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Cryptocurrency Taxes in the UK: The 2021 Guide

TLDR: Tax on cryptocurrency assets can be complex - whether that's calculating profit or loss on trades, ICO's or airdrops and the effects of hard forks. Instead you may want to talk to an expert - Contact details here:

The HMRC was one of the first countries to introduce tax on cryptocurrency assets. They are also one of the most active tax agencies when it comes to tracking down cryptocurrency tax avoiders. In this guide we will break down everything you need to know about crypto taxes and how they are calculated, in the United Kingdom.

2nd Oct 2020: Coinbase hands over data to the HMRC

As has been widely reported in the news, Coinbase has handed over data on UK customers who transacted more than £5000 worth of cryptocurrency between 2017 and 2019.

Here's the email that was sent out by Coinbase:

The topic has also been discussed on the Bitcoin UK subreddit


If you received one of these letters then here's some things you need to keep in mind:

  1. Coinbase does not have knowledge of your other cryptocurrency exchanges and wallets which means they have also reported any deposits of crypto into this wallet as "purchases" at market price. This can make it look like you transacted more than you actually did.
  2. Do not use the Tax Report from Coinbase to file your taxes unless it is the only exchange you have traded on. Refer to point 1.
  3. If you did not make more than £12,000 (annual capital gains tax exemption limit) then you do not need to file any capital gains. However, note that due to the way capital gains are calculated on crypto, figuring out the gain is NOT as simple as subtracting your fiat investment from what you had left at the end of the last tax year (more on this later).

Let's look at the crypto tax rules in more detail.

The Basics

Individuals that hold crypto as a personal investment will be liable to pay capital gains tax when they dispose of their cryptocurrency. 'Disposal' has been defined by the HMRC as:

  • selling crypto assets for money
  • exchanging crypto assets for a different type of crypto asset
  • using crypto assets to pay for goods or services
  • giving away crypto assets to another person

Naturally, the amount of capital gains will be the difference between the sales proceeds from the disposal and the acquisition cost of the crypto asset i.e. sale price minus buying price.

How much tax do you have to pay on crypto?

This depends on your income tax bracket:

  • If you're a higher or additional rate taxpayer, your capital gains tax rate will be 20%.
  • If, on the other hand, you're a basic rate tax payer, your tax rate will depend on your taxable income and the size of the gain (after any allowances are deducted).

There are also special rules for high frequency traders or businesses as we will see in the next section. If you are not a business you can skip ahead to the Calculating cost-basis section for an overview on how the actual capital gains are calculated.

Cryptocurrency trading as a business

If you are carrying on a business that involves cryptocurrency transactions, then the rules are more complex. You may be liable to pay a number of different taxes like CGT, Income Tax, Corporation Tax, Stamp Duties and even VAT depending on the type of transaction.

Note that the HMRC may decide to treat you as a business even if you are an individual if your level of activity is comparable to a business. So how does the HMRC decide whether you're holding crypto as an investment or whether you qualify as a crypto trader? Here's what the HMRC has to say about it:

Only in exceptional circumstances would HMRC expect individuals to buy and sell crypto assets with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself. If it is considered to be trading then Income Tax will take priority over Capital Gains Tax and will apply to profits (or losses) as it would be considered as a business

In this case, a trade in crypto assets would be similar to trading in shares, securities, etc. This means that crypto traders can refer to the Business Income manual (BIM56800) for more information on the relevant approach.

Calculating your capital gains / cost-basis (example)

A capital gain is the difference between the selling price and the purchase cost of an asset. The selling price is usually readily available but the purchase cost requires some accounting expertise to calculate.

For ex. if you were to make these transactions:

  1. Buy 1 BTC for £500 in 2015
  2. Buy another 2 BTC for £3000 in 2017
  3. Buy 3 more Bitcoins for £8000 in 2019
  4. Sell 1 BTC for £5000 in 2020.

What would be the cost of the 1 BTC that you sold in 2020? Is it the cost of the coin that you bought for £500 in 2015? Is it the cost of one of the Bitcoins that was bought most recently for £8000? Or is it the average cost of all purchased Bitcoins?

The HMRC uses a special share pooling method to calculate this. With the pooling method, you basically end up averaging out the acquisition cost of all the crypto you've purchased to calculate the purchase cost of the coins being sold.

However, that's not all. There are also special same-day and bed-and-breakfasting rules that make this calculation a lot more complex. Check out our article on calculating tax with share pooling for examples and information about how all this works.

These calculations can be very tricky to carry out by hand to calculate capital gains in accordance with the HMRC and Share Pooling rules.

