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Archive for Personal Tax

Personal Tax

Going to work in the UK? Tax refunds explained

If you're going to the UK to work it's important to know a few UK tax facts to make sure you don't end up losing your money.

When you start work in the UK you need to make sure you give your employer your National Insurance Number so you avoid paying emergency tax – which is much higher than the normal UK tax rates. Your National Insurance Number (NIN) is the unique number allocated to you by the Department for Work and Pension in the UK. It allows you to work, pay taxes and access public services in the UK.

PAYE and Self-employed tax

Once you start working you will need to pay UK tax either as a PAYE employee (if you're a receptionist, nurse or a teacher for example) or as self-employed person, such as a construction subcontractor.

If you are PAYE your employer should deduct tax from your earnings each time you get paid. If you are self-employed you are responsible for your own UK tax return called a self-assessment tax return. As a self-employed in the UK you can claim back work-related expenses such as work tools, transport and dry cleaning your work uniform.

If you've started work already in the UK you will be paying 20% income tax on earnings above £1830 and 40% on any earnings over £36,401.

Claim your UK taxes back

If you do end up on the wrong tax code and overpay tax in the UK, you can claim this money back once you leave the UK or when the tax year ends on April 5th. You have up to six years to claim any overpaid UK tax.

If you want to find out how much you could be owed, you can use a free online tax refund calculator. To claim your UK tax refund, you need to file a tax return. A tax return is the annual submission of tax forms documenting your earnings, taxes paid, deductable expenses and benefits that you send to the HM Revenue & Customs for review. From this information it is determined whether you have overpaid tax and are owed a tax refund.

The amount of your UK tax refund depends on factors like:

  • Your earnings
  • Your expenses
  • Whether you worked the whole tax year
  • If you had more than one job at a time or changed jobs
  • Whether you have children
  • If your circumstances changed, eg: you became self-employed
  • If you took a break during or between employments

When choosing a tax return company, we recommend that you select companies which:

  • Are HM Revenue & Customs registered agents
  • Have an office in the UK
  • Can guarantee that your tax refund will be 100% legal and safe

Cloud Accounting LLP

Cloud Accounting organises tax refunds for non-residents who work in the UK. We specialise in UK tax returns for PAYESelf-Employed and construction workers.

If you haven't set up your National Insurance Number yet, we can also help you with this.

Cloud Accounting customers get average UK tax refunds of £963 for PAYE and £1453 for construction workers' tax refunds.

How much Income Tax and National Insurance you should pay

As an employee, you pay Income Tax and National Insurance on your wages through the PAYE system. It’s important to check you have the right tax code and are paying the right amount.

  • Do you need to pay Income Tax and National Insurance?
  • How much can you earn before you need to pay Income Tax?
  • How much can you earn before you need to pay National Insurance?
  • What’s the difference between gross and net pay?
  • How is tax and National Insurance paid?
  • How PAYE works
  • What is a tax code?
  • What is an emergency tax code?
  • Tips and bonuses
  • Benefits in kind

Do you need to pay Income Tax and National Insurance?

You can earn a certain amount of income each year, called your Personal Allowance, before you need to pay any Income Tax.?

Got a question?

Our advisers will point you in the right direction.

Start a webchat online or call us on 0800 138 1677.

In general, not everyone may get the same Personal Allowance of £12,500 for the tax year 2019/20. A tax year runs from the 6th April to the 5th April.

The personal allowance is a fixed amount set against your gross income (your income before tax or any other deductions are taken) that allows you to receive that much income free of tax in a tax year.?

Received a loan from your employer?

This could be seen as tax avoidance and subject to a loan charge. HMRC have asked people who have been part of disguised remuneration schemes to come forward and provide information.

Further support is available on a dedicated HMRC helpline on 0300 0534 226.

However, you might get a smaller personal allowance if your income is over £100,000 or if you owe tax from a previous tax year. You might also get a larger Personal Allowance if you have overpaid tax from a previous tax year.

