Paying Tax

There are many different scenarios where you will end up paying tax. This guide will take you through some of the major taxes, and when you would have to pay them.

Income Tax

This is just a tax that you pay on the money you earn throughout the year. There is a personal allowance on your income, and when you go above this income you have to start paying tax.

• What you actually pay money on
• The money you earn from a job
• Money from your pension
• Interest earned on your savings
• Rental income
• Employment benefits
• Income from a trust

If the combined income from the above sources is above the personal allowance, then unfortunately you have to pay income tax. 

Income Tax Bands

Your tax band determines how much tax you actually pay. The more money you earn, the higher your band, and so the more tax you pay.

In England, Wales and Northern Ireland, the tax bands for the tax year 2022 – 2023 are as follows:

However, in Scotland they have slightly different tax bands:

One important thing to note, if you earn more than £100,000, your personal allowance will be reduced by £1 for every £2 you earn. This means that if you earn £105,000, your personal allowance is reduced by £2,500. When you earn approximately £125,000, you will no longer have a personal allowance, and so will be taxed on your whole income.

How to pay income tax

There are two ways to pay your income tax. 

The first of these is PAYE, or Pay As You Earn. This is when the tax is deducted from your salary.

The other option is to complete a self assessment. If you are self employed or get income from any of the sources listed above, then you have to complete a self assessment. Here you will have to declare all of your income.

Capital Gains Tax

Capital gains tax is a payment made to the government on the profit you get from the sale of a valuable asset. For example, this could be the sale of a property, an antique or shares, even cryptocurrency is subject to capital gains tax. 

Capital gains tax (CGT) doesn’t work like income tax however. The only way to report CGT is on your self assessment. As there are so many different things you could have to pay CGT on, you have to stay aware of what you need to report.

Rates and Allowance

There are only 2 different rates with CGT. The first is the basic tax rate. As of 2022, this means you would be paying 18% tax on residential property gains, and 10% on all other assets. There is also the higher tax rate, which is 28% on residential property gains and 20% on all other assets.

There is an allowance of £12,300 on CGT. This means that you will be able to make £12,300 profit before you have to start paying taxes. But, if you have joint ownership of an asset, like a second home, then you can combine your personal allowances to get an allowance of £24,600

Fortunately you don’t have to pay CGT if the home you’re selling is your primary residence. But if you are selling a second home or a buy to let property, you will either have to pay 18% or 28%, depending on the tax bracket.

Calculating and paying Capital Gains tax

When it comes to calculating how much you have to pay in capital gains tax, you can just do it by hand. But, this will take you a long time if you have a lot of assets to add up. So, there is a Capital Gains Tax Calculator the government has published which can save you a bit of time and stress. It’s very important to put the correct information when you’re declaring your capital gains, as if you get it wrong you could be fined. In some cases, the fine will even be more than the money owed.

When it comes to paying CGT, you can include it in your annual tax returns. Normally, the official deadline for tax returns is on January 31st. However, in 2022, this deadline was extended to the 28th of February. 

But, if you need to pay CGT on a residential property, you can’t wait to file your tax return. Instead, you have to report any gains you make within 60 days of the sale. Click here to find how to pay CGT on residential property gains.

Inheritance Tax

This is a tax that is paid on an estate when the owner passes away. An estate can include homes, money, valuables and more.

There are a few situations where inheritance tax wouldn’t have to be paid. The first of these is if the value of the estate is below the threshold of £325,000. Secondly, if you leave everything over the threshold to your spouse, civil partner, a charity or to a community amateur sports club. In these scenarios, you can use up your threshold and distribute £325,000 among friends and family, and so long as you leave the rest of your estate to one of the above, and the total is less than £325,000, there is no inheritance tax to pay.

However, if you are giving away your home to your children or grandchildren (this can include foster, adopted or step children), then the threshold is increased to £500,000. 

Additionally, if you’re married or in a civil partnership, and your estate is worth less than the threshold, the remaining threshold can then be transferred to your partner. So, in theory the maximum threshold possible is £1 million.

Rates

The rate you pay on inheritance tax is 40% for anything over the threshold. So, if your estate is worth £400,000, and your threshold is £325,000, you pay 40% tax on £75,000. 

However, there are some circumstances where you could pay a reduced rate. For example, if you leave 10% or more of the net value of the estate to charity, you would pay 36% tax instead of 40% on the amount over the threshold. 

Additionally, some of the gifts that are given before passing away could be taxed at various rates. This is known as “Taper relief”.