EXAMPLE

Natalie bought 1 BTC for £1,000. 6 months later she bought 0.5 BTC for £2,000. So her total pool of bitcoin is 1.5 and total allowable costs are £3,000.

Let's say Natalie sells 0.5 BTC some years later for £3000. This is what her capital gains calculation would look like:

Consideration £3000

Less allowable costs £3000 x (0.5/1.5) £1000

Gain £2000

Post this sale, Natalie will have a remaining pool of 1 BTC with an allowable cost of £2000.

Be mindful of the Same-day and the Bed-and-breakfasting rules

The rules of Same-Day and 30-Day that apply to shares also apply to cryptocurrency. This is done to prevent wash sales i.e. selling crypto and buying it back in an attempt to realize losses and reduce your tax burden.

Let's understand the same day rule first. If you sell a cryptocurrency and buy another crypto of the same type on the same day, the cost basis for your sale will be the acquisition cost of the crypto you bought on the same day. This will be the case even if the acquisition of the crypto takes place before the sale - as long as they are both on the same day.

The 30-day rule is also quite similar. Any of the crypto you acquire within 30 days of a sale will be used as its cost basis.

These rules are in place to make sure that you don't sell your holdings at the end of the tax year to create losses that you can write off, and then buy them back immediately after.

EXAMPLE

Simon owns 2.5 ETH. He has spent £2000 acquiring this crypto, which is his pooled allowable cost. Let's say Simon sells 1 ETH on 29th August 2018 for £3000, and buys 0.25 ETH on 12th September 2018 for £700. Since this 0.25 ETH has been bought within 30 days of the disposal, it doesn't go into the pool. Here's how Simon's capital gains will be calculated:

Step 1: Calculating gains on the 0.25 ETH

Consideration £3000 x (0.25/1) £750

Less allowable costs £700

Gain £50

Step 2: Calculating gains on the other 0.75 ETH

Consideration £3000 x (0.75/1) £2250

Less allowable costs £2000 x (0.75/2.5) £600

Gain £1650

After this transaction, Simon still has a pool of 1.75ETH which has allowable costs of £1400 remaining.

Common crypto tax scenarios

Buying cryptocurrency (eg. GBP → BTC)

There are no taxes on buying crypto in the UK, or even hodling it for as long as you want. You should still keep records of these transactions so that you can deduct the costs when you eventually sell them.

Selling cryptocurrency (eg. BTC → GBP)

Any sale of cryptocurrency is subject to Capital Gains Tax. Every different cryptocurrency is seen as separate CGT (Capital Gains Tax) asset.

EXAMPLE

John sells 1BTC in November 2017 for £12000. His cost for 1 BTC was £9000. In this case, his total capital gain would be £3000. This would be taxed at the appropriate rate depending on his tax bracket.

Trading one cryptocurrency for another (eg. BTC → ETH)

The HMRC makes it quite clear that exchanging one crypto for another also constitutes a taxable event. This means that you're basically disposing of a CGT asset and acquiring another one. The market value of the crypto that you receive is considered as the sales price for that transaction. If this crypto cannot be valued for some reason (eg. ICO tokens), then you can use the market value of the crypto you sold.

EXAMPLE

Let's say your costs for 0.1 Bitcoins was £500. In November 2017, you exchanged 0.1 Bitcoin for 2 Ether. At this time, the market value of 2 ether was around £800. This basically means that £800 is your sales proceeds and £500 is your cost basis, so the total capital gains would be £300.

Cryptocurrency to Stablecoins (ex. BTC → TUSD or TUSD → BTC)

A stablecoin is simply a class of cryptocurrencies that offers price stability by being backed by a reserve asset, usually a stable fiat currency like USD. As far as the HMRC is concerned, stablecoins like TrueUSD are exactly the same as any other cryptocurrency, and so the tax treatment is the same as for regular crypto to crypto trades.

Paying for goods or services with cryptocurrency

From a tax perspective this is the same as selling crypto and is subject to CGT. It's important to remember that the market value of the crypto that you use to pay for something will be counted as the sales proceeds.

Moving crypto between your own wallets/accounts

While there's no tax on moving crypto between different wallets, it's important to note that you need to keep a track of these movements. If you don't take these movements into account the HMRC might assume they are disposals and tax them.

Tax on Income from Mining

Mining of cryptocurrency can either be considered as a hobby or as a full-fledged business. This will depend on several factors such as:

  • degree of activity
  • organisation
  • risk
  • commerciality

Mining as a hobby

If your mining activity is classified as a hobby, then any income from mining has to be declared separately under the heading of "Miscellaneous Income" on your tax return.