The Personal Allowance will also be set at £12,500 for 2020/21 and then indexed with the Consumer Price Index (CPI) from then onwards.Find out more about How Income Tax, National Insurance and the Personal Allowance work

How much can you earn before you need to pay Income Tax?

In the UK, the tax system is based on marginal tax rates. That means it’s worked out as a percentage of income you earn inside certain thresholds – you don’t pay the same amount of tax on everything you earn.

As an employee:

  • you pay 0% on earnings up to £12,500* for 2019-20
  • then you pay 20% on anything you earn between £12,501 and £50,000
  • you’ll pay 40% Income Tax on earnings between £50,001 to £150,000
  • if you earn £150,001 and over you pay 45% tax.

*This assumes you have the standard Personal Allowance of £12,500 which is the amount you can earn before paying tax. Your Personal Allowance might be higher, for example if you’ve claimed certain allowances or if you’ve paid too much tax. It could also be lower for example, if you earn over £100,000, the standard Personal Allowance of £12,500 is reduced by £1 for every £2 of income.

For example, if you earn £52,000 a year, you pay:

  • nothing on the first £12,500
  • 20% (£7,500.00) on the next £37,500
  • 40% (£800) on the next £2,000.

You can use GOV.uk’s tool to estimate how much Income Tax and National Insurance you should pay for the current tax year. It can help work out your take-home pay if you don’t have any other deductions, for example pension contributions or student loans.

If you’re self-employed, the self-employed ready reckoner tool can help you budget for your tax bill.

From 6 April 2019 income tax rates will be set by the Welsh Government. These are currently the same as for England and Northern Ireland for the 2019/20 tax year.If you live in Scotland, Income Tax rates are different. Find out more on our Scotland Income Tax and National Insurance page.

How much can you earn before you need to pay National Insurance?

National insurance contributions (NICs) are taken from your earned income and essentially help to build your entitlement to certain state benefits, such as the State Pension and Maternity Allowance.

If you’re an employee, you’ll need to pay Class 1 NICs on your earnings. In addition, your employer will be required to make a secondary contribution of 13.8% of earnings above £166 a week. There is no upper limit on employer’s National Insurance (NI) payments.

As an employee:

  • you pay National Insurance contributions if you earn more than £166 a week
  • you pay 12% of your earnings above this limit and up to £962 a week (for 2019-20)
  • the rate drops to 2% of your earnings over £962 a week.

For example, if you earn £1,000 a week, you pay:

  • nothing on the first £166
  • 12% (£95.52) on the next £796
  • 2% (£0.76) on the next £38.

If you live in Scotland, Income Tax rates are different. Find out more on our Scotland Income Tax and National Insurance page.

What’s the difference between gross and net pay?

Gross pay is the income you receive before any taxes and deductions have been taken out. Your annual gross pay is what’s often referred to as your annual salary.

Net pay is what’s left over after deductions like Income tax and National Insurance have been taken off. It’s what’s often referred to as your take home pay.

You can see what your gross pay was and how much has been taken off (if anything) on your payslip.

How is tax and National Insurance paid?

If your income is more than your Personal Allowance in a year, you have to pay tax.

In general, your Personal Allowance is spread evenly across your pay packets for the year and your employer will take out tax before giving you your pay.

They know how much to take out through a system called PAYE (Pay As You Earn). If it turns out at the end of the year you have paid too much tax, you can get a refund; too little and you will have to pay extra.

Your employer will also make National Insurance deductions from your pay.

This is worked out on a weekly or monthly basis, or however frequently you get paid. Unless there has been a mistake, you cannot get back any of the National Insurance you pay, even if your earnings fall later in the year.

How PAYE works

When you start work, you’ll either need to hand in a P45 form from your last job, or complete HMRC’s new starter checklist, which you get from your employer.

These forms both tell HM Revenue & Customs (HMRC) you’ve started work and will be used to create a tax code.

Your tax code then tells your employer how much tax to take off your pay. The P46 form is no longer used.

PAYE might be used to collect tax not just on your earnings from this job but also on other income you have.