There are various types of relief that require a lot of reading, such as Business relief or Agricultural relief.

Who pays

Inheritance tax is paid by the estate at the time of passing. This is dealt with by the person who is assigned to deal with the estate. If there is a will, this is known as an executor. 

In most cases, those who receive the inheritance won’t have to pay tax on it. There are exceptions, for example if a beneficiary receives a rental property, then taxes will have to be paid on the profit.

With regards to gifting before you pass, people will only have to pay tax if you give away more than £325,000 and pass within 7 years.

VAT

VAT, or Value Added Tax, is a tax that is put on the price of some goods and services that are bought and sold in the UK. 

There are 3 separate rates of VAT, depending on the good or service. The first is 20%, which applies to most goods and services. The reduced VAT rate of 5% applies to certain goods and services such as home energy, residential property conversions and more. Finally, some goods and services have no VAT applied. This includes most food and childrens clothing.

National Insurance

This is a tax that is paid by employees, employers and the self-employed. The level of national insurance that you have to pay depends on many factors including your age, employment status, level of income and residential status.

When is it paid

If you get paid through a Pay As You Earn (PAYE) system, then your national insurance (NI) contributions will be paid automatically when you are paid. So, the amount you pay depends on how much you earn in that specific period. If in one pay period you earn a lot more, then you will pay more national insurance. But, if you then earn a lot less in the following months, you aren’t able to claim any national insurance back.

If you are self-employed, then your NI will be calculated when you fill in your self assessment tax return. It is then paid at the same time as your income tax.

How much will you pay

There are 4 different classes of NI depending on your situation.

Class 1 

If you are an employee in the year 2021-2022, you will start paying NI when you earn more than £184 per week. The rates for Class 1 are 12% tax for income between £184 per week and £967. Then, if you earn more than £967 a week, you pay 2% tax on those earnings.

So, if you earn £1500 a week, you pay nothing on the £184. You then pay 12% tax on the £783, and 2% tax on all earnings above £967, which is £533. The total NI you would have to pay would be £104.62.

However, in July 2022, the lower threshold for paying NI will increase to £242 per week. This means you won’t pay tax on earnings under that amount.

Class 2

If you’re self-employed, you could be able to pay Class 2 NI. The contributions you would have to make when paying Class 2 NI are a set rate of £3.05 per week in 2020-2021 and 2021-2022.

You have to pay these contributions for every week or partial-week that you are self-employed. However, there is a threshold you have to meet first before you have to pay NI. The threshold for Class 2 is £6,515, which is known as the Small Profits Threshold.

Class 3

Class 3 NI is voluntary, so you don’t have to pay it. But, some people choose to in order to fill gaps in your NI record. This could help you claim a higher State Pension.

In order to qualify for the full State Pension, you have to have at least 35 years of qualifying NI contributions. It is paid out to those who reach their State Pension age after or on the 6th of April 2016.

If you do not meet the criteria, you could receive a lessened State Pension.

If you decided to pay voluntary contributions to your NI, in the year 2020-2021, the weekly contributions were £15.40. However, this will vary depending on the year.

Class 4

Class 4 is for those who are self-employed and make £9,569 or more in profit (2021-2022). If you meet or exceed this threshold, you will pay 9% tax on profits from £9,569 to £50,270, and 2% tax on profits that are over £50,270.

Tax Rebates

A tax rebate, or refund, is money you claim back after you’ve paid too much tax over the year. Often, if you are paid using a PAYE system, the tax is taken out of your paycheck before you see it. This saves you time, but the taxman may not have all the information they need to figure out how much tax you should be paying. 

If you feel like you are paying too much tax in a specific year, filing a tax return could notify HMRC if you are owed a tax rebate.

This is much more often if you are self employed, as there are various tax reliefs on different aspects of running a business. Knowing as much as you can about tax returns and the self assessment system could end up saving you a lot of money.

Her Majesty’s Revenue and Customs

Her Majesty’s Revenue and Customs (HMRC) is the tax authority of the UK government. They are responsible for gathering and collecting taxes, as well as paying child benefits. They also enforce the payment of minimum wage by employers, as well as enforcing the tax and customs laws.

While Tax may not be the most exciting subject, it’s a very important part of life. Knowing as much as possible about the various taxes you may have to pay could save you a lot of money and make your life much easier. The government website has a lot more information that could help you figure out what taxes you need to pay, and if you are paying too much.