The income in this case will be the fair market value of the crypto at the time you receive it.

Appropriate expenses can be deducted from this income before adding it to the taxable income.

Also keep in mind that when you dispose of this crypto, that will be subject to capital gains tax.

Mining as a business

If mining is classified as a business based on the criteria mentioned above, then the mining income will be added to trading profits and be subject to income tax. Similarly, fees or rewards received in exchange of any mining/staking activity will also be added to taxable income. Appropriate expenses would be deductible, of course.

While disposing of such cryptocurrency, any gain in value from the time of acquisition will be added to the trading profits. You will also have to pay National Insurance Contribution for this transaction.

Tax on staking / lending

This is a grey area since there is no guidance from the HMRC on how to report these.

However, the conservative approach is to declare this in the same way as Mining i.e. pay Income tax on any staking/lending income at your regular income tax rate. If you received the income in a cryptocurrency then you can calculate the fair market value of the coins at the time you received them.

Note that some may want to treat this as savings income instead, the main benefit of this would be that you can claim your personal savings allowance to reduce the taxes further. However, we recommend checking with a tax accountant before doing this.

Tax on Hard Forks

A hard fork refers to a situation when a particular cryptocurrency splits into two, and crypto holders receive crypto from the new fork due to their holdings in the original crypto. In this case, the value of the new crypto is derived from the original crypto that's already held by the individual.

Crypto received from a hard fork, is therefore, not subject to income tax.

However, after the fork, the crypto assets have to go into their own pool. The deductible costs related to the original crypto assets will be split between the two different pools — one for the original asset and one for the newly forked crypto. The HMRC doesn't have any particular guideline for this apportionment. This splitting of costs should be just and reasonable under section 52(4) Taxation of Capital Gains Act 1992. Standard practice is that the cost of the original crypto is apportioned between the old and new crypto assets in line with the market values of both assets on the day after the hard fork.

Tax on Airdrops

An airdrop is a situation when a particular individual is selected to receive crypto, perhaps as part of a marketing or publicity campaign. Income tax will not apply to airdropped crypto provided:

  • They're received without doing anything in exchange
  • They aren't received as part of a trade or business involving crypto

If airdrops are provided in return for a service, they will be part of either miscellaneous income or trading profits (if you are a business). In either case, they will be subject to income tax.

If this airdrop is received by an individual, it will be subject to capital gains tax at the time of disposal. If it has been received by a crypto business or trader, any increase in valuation will be added to trading profits and be subjected to income tax and you will have to pay National Insurance Contribution on this as well.

Tax on cryptocurrency Margin Trading

There is little clarity from the HMRC when it comes to individuals who trade and invest in Futures, CFDs (Contract for Difference) and margin trading as far as cryptocurrency is concerned.

If an individual is treated as a financial trader, then the gains are added to trading profits and income tax is payable. However, when the individual is not a financial trader, it's not very clear whether gains or losses are to be taxed under capital gains tax or added to miscellaneous income and subjected to income tax.

Tax on ICOs / IEOs

ICOs (Initial Coin Offerings) or IEOs (Initial Exchange Offerings) refer to a situation where investors can purchase tokens/coins in a yet-to-be-released cryptocurrency/company. In this case, investors pay for the new token through existing cryptocurrency like Bitcoin or Ethereum.

In other words, this works like a crypto-to-crypto exchange. You will have to pay capital gains tax on the crypto that you exchange for the ICO token. The "sales proceeds" here will be the market value of the existing crypto (not the new token) on the date that the exchange took place. Plus, this same market value will also serve as the cost basis for the new token that you receive from the ICO, which you can use to calculate pooled costs.

How cryptocurrency gifts are taxed

If you give cryptocurrency as a gift to someone other than your spouse or civil partner, you will have to figure out the market value (in pound sterling) of the crypto on the date that it was given away as a gift. This will be considered as sales proceeds for Capital Gains Tax purposes.

Importantly, if income tax has already been charged on the value of the tokens that are gifted, section 37 Taxation of the Capital Gains Tax Act 1992 will apply. This basically means that the "sales proceeds" will be reduced by the amount that has already been subject to income tax, and then be subjected to CGT.

EXAMPLE

Janie is a UK resident who received crypto worth £500 as a gift from her mother. She sold it in May 2018 for £700. The pooled value of her crypto was £500 and her capital gain was £200. Janie's taxable income is £160000 and she falls in the category of additional rate tax payer. As a result her total CGT on the disposal of the crypto would be 20% of £200 or £40.