What is a tax code?

The amount of tax you pay depends on:

  • how much income you have
  • how much tax you’ve already paid in the year
  • your Personal Allowance.

Different people have different tax codes, depending on their circumstances.

Every year, HMRC sends out a Coding Notice telling you what your tax code is and how much tax you’ve paid.

You can also find your tax code on your payslip. It’s usually made up of a few numbers and a letter.

How is my tax code worked out?

Your tax code is normally the amount you can earn without paying tax, divided by 10, with a letter added.

For example:

Tax code: 1250L

1250 becomes £12,500 earned before tax.

My tax code starts with BR

You are not getting your tax-free basic personal allowance which means all your income is being taxed at the basic rate of 20%.

This can occur if your employer doesn’t have all the information it needs to work out your tax code.

It doesn’t always mean you’re paying the wrong amount of tax. For example, you may have two jobs and HRMC has allocated your personal allowance against one of these.

My tax code has no number, or starts with D followed by a number

This is usually because you have more than one source of income.

Your Personal Allowance is used up on your main income source, and you pay tax on everything you earn from your second income source.

For example, you might work a main job during the day and do shifts in a pub or work in a factory in the evenings.

If you earn more than £12,500 a year in your main job, your second job will be taxed at the basic rate. This can also apply to pensions or money paid out by investments (dividends).

My tax code starts with K

This means you have tax from the past you still need to pay, or you get money or benefits that can’t be taxed before you receive it, like a State Pension or company car.

From this, your employer can work out how much should be paid towards what you owe.

The amount you pay will never be more than half the amount you’ve earned or received during the pay period (whether that’s monthly, weekly or another period).

What is an emergency tax code?

Sometimes your tax code isn’t right for your circumstances and you might be given an emergency code.

An emergency tax code assumes that you’re only entitled to the basic personal allowance. It’ll mean you’ll pay tax on all your income above the basic personal allowance (£12,500 for 2019-20).

It won’t take into account any allowances or reductions and reliefs you might be entitled to.

This could mean you pay more tax than you should be for a short period of time.

For 2019-20, the emergency tax codes are:

  • 1250L W1
  • 1250L M1
  • 1250L X.

You may be put on an emergency tax code if you’ve started a new job, started working for an employer after being self-employed or are getting company benefits or the State Pension.

If your tax code is one of these, HMRC will automatically update it, but it might mean that for one or two months your pay won’t be the same, so be careful with your budgeting.

How do I check my tax code?

To make sure you’re on the right tax code, check your code matches the Personal Allowance you should be getting.You can check your Income Tax for the current year by using the GOV.UK service.

What do I do if I think my tax code is wrong?

If you think your tax code is wrong, or if you’re in any doubt, contact HMRC.

It’s important you give HMRC all the information they ask for so you don’t end up on the wrong tax code and pay too much or too little tax.Contact HMRC to sort out a tax problem.

If you think you’ve paid too much tax

It’s worth checking how much tax you’ve paid on your wages.If you think you’ve overpaid tax, you can check if you’re due a refund on the GOV.UK website or use the HMRC online tax checker.

Depending on your circumstances, you might be able to ask for a refund using a form, or you might need to contact HMRC directly.Contact HMRC to ask for a tax rebate.

If you think you haven’t paid enough tax

If you think you’ve underpaid tax, then you might have to complete a tax return.

If this is the case, normal self-assessment time limits apply.

To pay an amount up to £3,000 through an adjustment to your tax code for the following year, you should file a return by 31 December following the end of tax year.

Otherwise, tax still due for the last tax year must be paid by 31 January following the end of the tax year in which the income arose.

If you think you haven’t paid enough tax, contact HMRC.

You might be asked to complete a tax return. Be aware if you don’t do this, you will normally have to pay penalties and interest once the underpayment does come to light.Contact HMRC to sort out a tax underpayment.

Tips and bonuses

If you get money through your job that’s not part of your usual wages, like an annual bonus or tips from customers, you’ll have to pay tax on it, and usually National Insurance too.

