This week’s blog is about income tax for individuals. Now, the realm of income tax is huge so I have picked out the top 5 areas I have been contacted about recently.
But if you have an issue in mind that is not covered here, just get in touch and we would be happy to answer your questions.
So what is income tax?
Income tax applies to individuals on certain types of income they receive and that could be from a number of sources such as employment, renting a property, selling an assets, income on savings and receiving dividends from companies.
So in the UK we have about 30m employed persons and nearly 6m of SME (small medium enterprises). These small businesses make up 99% of the business population and nearly 17m out of the total 30m employed persons in the UK are employed by those businesses.
1. Employees
Employees care about the tax they pay so they will be concerned about having the right tax codes, so that they are taxed correctly. That they are not overpaying or underpaying tax. No one wants to receive a bill right? A rebate is always nice though!
Thankfully, online payroll software companies such as Sage, Iris and Quickbooks are continually updated in the background to ensure tax rates, bands, codes etc are up to date, so this means 99.9% of payroll processing is correct. The 0.1% of error will always be a result of human error and human error is simply putting in the wrong data, not updating an employee’s record with a tax code notice etc. So when it comes to changes, HMRC will always inform a business through issuing tax code notices, notices to correct a national insurance number etc. When HMRC sends any notice, it is really important for the employer to action it without delay.
At the end of each tax year, HMRC will notify any individual if there are discrepancies such as over or underpayments of tax.
However, if at anytime, you feel your tax code is wrong or that you may be overpaying tax, it is always advisable to contact HMRC but we also urge individuals to set up a personal tax account via HMRC’s website https://www.gov.uk/personal-tax-account
By setting up your tax account, you will see what payroll has been processed for you, what your current tax code is and you can update your details such as home address. You can also check how many years you have paid in (and have left) towards your state pension.
So if you haven’t set up your personal tax account, add it to your To Do List!
2. Personal Allowance
Every person in the UK receives a personal tax free allowance of £12,570 (current tax year). The only time this tax free allowance is reduced or removed is if you earn more than £100,000 in a tax year. For those earning more than £100,000, the personal allowance is gradually withdrawn at a rate of £1 of allowance lost for every £2 over £100,000 until it is completely removed.
3. Marriage Allowance
If you are married and your spouse does not work or has a lower income (below £12570) then your spouse can apply to transfer 10% of their personal allowance to you. In this current tax year, this has increased by £10 to £1,260. Also, great news for those who meet the criteria and have done for previous tax years, you can apply the transfer against earlier years so the partner with the higher income, could receive £250 per tax year for missed earlier tax years. If you need any help or have any questions, get in touch!
4. Dividend Income
For all those holding shares in UK companies and receiving dividends, you can receive up to £2000 of dividend income completely tax free (on top of your personal allowance). The tax rates beyond £2000 of income, are still attractive, at 7.5% for basic rate taxpayers and 32.5% for higher rate taxpayers. This is why we always advise those individuals running their own company, to be employed and receive dividends and we can help reaching that optimal balance.
5. High Income Child Benefit Charge
For higher rate taxpayers (those earning more than £50,000 in a year), who are themselves or their partners in receipt of child benefit, you need to be aware of the high income child benefit charge. This was introduced on 7 January 2013 and means that a charge will be levied on the partner with the higher income regardless who receives the child benefit. The charge is calculated as 1% of the amount of child benefit received for every £100 of income over £50,000.
Do you need help?
So if you think you have overpaid tax or you have any concerns relating to income tax, please get in touch with us. We offer free consultations.
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