Tax on Crypto Donations

If an individual donates crypto to charity, they are entitled to Income tax relief on the donated amount. They can also get an exemption from Capital Gains Tax although there are two exceptions:

  • In case the individual sells the crypto assets to the charity at a cost which is more than the acquisition cost, they will have to pay CGT on the difference between the selling price (instead of market price) and the acquisition cost.
  • In case they make a tainted donation — this refers to a situation where an individual makes arrangements with a charity to get some form of kickback/financial advantage.

Tax on wages received in Bitcoins

Any crypto received as employment income is considered money's worth. If you receive all or part of your salary/freelance income in cryptocurrency instead of fiat currency, you will have to pay income tax and National Insurance contributions based on the value of the crypto on the date of receipt.

The precise rules are different depending on whether the crypto assets you receive are Readily Convertible Assets (RCAs) or not. Any disposal of such crypto assets (that are received as employment income) is subject to Capital Gains Tax.

EXAMPLE

Greg is a freelance web developer who received a payment from a client in the form of 0.1 BTC in July 2017. The value of the 0.1 BTC was £500 on the date that it was credited to his bank account. This means he needs to add £500 to his taxable income while calculating his tax liability for the year.

Pension contributions with Bitcoin

The HMRC doesn't look at crypto assets as money so they cannot be used to make a tax deductible contributions to any registered pension scheme.

How to Minimize Your Tax Burden

Make use of your annual CGT allowance

Capital gains tax only has to be paid if you made over £12,000 (increased to £12,300 for tax year 2020-2021) in profits (source).

This means you can calculate your capital gains and if the result is negative or below the limit then you do not have to pay any capital gains tax!

Offset your crypto losses

If an individual sells cryptocurrency for less than the cost basis, then they will have a capital loss. This loss can be offset against the overall gains.

However, the loss needs to be reported to the HMRC first. Losses can be reported either by letter or on the Tax Return itself. Capital losses can be claimed within 4 years from the end of the tax year in which they occured.

Also, if the disposal of the crypto is made to a "connected person", then the actual sales price is not considered as the sales proceeds, the market value of the crypto on the date of the transaction is.

Claiming losses for defunct coins / crapcoins

With crypto assets that can fluctuate wildly, it's not rare for someone to own cryptocurrency that has become worthless or of 'negligible value'. In this case, the owner of the asset can file a negligible value claim.

This claim treats the crypto assets as if they have been disposed of and re-acquired at the amount stated in the claim. This allows you to write off a major loss for an asset that is now illiquid.

The claim only needs to contain the name of the asset which is worthless now, the amount at which the asset should be treated as disposed of (usually £0) as well as the date of the deemed disposal. This claim results in a loss that can be offset against gains once it's reported to the HMRC. The loss and negligible value claim can be made to the HMRC at the same time.

Leveraging Deductible Costs

There are certain allowable costs that can be deducted from the sales proceeds when calculating the gain or loss. Here they are:

  • The consideration (in pound sterling) that was originally paid to acquire the crypto asset
  • The transaction fees that's paid before the transaction is added to a blockchain
  • Any exchange fees related to trades
  • Professional costs for drawing up the contract for both acquisition and disposal of the asset
  • Costs related to advertising for a purchaser or vendor
  • Costs of making an apportionment or valuation in order to calculate the gains or losses

The following costs are not allowable for CGT purposes:

  • Any costs that have already been deducted against profits for Income tax
  • Costs of mining activities (such as electricity and equipment). That's because in case of individuals mining crypto as a hobby these costs are not wholly attributable to mining crypto. However, some of these costs can be deducted against profits for Income Tax or when the mining equipment is disposed of.

In case mining is being done as part of a business, the crypto assets will form part of trading stock. If they are transferred out of trading stock, the business will be treated as if they bought the crypto at the value that's being used in the trading accounts. This value can then be used as an allowable cost when they decide to dispose of the crypto assets.

Dealing With Loss and Fraud

Losing a private key

If a crypto owner misplaces their private key, the crypto assets are still owned by them and exist in the distributed ledger. That's why the HMRC does not treat this as a disposal from a CGT perspective.

However, in case there is no way of recovering the private key and accessing the crypto assets, the individual can make a negligible value claim so that they can crystallize the loss.

Being a victim of fraud

If your cryptocurrency is stolen/hacked, the HMRC does not consider this a disposal. That's because the individual still owns the assets and has a right to recover them. As a result, no loss can be claimed. However, in case someone pays for crypto assets but doesn't end up receiving any, they can claim a capital loss.

