Taxes Made Easy

Practical tax tips to guide you through the tax system and help you plan to minimise your liability.

Please use this guide to identify areas where you could take action, then contact us for advice and to discuss the most appropriate way forward.

Introduction

In the UK most income tax which flows into the Exchequer does so by deduction at source. The tax is taken from income before it is paid to the taxpayer and most of this happens by way of Pay-As-You-Earn (PAYE). This collection system will no doubt be familiar to almost everyone who is in employment and also to those who receive pensions.

Many of us, including children, the retired and working people, will have interest from savings accounts of one sort or another and many might also have shares from which income arises in the form of dividends. The savings allowance and dividend allowance may cover this for most people so that this income is taxable at 0%.

As the circumstances described above cover the overwhelming majority of individuals, more than 80% of the population will have little or no regular contact with HM Revenue and Customs (HMRC), the organisation that administers and regulates all taxes in the UK.

Over 10 million taxpayers have something more than just a regular income taxed under PAYE or income covered by the savings and dividend allowances. They might have income from their own business or receive rent from a property. Alternatively, it may be that their savings or dividend income is significant enough to result in tax being payable at the basic, higher or additional rates of tax. These taxpayers may be asked to complete a self assessment return each year and have direct contact with HMRC.

Practical Tip

If you are not asked to complete a tax return, it remains your responsibility to advise HMRC if there is a new source of untaxed income, a capital profit that could lead to a tax liability or you are subject to the high income child benefit charge. Please contact us for further advice if this affects you.

The personal allowance

In principle, all individuals are entitled to a basic personal allowance before any income tax whatsoever is paid. However, some individuals on high incomes may receive a reduced or even no personal allowance. This is explained further below.

The 2019/20 personal allowance is £12,500 and each individual may have taxable income up to £50,000 before they start to pay higher rate tax. See the devolved rates and bands for Scottish taxpayers set out later in this section.

Losing the personal allowance

Where an individual's total income exceeds £100,000 the personal allowance is reduced by £1 for every £2 of income in excess of that limit. This means that an individual with an income of £125,000 or more will not be entitled to any personal allowance.

Tax Tip

If your income is in the range £100,000 - £125,000 the restriction in your personal allowance is the equivalent of a tax cost of 60%. You may want to consider making or increasing certain payments which are tax deductible to minimise this tax cost.

Examples include pension contributions (which may be subject to restrictions) and charitable donations.

Tax rates and allowances

The income tax bands and rates for 2019/20 are determined by where you live in the UK and the type of income you have.

For most UK residents the following tax rates and bands apply:

Income tax band £

Rate %

Dividend rate %

0 - 37,500

20

7.5

37,501- 150,000

40

32.5

Over 150,000

45

38.1

In addition, some taxpayers may be entitled to the starting rate for savings which taxes £5,000 of interest income at 0%. However, this rate is not available if non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit.

Rates and bands for Scottish and Welsh taxpayers

For 2019/20 the tax rates and bands applicable to Scottish taxpayers on non-savings and non-dividend income are as follows:

Scottish income tax band £

Band name

Rate %

0 - 2,049

Starter

19

2,050 - 12,444

Basic

20

12,445 - 30,930

Intermediate

21

30,931 - 150,000

Higher

41

Over 150,000

Top

46

For 2019/20 the Welsh rate of income tax is set at 10% and this is added to the UK rates, which are each reduced by 10%. For 2019/20, the overall tax payable by Welsh taxpayers continues to be the same as English and Northern Irish taxpayers.

Scottish and Welsh taxpayers continue to pay tax on their savings and dividend income using the UK rates and bands.

Other Allowances

Individuals may be entitled to savings allowance (SA) with savings income within the SA taxed at 0%. The amount of SA depends on an individual's marginal rate of tax. An individual taxed at the basic rate of tax has an SA of £1,000 whereas a higher rate taxpayer is entitled to an SA of £500. Additional rate taxpayers receive no SA.

The dividend allowance (DA), available to all taxpayers regardless of their marginal tax rate, charges the first £2,000 of dividends to tax at 0%. Dividends received above this allowance are taxed at the rates shown in the table.

Dividends within the DA still count towards an individual's basic or higher rate band and so may affect the rate of tax payable on dividends above the £2,000 allowance.

Dividends are treated as the top slice of income. So the basic rate tax band is first allocated against other income.

Income tax is not the only means by which the government relieves us of our hard earned cash. You may own assets such as a precious antique, a second home or shares. If such an asset is sold, the chances are that a profit will arise and this may give rise to a liability to capital gains tax (CGT).

Details of any capital gains may have to be included on the self assessment return.

Inheritance tax may be payable on the assets that you give to others in your lifetime or leave behind when you die. At one time very few individuals had to worry about this tax. House price increases have changed this and many more estates have now become liable so you may need to consider some planning to minimise this tax.

Many of those in business have to understand the principles of Value Added Tax (VAT) because they will have to act as an unpaid collector of this tax. In addition, those who run their business through a limited company need to know about corporation tax which taxes a company's profits. Employing others in your business brings further obligations with Real Time Information reporting for PAYE and auto enrolment pension contributions responsibilities. We consider these issues later in this guide.

Practical Tip

Remember to keep all tax related documents such as interest statements, dividend vouchers, pay certificate form P60 etc. Place everything in a folder through the year as it is received. Then you can simply hand this to us when we need to prepare your self assessment return.

HMRC is increasingly emphasising the importance of good records. Failure to maintain adequate records may lead to inaccurate tax returns, which could result in penalties.

Self assessment (SA) timetable

  • Income tax and capital gains tax are both assessed for a tax year which runs from 6 April to the following 5 April.
  • Shortly after 5 April - SA returns or a notice to complete a return are issued by HMRC.
  • 31 October following - non-electronic returns need to be submitted to HMRC by this date.
  • 31 January following - final date for submission of the return and all outstanding tax to be paid.
  • There is an automatic penalty of £100 for late filing of the return.
  • Further penalties may be due if the filing of the return is significantly delayed. These may run into hundreds of pounds.

Practical Tip

The full £100 penalty will always be due if your return is filed late even if there is no tax outstanding. It is therefore essential to submit the return on time either by 31 October (non-electronic) or otherwise by 31 January following the end of the tax year.

This guide is designed to provide you with an overview of all of these taxes from seven perspectives - that of the family; the employee; the person running their own business; the taxation of investments; property matters; disposals and CGT and, finally, knowing that nothing is certain except death and taxes, the potential liability on your estate at death.

Please use the guide to help you identify planning opportunities, pitfalls to avoid and areas where you may need to take action and then contact us for further advice.