  • Your annual bonus, if you get one, is treated as if it’s part of your normal wages. You’ll pay tax and National Insurance on it through PAYE, in the usual way.
  • If you get cash tips direct from customers or through a ‘tronc’ system (where tips are pooled and shared between staff members of the pool), you also need to pay tax on them, but not National Insurance, provided the amount you get in tips does not involve your employer. It’s your responsibility to tell HMRC about these tips. They will then give you a new tax code estimating how much you get in tips each pay period, and taxes you on that amount. Find out more about troncs from HMRC (PDF)opens in new window.
  • If a customer gives you a tip via their bank card when paying for a meal or service, and your employer decides whether to share it with you, they are responsible for sorting out the tax and National Insurance. If the employer passes such payments to a tronc, then the rules above apply and no National Insurance is due.
  • A service charge is not the same thing as a tip, because the customer doesn’t choose to pay it. A tip is a payment that’s given freely.

Benefits in kind

Sometimes your employer will offer benefits like a company car or health insurance as part of your remuneration package.

These are known as ‘benefits in kind’.

You might need to pay tax on the value of these benefits.

  • Some benefits are always tax-free, such as employer contributions into a pension scheme for you, or childcare vouchers up to a limit.
  • Some benefits are always taxable. For example, goods that your employer lets you have for free or below cost price.
  • For some benefits it depends. For example, season-ticket loans are taxable if the value of all employer loans you get is more than £10,000 for the year.

How Tax is calculated

Income tax

Income tax is a tax on income including:

  • earnings from employment, including benefits in kind such as a company car
  • earnings from self-employment
  • most pensions income, including state, occupational and personal pensions
  • some social security benefits
  • interest on most savings
  • income from shares (dividends)
  • rental income
  • income from a trust

You won't usually have to pay tax on all your income, even if it's all taxable, because you'll be entitled to a certain amount of income tax free every tax year. The tax year runs from 6 April one year to 5 April the following year.

There's no minimum age when you have to start paying income tax. What matters is the amount of your taxable income. If this is below a certain level, no tax is payable.

Check how much income tax you'll pay

You can estimate your income tax for the current tax year on GOV.UK. You can’t use the calculator if you’re repaying a student loan or contributing to a pension through your employer. 

There are other online calculators you can use to estimate your income tax if you’re repaying a student loan or contributing to a pension. They include:

Income tax calculators can only give you an estimate - if you have questions about your income tax, contact HM Revenue and Customs (HMRC).

HM Revenue and Customs Taxes Helpline
Tel: 0300 200 3300 (Monday to Friday from 8.00am to 8.00pm; Saturday from 8.00am to 4.00pm)
Textphone: 0300 200 3319

Calls usually cost up to 40p a minute from mobiles and up to 10p a minute from landlines. It should be free if you have a contract that includes calls to landlines - check with your supplier if you’re not sure.

Income that's not taxable

Some income is not taxable, which means you don't have to pay tax on it - for example, Housing Benefit, Child Benefit and lottery winnings. The government ignores this income when working out how much tax you have to pay.

Paying tax on foreign income

You might need to pay UK income tax on foreign income, for example:

  • wages if you work abroad
  • foreign investments and savings interest
  • rental income on overseas property
  • income from pensions held overseas

Foreign income is anything from outside England, Scotland, Wales and Northern Ireland. The Channel Islands and the Isle of Man are classed as foreign.

Whether you need to pay depends on if you’re classed as resident in the UK for tax. If you’re not a UK resident, you won’t have to pay UK tax on your foreign income. If you’re a UK resident, you’ll normally pay tax on your foreign income. But you may not have to if your permanent home (domicile) is abroad.

Read more about paying tax on foreign income on GOV.UK.

Tax allowances

The amount of income tax you pay depends on how much of your income is above your 'Personal Allowance'. This is the amount of income you don’t have to pay tax on.

Check how much your Personal Allowance is on GOV.UK.

