Income tax is tax paid on gross income less certain allowances.

It is paid by anyone receiving wages, the self-employed and almost everyone who receives a total income above a certain threshold. It is paid by employees and people who are self-employed. Some types of income is not taxable. There is no lower or higher age limit. Everyone must pay tax if their income is above a certain level.

How you are taxed depends upon which schedule you fall under. The most common are Schedule E (for employees) and Schedule D (self-employed).

Essentially you add up your total income for the tax year.

Then deduct any income that the government has deemed non-taxable. Work out whether you you receive any relief on any expenses (usually only applicable to the self-employed and people purchasing on behalf of a business). Take this tax relief off the total income. You are left with what is called 'taxable income'.

Decide whether you are entitled to any tax allowances. Everyone at least has a personal allowance. Deduct these from the calculation.

Work out what your tax rate is.

Multiply your taxable income less allowances by the tax rate. There you are. You now know what tax is due to be paid that year. If you are over 65 and qualify for the married couple's allowance for over 65 year olds, you can also deduct a further percentage as applicable.

 

Exempt Income
Some types of income are exempt from tax. That means, wherever this income is received, no tax is due on it. So exclude this income from any tax calculation. For example, winnings on premium bonds, income made from spread-betting, child benefit and pay relating to profits on which tax has already been paid. of income which is exempt from tax include premium bond prizes, housing benefit, child benefit and profit-related pay.
See also our Tax Exempt Income section.

 

Tax allowances
As mentioned above, everyone in the UK is entitled to a basic personal tax allowance. You may also be entitled to extra allowances in addition to the basic allowance.
Employees taxed under PAYE, have their personal allowances spread evenly throughout the tax year. Self-employed and non-working income earners get their allowances taken into consideration when the Revenue makes their annual tax assessment.
There is more useful information on this topic on the Rates & Allowances section on the Inland Revenue web site.

Rates of Income Tax
Your tax rate effectively depends on your total amount of taxable income. The rates change regularly and are announced in the Budget each March. For up-to-date deatials on current income tax rates, visit the IR Tax Rates page.

If you are a regular employee and receive wage slips from your employer that show that PAYE (pay as you earn) tax and NI (national insurance) is being deducted from your wages, in most cases you will not need to fill in a tax return. If you receive income from any other source then you will need to complete one.

 

if you are self-employed then you will need to complete a self-assessment form, and also if you are a partner in a business or company director.
You do need to keep records of your income and capital gains - this is the law. This is so should you be required to complete a tax return, you will have the required figures at hand.

 

Ultimately, the onus is on you to request a tax return if you have received money that should be taxed under self-assessment. Sometimes, the Inland Revenue may pre-empt this and send you one anyway. On the self-assessment form, there is a general section that everyone needs to complete and additional pages for different types of income you may have received. There is a handy accompanying guide explaining the form in depth.

If you use an accountant or a tax adviser, they can complete the form for you if you like. However, always check it personally before you sign and send it off to the Inland Revenue. It can either be sent by post or else you can file it online. You can choose for the Inland Revenue to calculate your tax liability for you - in which case you need to file the return by 31st September. Otherwise, if you calculate the tax yourself, If you want the Inland Revenue to calculate the tax you need to pay, then you need to have it in at latest by the end of January the following year.

Good question, you do not want to double pay income tax! Yes, you need to examine each source of income and check whether tax has already been paid on it i.e. deducted at source. You do not have to pay this tax again.The most common example is interest paid on a savings or building society account. Often, this is paid NET which means the tax has already been deducted by the savings institution.

Occupational pensions are another example of income paid to you after tax has been deducted.

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 still needs to be declared, however the tax paid on it should be deducted from the yearly income tax liability.

pIf you are employed and want to check that your National Insurance tax has been calculated correctly you can check the current table on The Inland Revenue web site. They are worked out as a percentage of your gross income and are adjusted according to bands and level of pension contribution. For those of you who must complete a Self Assessment form, and are hesitant about making your own calculations, contact a professional adviser.

The Inland Revenue also have a good Help section on National Insurance.

The most important thing to do is to keep your records for the current tax year until you need to complete the annual tax return. You are supposed to keep personal tax documents and records for 22 months after the end of the relevant tax year. Businesses must keep their records for no less than five years after the relevant filing date.

Tax deductions at source
Most taxpayers including people on PAYE have their tax taken out before they receive their income (deduction at source). Also applies to people receiving savings or building society interest. A small percentage will pay their tax directly to the Inland Revenue on an annual basis.

 

Pay As You Earn (PAYE)
All employers are legally obliged to run the PAYE system. Effectively, they will deduct the correct National Insurance contributions and income tax out of the employee's gross pay, and send this off immediately to the Inland Revenue.

You should receive confirmation of your gross pay, net pay and any deductions that have been made on your payslips. This will also be totalled on the end-of-year P60 certificate. If you change jobs, your P45 certificate will give you tatals as at the time of leaving your old job.

See more information about PAYE.

 

Interest from banks and building societies
As mentioned above, banks and building societies deduct tax from the interest paid on most individual savings accounts at source.They forward this on to the Revenue. The account holder then receives his/her interest income net of tax.

The banks and building societies must confirm to you what the totals of gross and net income and tax paid on your behalf whenever you request it. Sometimes they send this information out automatically.

You can ask for this income to be paid to you gross (before deduction of tax). This is most applicable to those people whose total income falls below the annual exemption. This applies, of course, to child savings accounts.

The way to do this is to call or visit your branch and request the tax form R85. Fill this in and hand it back into the branch. This way you don't need to claim a retrospective tax refund.

Self Assessment
In this case (i.e. where you are self-employed) your will have to send your tax into the Inland Revenue direct with your Self Assessment form. This assumes that some or all of your tax was not already deducted at source. Apart from self-employment, this applies to income from buy-to-let property investments, other interest received gross, income coming in from abroad, fringe benefits and PAYE underpayments.

The Self Assessment procedure
If tax needs to be collected by Self Assessment, a tax return form must be requested and completed. Sometimes the Revenue will send you the form automatically but don't count on that happening. The Inland Revenue can calculate the tax due for you, or else you or your accountant / tax adviser can calculate the amount of tax due (termed as 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 your tax bill under Self Assessment
Once you have completed your Self Assessment tax return, you should receive a statement of account, a kind of tax bill, when the tax idue date arrives. If the Inland Revenue calculated the tax, the statement will clearly state how much tax is due to be paid. If you or your accountant calculated the tax, you need to enter the amount of tax 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.

Yes you do. However, the good news is that you have a higher tax free allowance once you hit 65. Note that your taxable income includes any pension income you may receive. State retirement pensions and some other social security benefits are also included as income for tax purposes. If you are receiving income from buy-to-let property, other retirement work, interest from savings or dividends then this all must be included on your tax return as income.

Now, if your only income is the basic rate state retirement pension, then you will not be liable to pay any tax. The reason is that your tax-free allowance exceeds the basic pension. If you are working for an employer, you will be taxed under the PAYE system.

 

Remember that if you have income which is taxable, it is your responsibility to ask your local tax office to send you a self-assessment tax form.

If you are making money from interest from savings or other investments, sometimes the tax is already deducted at source. You really need to check. There is a possibility that you can get that tax back if you are a low earner. If the income from these investments is paid gross (without tax having been deducted), then this income will have to be declared on your self-assessment tax return form.