The HMRC requires that everyone, whether an individual or business, report his income, profits, all deductions, and even losses of your business through the tax return file. You are also expected to include your tax liability and tax refund in the file. The HMRC uses self-assessment system as the official way to gather your financial information and automatically deduct relevant tax from your earnings. As a business owner, you have a responsibility filling in the tax return document at the end of each tax year, which should be on 5 April of the year it applies to.
What is self-assessment tax?
Tax is not one of the enjoyable topics and especially because failing to meet deadlines can result in heavy fines. Also, many people are not sure whether they qualify to file for tax returns or not. If you fall under the category of people who are filled with uncertainty when it comes to tax filing, then you will find this information very useful in answering all your questions.
Everyone who falls under the category of self-assessment must complete a tax return on a yearly basis. On the form, you are required to fill in all your taxable income and all capital gains as well as pay any tax dues for that year. You can also use the form to make any claims on tax reliefs or allowances that you may have. After completing the form, you are expected to send it to the HMRC department either online or on paper. Once the HMRC receives this information, they are going to calculate your tax liability, in which case this entire process is known as self-assessment.
Who should complete tax return the UK?
Self-assessment only applies to the self-employed individuals since the employed people pay their taxes in form of PAYE. To that end, you should only complete the tax return if you fall under one of the following categories;
- You are self-employed
- You are part of a partnership business
- You are a director in a profitable organisation
- You are a minister of any denomination or religion
- You are an executor or trustee of an estate
- You have an income that is not taxed such as rental income
- If you are entitled to an annual income from a settlement or a trust
- You have taxable foreign income regardless of whether you are a UK resident or not
- If your claims on expenses exceed £2,500
- If your annual income before tax exceeds £100,000
- Your savings and investment income exceeds £10,000
Calculating your income tax rate
As an income earning citizen, you have a responsibility of paying income tax on all income you receive during the tax year, which is above your personal allowance. Calculating income tax rates is complicated to many people and that’s why we come in, at WeAccountax, we help you with income tax rates. We also help you understand your personal allowance and differentiate between total income and taxable income.
Personal tax allowance
Everyone is entitled to personal tax allowance, which is simply the amount of money you can earn without paying tax. Any other amount that is above your personal allowance is subjected to tax at an applicable rate.
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Other than the above allowances, there are other special cases whereby blind people are entitled to a personal allowance of +£2,320. Married couples or people in a civil partnership are also entitled to a marriage tax allowance which allows couples born on or after 6 April 1935 to share a proportion of their personal allowance. 10% of the allowance is later deducted from your annual income salary. in this case, couples married before 5 December 2005, the allowance is automatically worked out from the husband’s salary but for couples married after that, it is deducted from the higher earning spouse.
Understanding income tax bands in the UK
After you have deducted your personal allowance, everything else is subject to income tax which is based on three marginal income tax bands as per for the 2017/18 tax year. Just as your personal allowance starts to shrink as your total earning hit the £100,000, the income tax brackets also differ starting from the basic rate of 20%, higher rate of 40%, and the additional rate tax bracket of 45%.
In Scotland, the higher rate income tax remains frozen at last year’s tax levels.
Calculating the 2017/18 income tax rate
If you reside in England, Wales or Northern Ireland, then you should the following table to determine your income tax rates in a current year.
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If you reside in Scotland, then you should use the following table when calculating your income tax rates.
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The above marginal bands allow you to only pay a specified tax on the portion of your salary. For instance, if your salary is in the higher rate tax bracket, then you will be expected to pay 40% tax only for the segment of your salary that falls in that category while the lower category of your salary remains in the basic rate brackets.
The HMRC collects tax on behalf of the government and the income tax collected is used to pay for various services including the welfare system, NHS, education, and investing in public projects such as the construction of roads, housing, and rails. As seen from the above tables, the income tax thresholds are divided depending upon income. Those who earn more pay higher taxes as to try and make the tax payment process fair to every income earner.
In addition to the basic income tax, every income earner is expected to contribute to the national insurance which is deducted from your income. The contribution starts the moment you hit 16 years of age and you pay until you reach the state pension age. The table below illustrates the 2017/2018 national insurance rates.
