Understanding taxes can be challenging, but it is important to understand where your money is going and ensure you know how much and why you are paying it.
What do you pay Income Tax on?
There are several things you will pay Income Tax on.
Most people in the UK get a Personal Allowance of tax-free income (currently £12,570). For most people, this is the amount of income you can have before you pay tax.
However, those earning over £100,000 need to be aware that your Personal Allowance is reduced by £1 for every £2 that your adjusted net income is above £100,000.
If your income exceeds £125,140, this means your allowance is £0.
How is income tax paid?
Most people pay Income Tax through Pay As You Earn (PAYE). This is when your employer or pension provider takes Income Tax and National Insurance payments before they pay your wages or pension. You will have a personal tax code, which tells how much should be deducted.
However, there are many taxpayers, such as the self-employed, who must report their income via their Self-Assessment tax return and make tax payments directly to HM Revenue and Customs (HMRC).
From April 2024, if you have a business and/or property income of £10,000 or more you will need to follow the new Making Tax Digital rules for Income Tax Self-Assessment.
This will require you to complete quarterly tax statements digitally using HMRC-compliant software and also complete an annual tax return.
Do you need to pay Income Tax?
There are three steps to follow to work out if you need to pay Income Tax:
If the amount exceeds £12,570 then you are liable for Income Tax. The rate at which you pay tax will depend on your marginal rate – basic, higher and additional.
These rates can be found here.
Are you due to pay more tax or eligible for a tax rebate?
If you have not paid enough tax, you will be contacted to pay back the tax you owe. If you have paid too much tax, you will be contacted to receive a tax return payment.
If you believe either one of these applies to you, you should contact HMRC to arrange corrections.
If you need advice on related matters, contact us today.
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