Your Personal Allowance may be bigger if you’re entitled to Marriage Allowance or Blind Person's Allowance. If you earn more than £100,000 a year, your Personal Allowance is smaller.

Read more about Marriage Allowance and Blind Person's Allowance.

If you're an employee or pensioner who pays tax through the Pay As You Earn (PAYE) scheme, your personal allowance will be spread throughout the year. This means every week or month you’ll have a certain amount of tax-free income and pay tax on the rest.

If you’re self-employed or have other taxable income not taxed through PAYE, your personal allowances will be taken into account when your tax bill is calculated. Your tax bill is calculated after you submit your annual tax return or repayment claim.

Tax reliefs

You don’t have to pay income tax on some work-related expenses - for example, if you need to spend money on uniforms or travel for work. This is called ‘tax relief’. 

Your tax relief is applied in the same way as your personal allowances. If you’re employed, your tax relief is spread throughout the year. If you’re self-employed, or you have other taxable income, your tax relief is taken into account when your tax bill is calculated. Your tax bill is calculated after you submit your annual tax return or repayment claim.

Read more about tax relief and find out how to claim on GOV.UK.

Income tax rates

You’ll be taxed a percentage of your earnings if you earn above your personal allowances and tax relief. The rate of income tax you pay depends on how much money you earn.

Check what the income tax rates are on GOV.UK.

Check if you’ve already paid tax on your income

When you're calculating how much income tax you need to pay, you’ll need to work out if you’ve received any income where the tax has already been paid. Your employer should have already deducted tax from the wages or workplace pension payments you get.

When the government calculates your total taxable income, they deduct your personal allowances and tax relief from your ‘gross income’. This is the amount you received before tax. So when you're working out the total tax you need to pay for the year, make sure you take into account if you've already paid tax on your income. 

You might also pay income tax on the interest you earn on your savings before it’s paid to you. This depends on your personal savings allowance. Check what your personal savings allowance is on GOV.UK. 

National Insurance contributions

As well as checking you’re paying the right amount of income tax, you might want to check you’re paying the correct amount of National Insurance contributions. National Insurance contributions are calculated on gross pay - this is your total pay before tax. If you’re employed, the amount of National Insurance you pay depends on the amount you earn and your pension arrangements.

If you’re self-employed, you pay National Insurance contributions at different rates depending on your profits.

Check what your National Insurance contributions should be on GOV.UK. 

Keeping a record of your income

If you have to do a Self Assessment tax return, you must legally keep a record of your income and any expenses you claim against tax. You’ll need these records if HMRC asks you to complete a tax return. 

Read more about what records to keep and how long you should keep them for on GOV.UK.

How you pay income tax

If you’re employed or you get a pension, your tax is deducted from your earnings before you receive it through the Pay As You Earn (PAYE) scheme. This is called ‘deduction at source’. 

If you’re self-employed, your income tax is not deducted at source and you have to do a Self Assessment.

Myths about HMRC’s powers

Myths about HMRC’s powers means it often overreaches during inspections.

HMRC can open documents that are visible but cannot search for them

Common myths businesses have about the extent of HMRC’s powers during an inspection means it is often able to overreach. These myths need to be debunked to avoid HMRC finding evidence that it should not have been allowed to. HMRC uses inspections as means to gather the evidence needed for its investigations.

HMRC will look to push the limits of its powers and inspectors will often use ‘force of personality’ to get what they want. It is therefore important that businesses are aware of the limits on HMRC’s powers; this includes:

1. Myth: HMRC can search for documents during an inspection 
When making an inspection, HMRC can touch and open documents that are visible but cannot actually search for something that is not visible. The broad rule that businesses need to know is “inspect is by eye and search is by hand”.

HMRC also cannot copy documents, remove documents or enter vehicles on the premises.

2. Myth: HMRC can inspect any document it wants
Certain documents cannot be inspected; for example, this includes documents that are older than six years, documents with legal privilege and tax advice documents.

