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UK Personal Tax Guide & Questions

What is income tax?

Income tax is a tax paid on income. It is paid by employees and people who are self-employed and may also be payable if you are not working but you have an income, such as a retirement pension or an occupational pension. Not all types of income are taxable and it will seldom be the case that all of your income is taxed. There is no minimum age at which a person becomes liable to pay income tax. What matters is your income. If this is below a certain level, no tax is payable.


There is no single definition in tax law of income. Income tax law divides various types of income into schedules. If an item comes within a schedule it counts as income and income tax must be paid on it. The way the tax must be paid will depend on which schedule it falls into. The most common schedules are Schedule E for employees and Schedule D for the self-employed.

How is income tax calculated?

There are five main steps in calculating income tax:-
Step 1: Add together all your yearly income, including social security benefits, income from renting out accommodation, wages, occupational pension, interest from bank and building society accounts.
Step 2: Take off any income which is exempt from tax. Calculate whether you can claim tax relief on any of the money you have spent over the year (tax relief usually applies to people who are self-employed and have to buy items for the business). Deduct this tax relief. This leaves income on which tax may be payable ( taxable income ).
Step 3: Work out which tax allowances you are entitled to. You will be entitled to a personal allowance (plus age related additions if appropriate). These allowances are deducted at this stage in the calculation.
Step 4: Multiply the taxable income by the correct tax rate. This gives the tax due to be paid that year, unless you are entitled to married couple's allowance for over 65 year olds.
Step 5: If applicable, deduct the appropriate percentage rate of married couple's allowance for over 65 year olds.

Income which is exempt from tax
Some income is exempt from income tax, which means that tax is never paid on this income. This income should therefore be put to one side before any tax calculation can be done. Examples of income which is exempt from tax include premium bond prizes, housing benefit, child benefit and profit-related pay. It is therefore necessary to check whether any income is exempt from tax before doing a tax calculation.
See also our Tax Exempt Income section.

Tax allowances
Everyone is entitled to a basic personal tax allowance. In addition, you may be entitled to other allowances on top of the basic allowance. This means that some of your income, which would otherwise be taxable, will be tax free.
Tax allowances are announced in the Budget each year. If you are an employee and so are taxed under Pay As You Earn (PAYE), your personal allowance(s) will be spread throughout the year, so that each week or month you will be left with a certain amount of tax free income after the tax has been deducted. If you are self-employed or have an income but are not working, your personal allowance(s) will be taken into account when the Inland Revenue assesses your tax liability each year.
For information about personal tax allowances and who can claim which allowances, see the Rates & Allowances section on the Inland Revenue site.

Income tax rates
Income is taxed at different percentage rates, depending on the amount of taxable income. These rates are announced in the Budget every year. For details on personal income tax rates.

Do I need to send in a tax return ? How do I go about this?

If you are working for an employer who is taking PAYE (pay as you earn) tax and national insurance from your regular wages, and you do not have any other income, you do not usually need to complete a tax return form.


You will need to fill in a self-assessment form if you are self-employed, a company director or a partner in a business.
If you are a personal representative or a trustee you will have to complete a tax return for the person or trust you are representing.
By law everyone needs to keep records of their income, gains and expenditures so that they can complete a tax return if they get one.

If the Inland Revenue suspects you have income which needs to be taxed under self-assessment, it will send you a tax return to complete. However, it is your responsibility to ask for a tax return if you think you have income which needs to be taxed under self-assessment. The self-assessment form has a main section for everyone and supplementary pages depending on what type of income you have. There is also a guide to help you complete the tax return.


You, your accountant or your tax advisor can fill in the form, but you should personally check that everything on it is correct. The form can be sent to your tax office by post or you can send it electronically. If you want the Inland Revenue to calculate the tax you need to pay, your tax return must be sent by 31 September. If you wish to calculate your own tax then the deadline is 31 January the following year.

What about income on which tax has already been paid?

When calculating the tax due, it is necessary to work out whether or not you have received any income on which tax has already been paid. For example, interest on savings in a building society or bank account, where the interest is paid to you after the bank/building society has taken the tax off it. Payments from an occupational pension will also have had tax taken off before the payment is made to you.


When working out the total tax due for the year, it is necessary to take into account the fact that tax has already been paid on this income. This income (which needs to have the tax deducted added back in) will also count towards taxable income on which personal tax allowances are allowed.

What about National Insurance contributions ?

When checking whether your tax has been correctly calculated, it may also be useful to calculate the national insurance contributions that you have to pay, as this will give the figure for your take-home pay. National insurance contributions are calculated on gross income. National insurance contributions for employees are deducted at different rates depending on your pension arrangements and on your level of income.


For help in calculating your national insurance contributions in order to work out your take home pay, an experienced adviser should be consulted. You can view the latest rates table by clicking here .


The Inland Revenue have a comprehensive Frequently Asked Questions section on National Insurance which you can access here .

How long do I need to keep my records?

If you are a taxpayer, you must keep records of your income to enable you to complete a tax return. Personal or non-business records must be kept until 22 months after the end of the tax year that they relate to, and business records must be kept for five years after the fixed filing date.

How does the Inland Revenue collect income tax?

