Well the official slogan is ‘tax doesn’t have to be taxing’, but for many working their way through the many variables and different rules this can be far from the case. Here we have detailed just some of the areas that you will need to consider when filling out your tax forms and if you need any assistance understanding your tax, remember we are always here to help.
Your Personal Tax Allowance
We all have a personal tax allowance, currently £11,500, which represents the amount we can earn without paying any income tax. Once this limit is reached you then start to pay tax at the appropriate rate on any income you receive.
Marriage Tax Allowance
This allows couples, both married or in a civil partnership, to transfer a proportion of their personal tax allowance between them. You may be eligible for this if both you and your partner were born on or after 6 April 1935 and one of you does not use their personal allowance with the other earning less than the basic rate limit. If only one partner was born before 6 April 1935, then you may be able to claim the married couples' allowance.
Your Income Tax Band
Once you know your personal allowance, anything extra you earn is liable for income tax. There are currently three income tax bands - the 20% basic rate, the 40% higher rate and the 45% additional rate tax bracket.
You will need to pay the specified tax rate on the portion of the income that is in that bracket. So, if your salary puts you in the 40% tax bracket, you will pay 20% on the lower earnings bracket amount, 40% on anything earnt over this and then 45% on any income over £150,000.
Tax Free Allowances
Savings interest is now paid to you tax free rather than with 20% tax deduction as was historically the case. There is an additional Personal Savings Allowance which allows you to earn interest without having to pay tax on it. The amount of the allowance varies depending on your income tax band, with basic rate tax payers being able to earn £1,000, higher rate payers £500 and additional rate payers being unable to claim any allowance.
In addition, if you don’t have significant non savings income such as employment or self-employment, you may benefit from the Savings Starting Rate which enables you to earn another £5,000 per year in savings interest on which you will be charged tax at 0%. However, for every pound of other non-savings income you have which is above the personal allowance, you will lose a pound of your savings allowance. Once you have non savings income of more than £16,500, you will no longer be able be to benefit from this.
If you are self-employed, you pay your National Insurance contributions via your annual self-assessment tax return and these contributions are based on the level of profit you make. Until April 2019, you will need to pay two classes of National Insurance contributions (NICs) - class 2 and class 4. But from April 2019, only class 4 NICs will be payable on the profits you make.
Capital Gains Tax
If you sell or give away an asset, you may have to pay capital gains tax. There is an annual exemption amount, currently £11,300, that allows you to receive some gains tax-free, but over this limit you pay capital gains tax on all gains. However there is some good news, as there are some exemptions such as main homes, cars or lottery winnings and small personal assets bought and sold for less than £6,000.
When you invest, you either make money from selling the shares at a profit or when the shares pay dividends. Similar to the Personal Savings Allowance, there is a Dividends Allowance which allows the first £5,000 you receive to be tax free. Any dividends received above this allowance will then be taxed depending on our tax bracket, unless they are held in a stocks and shares ISA.
Paying Into A Pension
This can get complicated, and there are many different methods of making contributions and different types of pension schemes available. The basic rule is that ultimately any pension contribution is made tax free within allowable annual limits. It is important to know how your contributions are made as if they are not deducted from pay before tax, and you are a higher rate taxpayer, you will need to list the contributions on your annual tax return to ensure that you enjoy full tax relief.
Even if you do not have any employment income or self-employment profits and are not a tax payer, you can receive an extra £20 on each £80 paid into a pension each year up to the value of £2,880, meaning £3,600 ultimately ends up in the pension scheme.