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The above rates only apply to the employed individual. If are self-employed, the rates are a bit different and more complicated. If you are self-employed, you are expected to pay two types of national insurance contributions, the class 2 and class 4 until 2019. However, the proposal to increase the two was scrapped and as from April 2019, you will only be expected to pay the class for national insurance contributions.
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This cluster includes some very complicated national insurance rules and you might require asking your accountant to clarify them for you.
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How much tax should you expect to pay on various forms of income?
When it comes to tax payment, you don’t normally pay on your first slice of income and this is what we referred earlier as personal income tax allowance. From the illustration above, you start paying tax once your income exceeds this figure. However, the HMRC income tax calculator takes into consideration the source of your income to help determine how much tax you are supposed to pay. This leads to the categorization of different personal income tax thresholds as we are going to see.
Income tax on rental property, employment, and pension
This is normally categorized as non-savings income and it is taxed in three different tax brackets depending on how much you are making. In this case, your personal allowance and any other deductible reliefs that you are entitled to are subtracted from your total income to get your taxable income.
The following rates are used to calculate your 2017-18 tax relief.
- If your taxable income adds up to £33,500, then you fall under the basic taxpayers’ category and you are supposed to pay 20% tax. In this case, if you include your personal allowance of £11,500, then it means that the basic rate taxpayers have a threshold of £45,000.
- If your taxable income is beyond this threshold, then you are supposed to pay 40% tax on the income above this threshold.
- Those who earn £150,000 and above are obligated to pay 45% tax.
2018/19 Tax Rates
The 2018/19 tax rates are a bit different with the basic taxable income starting from £34,500 and tax rate of 20%. In this case, the personal allowance will be 11,850 in which case the threshold for the basic-rate taxpayers will be £46,350. If your taxable income exceeds £46,500, you will be expected to pay 40%, and for those with a taxable income of £150,000 and above will be taxed at 45%.
It is important to note that these rates will only apply to those living in England, Northern Ireland, and Wales. Those living in Scotland will be subject to the December 2017 tax rates.
Tax rates for the self-employed
If you are self-employed, you will pay taxes on your profits and not your gross income. In this case, the gross income is all your earned revenue before any deductions or allowances are made.
Rental income tax London
Property owners are obligated to pay tax if they rent out their properties. However, rental income tax in London depends on how much you are collecting from your rental property. If your profits are over £5,965 per year and your rental property as a business, then you are expected to pay Class 2 National Insurance. In this case, you have to;
- Be a landlord as your main job
- Have more than one property that you have rented out
- You are buying new property with the aim of renting them out
In case your annual profits are below £5,965, then you are not obligated to pay taxes but can make voluntary Class 2 National Insurance Payments. Paying this is not mandatory but it helps you get full State Pension. If you earn less than £2,500 annually from your rental property, then you must contact the HMRC and fill in the self-assessment return. In case you have never sent your tax returns, you must register by 5 October stating the tax year you owned the rental property.
Declaring unpaid tax
If you have missed filing your returns from the previous years, you can inform the HMRC before they find out. In this case, if you will pay any fine, it won’t be as severe as when the HMRC find out on their own that you have been skipping taxes. Once you report yourself, you are given a reference number and 3 months to sort out what you owe the HMRC.
If the property is owned by a company, then it is taxed as any other business income. However, you can claim a tax relief for;
- Commercial properties
- Residential properties
- Furnished holiday properties
In either case, the company must pay tax on all profit made from the property, which is calculated by deducting all the expenses. Deductible expenses include all things you spend money on to improve the condition of your property. These include things like;
- Interest on property loans
- Letting agent fees
- Accountant fees
- Legal fees for lets less than years or renewal fees for lease less than 50 years
- Insurance fee for the property
- Property maintenance and repair
- Utility bills including gas, water, and electricity
- Council tax
- Service charges
If you spend money on replacing domestic items such as fridges, carpets, sofas, curtains, beds, cookery, and cutlery, then you can also ask for a tax relief. However, in this case, you must ensure that the item bought is being used by the tenant and that the replaced item is no longer in use within the property.