Income tax is a tax payable on income that you earn each year. You will
probably not
have to pay tax on all of your income because of the personal allowance that allows you
to keep
a percentage of your earned income, but any income earned over your personal allowance
will be
liable to income tax. The personal rate for 2016-17 will be £11,000. This means
that an
individual can earn up to this amount tax-free before becoming liable for income
tax.
The amount of income tax you pay will be affected by how much you earn during the tax
year. The
tax year runs from 6 April one year to 5 April the following year. There is no minimum
age at
which you start becoming liable for income tax, so no matter what your age, if you earn
over
your personal threshold in a tax year, you will be liable to pay tax on your
income.
You can class taxable income as money coming in from the following sources:
- earnings from employment, including benefits in kind such as a company car
- earnings from self-employment
- most pensions income, including state, occupational and personal pensions
- some social security benefits
- interest on most savings
- income from shares (dividends)
- rental income
- income from a trust.
How do I work out my income tax?
How income tax is calculated is quite complex, but you can use these tips as a guide to
give you
a rough idea of how much income tax you may be liable to pay:
The easiest way to work out your income tax liability is to note down all your sources
of
taxable income and how much you earn from them for the year. Remember to include money
coming in
from paid employment, self-employed earnings, any taxable social security benefits you
receive,
pension payments, interest from bank and building society accounts, as well as any money
you get
for renting out premises or accommodation. Add together all your income figures to get a
final
total. This will give you your total income for the year, and you can then work out how
much tax
you will need to pay on that figure.
You may be in receipt of some non-taxable income that you should exclude from your sums.
These
would include any of the following benefits and winnings: Tax credits (working tax
credit and
child tax credit), child benefit, maternity allowance, housing benefit, personal
independence
payment (PIP), premium bond prizes, gambling and lottery winnings. Do not include any of
these
payments in your income tax calculations.
In some cases you may be able to claim tax relief for some of your money spent during
the year,
such as with pension scheme contributions for example, or money paid out on certain
employment
expenses. Business expenses can be deducted from income for the self-employed, so these
can be
taken out of your earnings before calculating your total income figure.
For a UK resident you are entitled to your basic personal allowance before having to pay
any
income tax. The personal allowance for 2016-17 is £11,000 but if you were born
before 6
April 1948, you will have a slightly higher age-related personal allowance.
Once you have taken off any allowances that you may be entitled to, then you should be
left with
an income figure on which you will pay income tax. This is what is known as your taxable
income.
How to calculate your income tax payment
As a rough guide, if your taxable income figure is less than £31,785 then you
should
calculate your income tax at 20%. For those with a figure between this and
£150,000,
you will be charged a higher tax rate so you need to calculate your income tax at 40% of
your
taxable income. If your taxable income is above £150,000 then you will be expected
to pay
45% as income tax.
There are a few other allowances to take into consideration, such as Married
Couple's
Allowances, and also any tax already paid by you through PAYE from your regular
employment for
example, or occupational pension payments etc. Interest on savings in a bank or building
society
account usually has tax taken off before it's paid to you. You may have overseas
income that
is taxed abroad, or income that is not taxable such as child benefit and housing
benefit, or
income from winnings from gambling, lottery and premium bonds.
If you have any foreign income coming in that is not taxed abroad, then you may need to
pay UK
income tax on that income. This sort of income could be from wages earned from working
overseas,
interest payments for foreign savings and investments, income from overseas property
rental etc.
HMRC class foreign income as money paid to you from countries outside of England,
Scotland,
Wales and Northern Ireland.
How do I pay Income Tax?
Most employees working in a regular paid job will have their deduction of tax taken at
source.
This means they pay their tax through deductions that are made from their income before
they
have it paid to them. The most common example of this is the PAYE system. Employers are
required
by law to pay their employees through the PAYE system. This is the case for members of
occupational pension schemes too. Payments taken, including class 1 national insurance
contributions where appropriate, are sent to HMRC on your behalf by your employer.
Confirmation
of amounts deducted will be shown in your employee payslip or salary statements, and
through a
P60 certificate at the end of the financial year.
Bank and building society interest payments will be liable to income tax and your bank will deduct the tax from the amount earned before the interest is paid to you. Your bank will pay this over to HMRC on your behalf. Your bank or building society will show the details of the deductions made on your statements, and you can request to see this information free of charge by asking for it.
Self Assessment tax payments
If you are self-employed, receive income from rental property, get income from overseas,
or
receive gross interest from a savings scheme or investment account, then you will need
to pay
tax direct to HMRC through the system of Self Assessment. Each year you will need to
submit a
tax return, and HMRC will work out how much tax you will need to pay based upon the
figures you
include on your return.
You can submit a self-assement tax return online, or you can complete a paper copy. You
will
need to submit your paper copy return by the filing date of 31st October following the
end of
the tax year, and once you receive your tax calculation from HMRC, you will have until
31st
January to send your payment. The online return will give you an automatic calculation,
and the
due date for filing and payment is the same - 31st January following the end of
the tax
year.