Deduction of tax at source
Only a minority of taxpayers pay tax directly to the Inland Revenue every year. The majority of taxpayers pay their tax through deductions that are made from their income before they receive it. This is called deduction at source.


Some of the most common examples of deduction at source are PAYE, see below, and bank and building society interest, see below.


Pay As You Earn (PAYE)
By law, anyone making payments to employees or members of occupational pension schemes is obliged to operate the PAYE system . This means they must deduct income tax and Class 1 National Insurance contributions from the payments that they make, and must send these sums to the Inland Revenue.


You are entitled to receive written confirmation of deductions that have been made by:-
* payslips, showing gross pay, deductions made and net pay if you are an employee; and
* a P60 certificate at the end of each tax year, confirming the amount of gross earnings, and the income tax and class 1 national insurance contributions deducted; and
* a P45 certificate whenever you change jobs, which shows the tax code operating on your earnings at the time you left and, in some cases, the earnings and income tax deducted in the tax year to date.

For more information about PAYE and notifying the tax office about taxable income, see PAYE.


Bank and building society interest
Banks and building societies deduct income tax from the interest paid on most deposits made with them by individuals, and pay this over to the Inland Revenue. This is done before the interest is paid to the account holder.


Confirmation of the interest earned in each tax year and the income tax deducted, must be provided by the bank or building society free of charge to you, the saver, if you ask for it. A number of banks and building societies send these details to all their investors each year, as a matter of course.


If you do not need to pay any tax on this interest, for example, because your total income from all sources falls below your tax free income for the tax year, you can arrange to receive your interest gross, that is without deduction of any tax.

You should ask your branch of the bank or building society for form R85, which you must complete and return to the branch. This avoids the need to claim a tax refund.


Collection of tax by Self Assessment
Tax may have to be paid to the Inland Revenue direct by Self Assessment where the full liability was not, or cannot be, met by deduction at source. This may occur with, for example:-
*earnings from self-employment
*rental income from property
*interest received gross, for example, on National Savings investments accounts
*income from overseas
*fringe benefits received by employees and earnings of employees where an insufficient amount has been paid under PAYE.


Assessment procedure
Where tax needs to be collected by Self Assessment, for example, because you are self-employed, a tax return form must be completed. You can then either ask the Inland Revenue to calculate the tax due based on the figures in the tax return (revenue calculation), or you or your accountant / tax adviser can calculate the amount of tax due yourself (taxpayer calculation). You can make a direct enquiry to a well-known and very capable firm of tax advisers, Kingston Smith, by clicking here .


Paying tax under Self Assessment
If you have completed a tax return, you will usually be sent a statement of account, which is like a tax bill, when the tax is due. If you asked the Inland Revenue to do the tax calculation, the statement of account will show the result of the calculation and how much tax is due. If you did the tax calculation yourself, you will need to enter the amount that you are due to pay on the statement of account.


The due date for payment
Look at our section on tax due dates for the various types of tax returns.

Do I need to send in a tax return? How do I go about this?

If you are working for an employer who is taking PAYE (pay as you earn) tax and national insurance from your regular wages, and you do not have any other income, you do not usually need to complete a tax return form.


You will need to fill in a self-assessment form if you are self-employed, a company director or a partner in a business.


If you are a personal representative or a trustee you will have to complete a tax return for the person or trust you are representing.


By law everyone needs to keep records of their income, gains and expenditures so that they can complete a tax return if they get one. If the Inland Revenue suspects you have income which needs to be taxed under self-assessment, it will send you a tax return to complete. However, it is your responsibility to ask for a tax return if you think you have income which needs to be taxed under self-assessment. The self-assessment form has a main section for everyone and supplementary pages depending on what type of income you have. There is also be a guide to help you complete the tax return.


You, your accountant or your tax advisor can fill in the form, but you should personally check that everything on it is correct. The form can be sent to your tax office by post or you can send it electronically. If you want the Inland Revenue to calculate the tax you need to pay, your tax return must be sent by 31 September. If you wish to calculate your own tax then the deadline is 31 January the following year.

Do I still have to pay tax now that I am over 65?

When you are over 65 you still have to pay tax on your income, but your tax free allowance is higher than before you were 65. Your taxable income includes your occupational pension or personal pension if you have one. Some social security benefits are also taxable, for example, your retirement pension. You may also have income in the form of interest from savings or shares, from rental on property that you own or earnings from any work you are doing.


If your only taxable income is basic rate state retirement pension (excluding graduated or additional pension) you will not pay any tax. This is because your tax free allowance will be more than the basic pension. If you are working, either full-time or part-time, your earnings will be taxed under the PAYE system. Any tax due on your other taxable income, for example, state retirement pension, will be deducted from your earnings under the PAYE system.


You may be sent a self-assessment tax return form. If you are not sent a form and you have income which is taxable, it is your responsibility to ask your local tax office to send you a form.


If you have investments you need to check whether the tax is deducted before you get the income. If your income is low, you may be able to claim back tax that has been paid on your investments. Income from some investments is paid gross, that is, without tax having been deducted. The interest on income bonds, for example, is paid in this way. You need to enter this on your tax return form, and follow for tax collection by self- assessment.
If you have a drop in income when you retire, you may be entitled to a tax rebate.

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