Income Tax – All You Need To Know
Income tax is one of the most common taxes you could pay as a taxpayer in the UK. Simply put it’s the tax you pay on the money you make if it’s not made through investment but as a payment for work. This is how most people get their earning, and that’s what they pay.
Things get a bit more complicated when the way we earn an income is taken into account. Most earn a salary for their work, but there are also business owners who could earn a salary as well or could earn a portion of the profit the company makes.
The first question that arises in these cases is what income is from the government’s standpoint and more precisely from the standpoint of HMRC. There’s a list of ways you can earn in, and all of these are taxable:
- Earnings from employment, this includes benefits in kind.
- Earnings from self-employment.
- Pension income, including state pensions.
- Some social security benefits.
- Interest on savings.
- Income from shares (dividends).
- Rental income.
- Income from trusts.
Taxes are paid on the income that you make within a year, and that’s how you need to report the income so that your taxes are calculated for the year. This doesn’t mean that payments are made once a year. It’s possible to pay yearly taxes in four instalments paying the last one when you report the taxes for the previous year.
The tax year isn’t the same the calendar year. It starts on the 5rh of April, and that’s when you need to report your income for the year and to pay the taxes on the last year. Taxes are paid regardless of how old you were on the year you started earning.
How tax is calculated
The taxes are calculated in a few simple steps, and that’s done for the year of income. You’ll start by adding all of the income you have for the year from all sources. That will give you the amount on which you’re taxed and therefore what your tax rate is.
However, you won’t pay taxes on the whole amount; it’s just used to decide on how much you should pay. After that, you should deduct the tax exemptions and the allowances that you have the right to. That’s the amount on which you pay taxes.
Tax allowance is the amount on which you’re not taxed at all. That’s the allowance that’s designed to help everyone and allow you to keep as much of your money as you can. How it’s calculated is a bit tricky because it depends on how much you earn. The basic amount is £32.000 a year, meaning that you start paying the lowest tax rate on the amount you earn above that.
What makes things more complicated is that the allowance gets smaller as you earn more than £100.000, meaning that at one point, you want to have an allowance at all.
Income made abroad
When a portion of your income is made abroad, you’ll need to pay taxes on it as well if you keep your UK citizenship. However, the taxes are paid only when you move the income from abroad to the UK and are able to spend it there.
- Wages made on the work done abroad
- Foreign investments and saving interest
- Rental income on the properties that based abroad
- Income from pension funds held overseas
The rules for taxation in those countries apply as well, so you need to be familiar with those as well.
National insurance contributions
Besides the tax on income, there’s one more payment that you’ll need to make that’s based on income and paid yearly or monthly and that technically isn’t a tax but a contribution towards insurance. It’s called national insurance contribution, and it’s paid with the income tax.
These contributions will pay for the insurance you have in case you get sick; it also goes towards your pension and covers you in case you’re unemployed and are between jobs. The contributions depend on the amount you make and the type of employment you’re under.
Income tax is the tax paid on the amount you’re making within a year. There are different rates based on how much you earn, but there’s also an allowance that you don’t pay any taxes on that gets lower as you earn above £100.000.
The taxes are paid once a year, but that can be done in four instalments. It’s paid on all kinds of income, starting from your salary but also on income from dividends and rent. Income tax is also paid on income made abroad once you move it back to the country.