3. Myth: HMRC can enter the premises when making an unannounced visit 
HMRC cannot make a forced entry and entry can be refused. If this happens, then HMRC must withdraw immediately. It is worth bearing in mind that this could be fine if a tribunal rules that entry should have been allowed, although this is unlikely. However, HMRC can make a forced entry when conducting a raid.

4. Myth: HMRC can require a business to add up sales revenues
During an inspection, HMRC can inspect assets on the premises which includes cash. However, HMRC has no power to require a business to ‘cash up’ during an inspection – this means adding up the cash generated during a trading period.

If HMRC decides to visit a business and do an inspection, there are steps management can take to reduce its impact. For example: inviting inspectors into a private room away from staff and documents; check the inspection notice has been signed by an authorized officer; and call their accountant immediately.

HMRC will look to push the envelope where it can so it’s crucial businesses are aware of their rights.

These myths means that businesses could find themselves handing over documents and assets that they didn’t need to do. This can result in problems if HMRC then uses what it finds to launch a full blown investigation.

Businesses should seriously consider our Fee Protection to cover the significant costs of advisor during these lengthy investigations.

HMRC enquiries and fee protection cover

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I have recently started offering and speaking to clients about professional fee protection insurance and have seen a fairly encouraging uptake, but not in all cases!

I recently met with a long standing and respected client and was quite taken aback when he claimed that “if you had done your job properly in the first place, then HMRC would not be making an enquiry”.

Of course even if you are happy that your accounting records and tax affairs are in good order, this does not mean that you will not be selected for an enquiry.

After explaining to my client that HMRC are empowered to look into the tax position of any taxpayer, regardless of whether all returns and payments have been made on time,  I went on to explain that clients may have to justify not only their accounts, but also their personal income and lifestyle in the event of an enquiry.

Discover myths about HMRC inspection powers

It is fairly common knowledge that HMRC are carrying out more enquiries in an attempt to close the tax gap between what they believe is due to them and what they collect. Added to the new, far-reaching powers of inspection it is likely to mean that the number of enquiries will continue to increase and that they will become more in-depth.

Investigations can take considerable time to resolve, typically 19 months (although many take several years). During this time, advisors’ time and therefore fees could rapidly mount; but subject to certain limits and exclusions, would be covered by the fee protection product I am able to offer. 

With the infamous mis-selling of PPI in the past, and an extended warranty being offered with pretty much every consumer purchase we make these days, clients will of course act on personal attitudes to insurance policies and risk.  However, having had first hand experience of what can happen should a client be picked at random for inspection, I am pleased to be able to offer this type of product and hopefully offer peace of mind in the event of an enquiry.

How much can a tax investigation cost my business?

Tax investigations can be incredibly costly, with various elements adding up to create a financial headache for small business owners.

Time

While it might not seem like a financial cost at first, a tax investigation can eat up a large portion of your time which will have a cost implication.

You will often be called upon to provide additional information during the investigation, working alongside accountants and other financial specialists to respond to requests.

If you’re part of a small team of salespeople or a sole trader for example, this could severely hamper your business and your ability to work -  your ability to sell, offer services to customers and, ultimately, make money.

Tax Repayments

A tax investigation is carried out to calculate if  you owe any money to HMRC and how much that is. That repayment can vary depending on the findings of the investigation.

You  should also be aware that any repayments you make could be subject to additional fines – if the errors in your original were found to be deliberately misleading you could be asked to pay a penalty that ranges between 20 and 70% of the extra tax you are required to pay.

Additional costs

You should also factor in the general accountancy bills that might build up through the investigation. In some cases, these additional fees can be significantly more than the amount you’re being asked to pay HMRC, especially in a lengthy investigation where you’re waiting on a final fee from HMRC, all the while utilising an accountant who has on-going fees to be paid.

This is why I am continuing to highlight the benefits of our fee protection service to new and existing clients and offer a package designed to reimburse the cost of specialist financial representation in the event of an enquiry, tailored to cover corporate, partnership, sole trade and personal taxation matters.

CLOUD ACCOUNTING LLP

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