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Income Tax

Income Tax is a tax on your taxable income reduced by your tax allowance and tax reliefs.

 

1. Taxable income consists of:

  • Earnings from employment (wages and salaries) if you are employed on the basis of a contract of service (employment contract, work’s contract);
  • Some perks and benefits from your employer;
  • Earning from self-employment if you are a sole trader or a partner of a partnership;
  • Income from state, company and personal pensions as well as from retirement annuities;
  • Bank and building society interests, excluded interests on Individual Savings Accounts (ISA);
  • Dividends on company shares, for example, if you are a shareholder in a limited liability company (ltd), excluded dividend income from Individual Savings Accounts (ISA);
  • State benefits such as Carer’s Allowance, Jobseeker’s Allowance, Employment and Support Allowance under certain conditions, Incapacity Benefit from week 29 and Weekly Bereavement Allowance, Statutory Sick Pay, Statutory Maternity/Paternity Pay and Statutory Adoption Pay;
  • Rents over the first £4,240 a year paid by a lodger in your family home and the total income from your other properties;
  • Trust income;
  • Pensioner bonds.

2. Almost all UK residents are entitled to Personal Allowance (PA), which is a tax-free amount of your taxable income you are allowed to earn each tax year without paying any Income Tax. In other words, you pay Income Tax only on the income above your Personal Allowance. The basic Personal Allowance (tax-free amount) for people aged under 65 is

  • £6,475 for the tax year 2010-11;
  • £7,475 for the tax year 2011-12.

There are other thresholds for people aged 65 and over as well as for the disabled.

 

If your income is over £100,000, starting from the tax year 2010-2011, your Personal Allowance of £6,475 is reduced by £1 for every £2 of the income above the threshold of £100,000. The reduction applies for all age groups.

 

3. Other allowances, reliefs and expenses you are entitled to deduct from your taxable income.

  • As self-employed (sole trader or partner in a partnership) you may obtain tax reliefs for much of the capital, motoring, premises and administrative expenses of running your business. If you use something for business and privately, you have to split the costs proportionately.
  • As an employee or a company director you may obtain tax reliefs for travelling costs and other expenses carried while doing your job. It includes costs of small work tools, protective and uniform clothing, fees and subscriptions to professional organizations, home working and capital expenditure. You can as well claim tax relief for business mileage if you use your own vehicle on business or buy fuel for a company car you drive. However, you are not allowed to claim a relief for your usual commuting costs. As an employee you get tax relief on public, company and personal pensions as well.
  • Everyone can receive tax relief making gifts to charity. You may do it in the form of gift aid, payroll giving or giving assets.

4. Non-Taxable income, which is not subject to Income Tax includes:

  • Some state benefits such as Disability Living Allowance, Attendance Allowance, Pension Credit, Winter Fuel Payments, Christmas Bonus, Employment and Support Allowance under certain conditions, Housing Benefit, first 28 weeks of Incapacity Benefit, Child Benefit, Guardian’s Benefit, Maternity/Paternity Allowance, Industrial Injuries Benefit, Severe Disablement Allowance and Young Person’s Bridging Allowance;
  • Interests on Individual Savings Accounts (ISA) and Savings Certificates;
  • Rents up to the amount of £4,250 a year from a lodger in your family home;
  • Working Tax Credit (WTC) and Child Tax Credit;
  • Wins from Premium Bonds, which are also free from Capital Gains Tax (CGT).

It is extremely important to establish the exact amount of your Income Tax. To do it you have to take the following steps:

  • To check if you use the correct tax code. If you are an employee your employer uses your tax code to calculate the amount of tax to deduct from your pay. A tax code usually consists of several numbers and a letter. The most common tax code for the tax year 2010-11 is 647L. This tax code is applied for employees eligible for the basis Personal Allowance of £6,475.
  • To calculate your total taxable income;
  • To deduct your allowances and reliefs;
  • To calculate the actual Income Tax liability by using applicable Income Tax rates and taxable bands.

If you have paid too much Income Tax, you are entitled to claim the overpayment back. If you think you are paying too little Income Tax as an employee or a pensioner, you must contact HM Revenue and Customs (HMRC) to sort it out.

 

There are different ways to pay Income Tax depending on whether you are a self-employed person or an employee.

  • If you are self-employed, you must prepare your Income Tax Self Assessment for each tax year and submit it to HM Revenue and Customs (HMRC) in due time.
  • If you are an employee, your employer deducts Income Tax from your pay and transfers it to HM Revenue and Customs (HMRC) using PAYE (Pay As You Earn) system. Deductions made under the PAYE system are held on an employee’s account to be set off against his or her liabilities resulting from Income Tax and Class 1 National Insurance Contributions. It may happen that the deductions made by your employer or employers exceed your actual Income Tax liabilities. In such cases you can claim the overpayment by submitting your Income Tax Self Assessment to HM Revenue and Customs (HMRC).

Capital Business Links Ltd has been supporting the self-employed and employees with professional tax advice for years. We will be happy to assist you in calculating your Income Tax and in preparing your Self Assessment Tax Return. To receive more information or to arrange an appointment with one of our tax consultants contact us on telephone number 0208 567 99 44 or at our e-mail address.