Tax system overview
A large chunk of your earnings disappears in tax. Tax is how the government raises money to spend on public services, such as education, health and the social security system. Tax is levied on many goods and services in the shape of Value Added Tax (VAT); we pay income tax on the money we earn. Tax can also be levied on a range of transactions, such as inheritance and profit made on the sale of homes or antiquities. The tax system is fiendishly complicated: it is no wonder there is an army of tax experts trying to pick holes in it on behalf of their clients. There are said to be only two certainties in life - death and taxes. But certain types of taxes apply only to certain people - you have to earn above a certain limit to qualify for income tax and if you are self-employed you may be entitled to claim back much of your VAT. There are exemptions, relief, thresholds and allowances - all of which can make the system difficult to navigate.
PAYE People in full-time employment pay tax through the 'Pay as You Earn' (PAYE) system. The money owed to the taxman is deducted at source, so when you get your pay slip it will record how much tax has already been taken out. The pay slip will also detail how much National Insurance you have paid. National Insurance Contributions are used to fund parts of the welfare state, including pensions and the NHS. When you first start work, you have to fill in a P46 tax form - this will notify the taxman that you have begun working and will enable you to be given a tax code. Tax codes explain what your allowances for the year are - L is the basic allowance - and therefore at what point you start paying tax.
It is the individual's responsibility to notify the taxman that they are earning money and to pay tax accordingly. The Revenue and Customs will prosecute people if it discovers they have deliberately concealed details of their employment or income.
Self-assessment Self-assessment is the tax regime introduced by the Revenue in the mid-1990s - mirroring the systems already in place in the US and Australia. The system shifts the burden of administering tax affairs on to individuals. If you're worried that you may have been paying too much (or too little) tax the P60 tax form you receive at the end of each tax year (each tax year runs from 6 April to 5 April) will set out how much money you earned and what tax you paid. If you think the figures are wrong, contact your local Inland Revenue tax office for help.
Taxable income It is not a defence to say that you did not know a particular form of income gave rise to a tax liability. Most forms of revenue are covered by income tax, including all financial income from employment (freelance, self-employment etc.), share handouts or options, income from property such as rent, interest and other savings.
Income tax explained
There are many different ways where tax is applied: * Tax is how the government raises money to spend on public services, such as education, health and the social security system. * Tax is levied on many goods and services in the shape of Value Added Tax (VAT); we pay income tax on the money we earn. * Tax can also be levied on a range of transactions, such as inheritance and profit made on the sale of homes or antiquities.
The Tax system is very complicated, that's why people employ tax experts to try and find ways round it, but everyone is different with different a circumstance which is why there is such a variation on tax codes and legislations. You have to earn a certain amount before you qualify for income tax and if you are self employed you can claim back quite a bit of VAT.
People in full-time employment pay tax through the 'Pay as You Earn' (PAYE) system. The money owed to the taxman is deducted at source, so when you get your pay slip it will record how much tax has already been taken out. The pay slip will also detail how much National Insurance you have paid. National Insurance Contributions are used to fund parts of the welfare state, including pensions and the NHS. When you first start work, you have to fill in a P46 tax form - this will notify the revenue that you have begun working and will enable you to be given a tax code. From then on, your employer will send you a P45, which you will pass on to your next employer to inform them of your tax code and for them to fill in and send over to the revenue. The Revenue and Customs will prosecute people if it discovers they have deliberately concealed details of their employment or income. Self-assessment If you are worried that you may have been paying too much (or too little) tax the P60 tax form you receive at the end of each tax year (each tax year runs from 6 April to 5 April) will set out how much money you earned and what tax you paid. If you think the figures are wrong, contact your local Inland Revenue tax office for help. Value Added Tax explained
 How VAT works and who has to pay it. There are three rates of VAT in the UK:
If you run a business or work for yourself you will probably have to register for VAT. The VAT registration level is £61,000 of your taxable turnover, but businesses with turnovers of less than this limit can also register if they wish. There can be advantages to this approach but you should be sure of your responsibilities - becoming VAT registered will involve you needing to keep very good records and to supply VAT returns. Companies over the £61,000 limit which fail to register can be fined. Taxable turnover VAT doesn't apply to services such as insurance, some types of education, training and loans, as these are deemed to be "exempt". There are two types of VAT: Output VAT is charged by a business and is paid by its customers. (in this case it is, VAT on its output supplies). Input VAT is paid by a business to other businesses on the supplies that it receives (in this case it is, VAT on its input supplies). To work out what is owed to Revenue and Customs, deduct your input tax from your output tax. If input tax is greater than output tax, a refund may be owed. Should I register? Even if your taxable turnover is below £61,000, you may be eligible to apply for 'voluntary registration'. You must register for VAT if:
You'll have to keep careful VAT records and accounts, account for output tax on all your taxable supplies, and send in VAT returns regularly. For information, call Revenue and Customs helpline: 0845 010 9000. |
PAYE