Income Tax

Income Tax - Pitt - you stinker .........  Income Tax was introduced by William Pitt the Younger, in his December 1798 budget to fund the Napoleonic War.  It was a temporary tax but it is still here some 200 years later.

Income tax is exactly what it sounds like.  It is an annual tax on income.  There are different types of income with different tax rates.

Rates and allowances - Each year, as part of the Budget and subsequent Finance Act for the year, the Government renews its right to tax you and sets the rates and allowances.  You are taxed in tiers.  Up to date rates are detailed in our tax tables.

How is tax worked out? You have an annual allowance which is tax free and anything above this is then taxable.

Self-Assessment - Fact files

Self-Assessment is a system where you complete your own tax return each year and file it with HM Revenue and Customs.

Self-Assessment Tax Return Service

We offer a full, low cost self-assessment tax return service - contact us to request information on this service.

Key Income Tax Dates:

• 6 April to 5 April - the tax year
• 30 September - last date that HM Revenue and Customs will calculate your tax return for you based upon your paper-based self-assessment return
• 30 December (currently - may change to 30 November) - last date for HM Revenue and Customs calculating your tax return for you using online self-assessment return
• 31 January - last date for settlement of any taxes due to be paid

Self Employed - Additional Dates

For Self-employed people, you are required to make tax payments on account for the current trading year based upon the previous year’s profits and return.

• 31 January (in year of trade) - 1st payment on account due of 50% tax of previous year's tax liability
• 31 July (just after year of trade has finished at April) - 2nd payment on account due of 50% tax of previous year's tax liability
• 31 January (after year end) - final tax settlement due after deduction of the two payments on account.  Note at this time you will also be making yet another 1st payment on account for another trading year.

Tax Evasion:  It is illegal to evade tax.  If you knowingly do it you may be fined the same amount as the tax due i.e you pay the tax due and you pay a fine that is the same plus say £100 for incorrect filing.  Always tell us your full information as it is your responsibility to make a full a frank disclosure.  That way, if we get it wrong, we get the fine and not you.  If you do not tell us it all, you get fined.

1.  Income Tax Employed

PAYE - Pay as Your Earn - Employment Income

Employees pay normal income tax as earned income by deduction at source by the employer.  This is known as PAYE deductions. 

The employer then forwards any taxes deducted to HM Revenue and Customs by the 19th of the following month.

PAYE - Pay As Your Earn - Pensioners Income 

Pensioners in receipt of pension annuity income also pay normal income tax as earned income by deduction at source by the pension annuity provider.  The pension company again forwards tax deducted to HM Revenue and Customs under the same PAYE system as employers.

State pensions:  State pensions are taxable but they are paid with no deduction for tax, but your tax code allowance is reduced meaning that you pay more tax on your other pension income.

Age Allowance

Pensioners over the age of 65 may also receive an increased tax free income allowance.

What is taxable?

Employment income includes salaries, fees, bonuses, benefits in kind and pension income.

All these are assessed in the year in which the income is received or the benefit is enjoyed.

P60

Each year, your employer or your pension company, if you are retired, will send you a copy of your p60.  This is the yearly statement of income received and tax deducted. 

You may need to use these figures for your self-assessment tax return.

2.  Income Tax Self Employed

Self-employed, sole traders and partnerships pay normal income tax as trade income.

Register with HMRC

You are required to register with HM Revenue and Customs as self-employed.  They will then send you relevant notification for self-assessment returns when due.

What is taxed?

• UK Resident: Income tax is charged  for UK residents on income derived worldwide from any trade, profession or vocation.
• Non UK Resident:  Income tax is charged for non-UK residents on income derived in the UK from any trade, profession or vocation.

When do I do my accounts?

You can prepare you own accounts to any date you prefer, it does not have to be the tax year end on 5 April.

Many people though find it easier to keep their records in accordance with the tax year end date.

Expenses

From your trade income, you are allowed to make deductions for legitimate business expenses.  These are expenses that are wholly and exclusively incurred in connection with trade.

Capital Expenditure

It is important to note that the capital used to buy a company van or a piece of machinery is not an expense, it is a capital asset.  

Think of this simply that the day before you purchased the van you had £10,000 in the bank as capital and the day after, you still have £10,000 in capital in the form of a van.  You have not lost any money i.e.  not incurred an expense as you still own a van.  You can however, make a deduction for the depreciation in value of the van over the year as an expense.

3.  Income Tax Property Rental Income

Income from property includes rent received and other receipts from let property less any deductions for expenses.  Property income is taxed at normal income tax rates.

UK Property Income

Income from UK property is taxable on UK residents or non-residents.

Overseas Property Income

Income from overseas property is taxable on UK residents although allowances will be made for any taxes paid where the property is situated.  

Allowable Expenses

That can be deducted from income declared:

• Maintenance and repairs costs
• Rents and rates
• Interest in connection with loans on the property (full relief restricted from 2017/18 and from 2020/21 only a basic rate tax credit is allowed), but not relief capital repayments - it is interest only
• Other expenses exclusively incurred in the course of the letting.

Improvement costs are not allowed and should be used to offset any capital gains tax bills when the property is disposed of. 

Self Assessment

There is a special section and form in the self-assessment tax return to submit details of income ane expenses for property income.

4.  Children's Income Tax

Children are taxed:

Children are subject to tax on their income in the same way as any other individual.  Age is irrelevant to the HM Revenue and Customs.

Children have the same Tax Rates and Allowances as any other individual in the UK.

Therefore, if your child has an income you should read the normal pages for employed income, self employed income and savings income.

Below threshold:

In practice, many children have income and savings interest that is well below the personal tax threshold and therefore, there is no tax to pay.

5.  Other Taxable Income