. Tax Allowances and Reliefs:
Individuals can reduce tax liability using allowances such as:
Marriage Allowance (£1,260 transferable allowance)
Dividend Allowance (£1,000 tax-free dividends)
Savings Allowance (£1,000 for basic rate taxpayers, £500 for higher rate taxpayers)
7. Self-Assessment and Tax Returns:
Self-employed individuals, landlords, and those with additional income may need to file a Self-Assessment tax return. The deadline for online submissions is 31 January each year.
Do You Need to File a Self-Assessment Tax Return?
You’ll likely need to complete a Self-Assessment tax return if any of the following apply:
- You’re self-employed.
- You have income from sources other than your salary (e.g., rental income, interest from savings, dividends).
- You’ve received untaxed income.
- You’re a company director.
- Your income is over £100,000.
How to File a Self-Assessment Tax Return:
The easiest way is online through the HMRC (Her Majesty’s Revenue and Customs) website. You’ll need to create a Government Gateway account and follow the instructions. You can also file by paper, but it’s generally more complex.
Key Deadlines:
- Online Self-Assessment: The deadline is usually January 31st following the end of the tax year.
- Paper Self-Assessment: The deadline is usually October 31st following the end of the tax year.
Tips for Managing Your Taxes:
- Keep Accurate Records: Maintain organized records of all your income and expenses throughout the year. This will make filing your tax return much easier.
- Understand Allowances and Deductions: Familiarize yourself with the various tax allowances and deductions available to you. You might be surprised at what you can claim!
- Don’t Delay: File your tax return on time to avoid penalties.
- Seek Professional Help: If you’re unsure about anything, don’t hesitate to seek advice from a qualified accountant or tax advisor. They can provide personalized guidance and ensure you’re paying the correct amount of tax.
Contact CBM Accounting today to know more!
