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Income Tax

Find out what you need to know about forming a UK company

What is Income Tax?

Income tax is the tax that you have to pay on your income every year. As personal allowances allow you keep a percentage of your earned position, so you do not need to pay tax on your all incomes. But, if you earn some money over your personal allowance then you are liable for income tax.

The amount of income tax will depend on how much you earned during the tax year. The tax year starts on 6 April and finishes on 5 April. The age for which you can be liable for income tax is not fixed. No matter, how old you are, if you are earning more than your personal threshold in a year, then you are legally responsible for paying tax on your income.

You can categorize taxable income as per the income sources. Here are some of them:

  • Earnings from the self-employment
  • Making money from employment such as benefits in kind such as a company car
  • Most pensions income such as personal, occupational, and state pensions
  • Interest on savings
  • Some benefits from social security
  • Making money from shares
  • Income from a trust
  • Rental income

How do I work out my income tax?

It is quite complicated to understand how income tax is calculated. Here are some tips which can guide you with the procedure. Get a rough idea from here, and calculate how much income tax you have to pay on your earnings from different sources.

Some income is taxable whereas some are free of tax. The simplest and easiest method to find out the amount of income tax you’re liable for is: note down all sources of taxable income and calculate how much you earned from those sources in a year. To calculate your total income, remember to include money coming to you from self-employed earnings, paid employment, pension payments, benefits from taxable social security you receive, interest from building society accounts, interest from banks, and money you earn for renting out your accommodation or premises. Figure out all the earnings you are getting and add them all together to find total. After this, you will have the total earnings of the year. Now, you can work out easily the amount of the tax you have to pay on your total earnings.

There are some non-taxable incomes that you must keep out from the total sum of your earnings made in a year. This includes benefits and winnings from the different sources such as child benefit, tax credits (working tax credit and child tax credit), personal independence payment (PIP), maternity allowances, premium bond prizes, gambling and lottery winnings, and housing benefit

In several cases like money paid out on certain employment expenses or with pension scheme contributions, you are eligible to claim tax relief for some money out of the total amount you’ve invested in the whole year. Business expenses or allowances can be reduced from the amount of income for self-employment. Before figuring out the total earnings of your year, remember to extract this amount from your earnings.

As a resident of UK, you are free to your basic personal allowances before paying any income tax. A number of personal allowances are £11,000 for 2016-17. But, for people who were born before 6 April 1948, the rate of personal allowances is a little higher.

Once you have extracted a number of allowances that you can be entitled to, you are liable to pay income tax on the remaining amount. And this is what called as your taxable income.

How to calculate your income tax payment?

As a rough idea, if the total amount of your taxable income is less than £31,785, then the rate of income tax that you have to calculate is 20%. If you fall in the category of people with a total figure between this and £150,000 you have to pay higher tax rate. So for this taxable income, you need to calculate your income tax at 40%. And in case, if the amount of your taxable income is more than £150,000, then you need to pay 45% of your income as income tax. 

There are several other allowances that you need to take care including allowances for the married couples, or the tax you’ve already paid through PAYE from your occupational pension payments or regular employment, etc. Or interest on building society account and savings in a bank basically has tax deducted before the amount is paid to you. The overseas income which is already taxed in abroad, or earnings which are not considered as taxable income including housing benefit and child benefit, or income from winnings from lottery, gambling, and premium bonds.

In case you have any foreign income which is not taxed abroad, then on that income, you can pay income tax as per the UK income tax rate. This kind of income can be from salary earned from working in a foreign country, earnings from the property rented in foreign, interest payments for foreign investments and savings, etc. According to HMRC, foreign income is the money received by you from countries outside of Scotland, England, Northern Ireland, and Wales.

How do I pay Income Tax?

Most of the people pay their income tax directly through their pension or wages. Here, you are going to read about the same. From here, you can get a rough estimate about how to pay your income tax.

As you read, most of the employees pay their tax directly from their wages. It means people working in a regular paid job get their salaries after deduction. So they don’t need to pay tax on those earnings as the tax is already deducted. The most common example of this would be PAYE (Pay As You Earn) system. This is a method of paying income tax. In this case, as per the laws, employers of the companies deduct tax rate and national insurance contributions from their employees’ salaries before paying to them. The rate of tax and national insurance contributions deducted from an employee’s salary depends on his/her salary.

The same system is also applicable to the members of an occupational pension scheme. You pay tax for your whole year. Instead of paying tax in one lump sum you have to pay it every time you get the salary. Your employers are responsible for sending this deducted tax and class 1 national insurance contributions amount to HM Revenue and Customs (HMRC). You will get a pay slip setting out your salary, tax, and other deductions from your salary on the day when you get your pay. And at the end of the financial year, you will get a P60 Certificate. In case receive pension, you will not receive a pay slip on every payment.

Similarly, bank and building society interest payments are legally responsible for income tax. In such cases, the tax is extracted by the bank from the amount earned before the interest is delivered to you. The bank will send this amount to HMRC on the behalf of all involved in this investment. Your building society and bank show you complete details of these deductions within your statements. You can also request to see this information by asking for it, and you don’t need to charge for it.

Self Assessment tax payments

Self Assessment is a method used by HMRC to collect the tax. If you are a self-employed person, receive your income from overseas, get your income from rental property, or get gross interest from an investment account or saving scheme, then you can pay your income tax to HMRC directly by the Self Assessment system. You have to pay income tax every year on your taxable income. HM Revenue and Customs will find out how much tax rate you have to pay based on the total figures you include on your return.

By self-assessment tax system, you can submit your tax online as well as offline. You can file it online via visiting the site or you can fill a paper copy. Submit this paper copy return to HMRC by the submitting date 31st October following the end of tax year. Once you receive your tax calculation on your total earning from HMRC, you have to pay it until 31st January. With online submission, you will receive an automatic calculation of tax amount on your total earnings. The date of submitting your income tax is same as 31st January following the end of your tax year.

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