History
The first income tax was introduced in Great Britain in 1799, to fund the war against the French forces under Napolean. Income Tax is a “temporary tax” and expires every year on the 5th April and Parliament has to reapply it by an annual Finance Act. The PAYE (Pay As You Earn) system was introduced in 1944 as it was thought to be a more efficient tax collection system.
What Do I Have To Pay Income Tax On?
Income tax is applicable to taxable income which includes the following:
- Earnings from employment
- Earnings from self-employment
- Most pensions income (State, company and personal pensions)
- Interest on most savings
- Income from shares (dividends)
- Rental income
- Income paid to you from a trust
How Do I Pay Income tax?
There are various ways that you may pay income tax, it may be deducted at source, such as with salaried income under PAYE or with bank interest. Tax payers that have earnings from sources such as rental income or self-employment will be required to file a self-assessment tax return (SATR) annually. The tax calculated from this will either be paid yearly or bi-annually.
Example:
Niko has income tax (including national insurance) to pay from his self-employment as a consultant and two rental properties, the total tax for the year 2011/12 (6th April 2011 to 5th April 2012) is £26,000 and has already paid £21,000 on account in January and July 2012 for this tax year. He files his 2011/12 tax return in August 2012; he will have to pay the following:
The underpayment of £5,000 tax will need to be paid by 31st January 2013, he will then also be asked to be paid the same amount of tax on account for the year 2012/13, so will pay as follows:
By 31st January 2013:
- £5,000 balance outstanding on 2011/12 tax year
- £13,000 first payment on account
By 31st July 2013:
- £13,000 second payment on account
If he thinks that 2012/13 is going to be a less profitable year for him than 2011/12 he can request to pay a lower payment on account.
How Is Income Tax calculated?
It is calculated on the income received, or with the case of self-employed income the net profit. Most people have a personal allowance, some groups have a higher personal allowance e.g. over 65s. Any income earnt within your personal allowance will not have any income tax deductions. If any tax has been deducted, this can be claimed back. Once the personal allowance has been exhausted the following levels of income tax are applied:
| Rate | 2010-11 | 2011-12 | 2012-13 |
|---|---|---|---|
| Starting rate for savings: 10%* | £0-£2,440 | £0-£2,560 | £0-£2,710 |
| Basic rate: 20% | £0-£37,400 | £0-£35,000 | £0-£34,370 |
| Higher rate: 40% | £37,401-£150,000 | £35,001-£150,000 | £34,371-£150,000 |
| Additional rate: 50% | Over £150,000 | Over £150,000 | Over £150,000 |
The 10 per cent starting rate applies to savings income only. If, after deducting your Personal Allowance from your total income liable to Income Tax, your non-savings income is above this limit then the 10 per cent starting rate for savings will not apply. Non-savings income includes income from employment, profits from self-employment, pensions, income from property and taxable benefits.
The rates available for dividends are the 10 per cent ordinary rate, the 32.5 per cent dividend upper rate and the dividend additional rate of 42.5 per cent.
Please note that tax payers that earn over £100,000 have a gradually reduced personal allowance, and that the top rate of income tax of 50% is reduced to 45% in the 2013-14 tax year.
National Insurance
When planning for your income tax payments do not forget to consider National Insurance (NI) implications. NI is effectively an additional tax, however, it has different rates and is not applicable in all income. For example NI is not applicable to rental income or bank interest. If you are under the PAYE system you will pay Class 1 employee national insurance and your employer will pay employer national insurance. If you are self-employed you are subject to Class 4 and Class 2 NI.
Tax Accounting And Planning
If you would like to review your current tax situation and would like to be able to plan and budget for your future tax bills, contact your accountant or us for a tax review.
Tags: bank interest dividends employment earnings finance act income tax interest tax national insurance personal pensions self assessment tax self assessment tax return self employment taxable income