Similarly, an individual who pays for and receives crypto assets that turn out to be worthless, can file a negligible value claim to the HMRC and offset losses.

Which tax forms do you report crypto on?

Capital gains are reported on the Capital gains summary form (SA100 Tax Return).

Capital gains summary

WHO NEEDS TO FILE THIS?

Anyone who has capital gains or losses during the tax year. You don't need to file it if your profits are less than the annual CGT allowance (£12,000 in 2019).

WHAT INFORMATION IS NEEDED?

This form requires you to enter the number of disposals, profits and losses from your crypto trades. You also use it to declare any other capital gains ex. from the sale of a residential property.

What if I don't file my crypto taxes?

The HMRC is quite active in ensuring cryptocurrency traders pay their taxes. They regularly ask major exchanges like Coinbase for information on their UK based customers. This is usually followed up by notices to identified crypto traders who misreported their capital gains.

Traders receive email from Coinbase about HMRC's request

With the cryptocurrency and Defi markets growing at such incredible rates the HMRC is unlikely to stop its pursuit so it's best to be proactive and report/pay your crypto taxes in time to avoid late penalties and prosecution.

FAQ

When is the filing deadline?

The tax year in the United Kingdom starts from 6th April and goes up to 5th April the next year.

If, for instance, you're paying taxes for the year 2018-19, you would have to file your online tax returns by 31st January 2020. You would also be expected to pay your taxes in full by this date. If you're filing paper returns, then the deadline would be 31st October, 2019.

What kind of transaction records does the HMRC ask for?

As far as record keeping is concerned, the HMRC correctly states that many exchanges do not keep detailed information about crypto transactions and the onus of maintaining these transactions accurately rests with the taxpayer. These details include:

  • the type of crypto asset
  • date of the transaction
  • whether the crypto assets were bought or sold
  • the number of units involved
  • value of the transaction in pound sterling
  • cumulative total of the investment units held
  • bank statements and wallet addresses, as these might be needed for an enquiry or review

You should ensure you download reports regularly from your exchanges as they can lose your data or just delete it permanently after a certain period of data.

Tax Refund claims for home workers’ office equipment – how do you make a claim and what is it?

Want a refund without the hassle? Get in touch with us if you want us to complete the form for you.

WHATSAPP US IF YOU HAVE ANY QUESTIONS

alternatively, I'll create a video demo showing you how to do this later - watch this space

  • Millions who are now working from home are entitled to claim for certain items
  • This could include study chairs, desks and stationery, printer paper and ink
  • These claims are made through P87 forms which are given to the taxman 

HMRC has been 'inundated' with claims from employees working from home during lockdown who are taking advantage of little known tax relief for office desks, chairs and printer ink.

Millions of people who are now working remotely due to the coronavirus pandemic are entitled to claim tax relief for items they say are 'wholly, exclusively and necessarily' to successfully do their job.

This could include study chairs, desks and stationery, printer paper and ink.  

Online furniture store Wayfair has noted a 200 per cent increase in searches for home office items in the UK in the past month, with desks, bookcases and office chairs becoming best-selling items

These claims which are made through P87 forms given to the taxman, were not commonly used before the pandemic and were only accessible if an employer agreed an employee was required to work from home and not just because they wanted to.   

But now the lockdown has opened the floodgates to claims, which could be worth hundreds of pounds of tax relief being paid back to employees. 

The amount of tax relief for office equipment will be the same as the level of income tax rate you earn at work. 

How to make a claim

If you are self-employed, you should claim for your working expenses as normal through a self-assessment tax return. 

If you're employed — and you have expenses of up to £2,500 per year — you should submit a P87 form. 

For bigger sums, you will also have to submit a tax return. 

A P87 form can be downloaded on the Government Gateway website and sent to HMRC online or by post.  

HMRC is likely to be very busy with claims so workers could claim online to save time. 

You have four years from the end of the tax year to make a claim. 

If it is successful, HMRC will pay you by cheque or adjust your tax code. You will not have to submit receipts with the P87, but keep them as HMRC may want to check them.

For example, a basic-rate taxpayer who claims £1,000 of allowable expenses will receive £200 - which is 20 per cent of what they spend on equipment.

If you are a higher vrate taxpayer (40%) and you buy £2500 in allowable working from home items - you could cliam a tax refund of £1000

Employers should watch out for people buying items for personal use as HMRC says items must be for employment duties - which is difficult to prove.   

Therefore purchases like clothing, broadband or a laptop won't be accepted by HMRC as they are used in every day life as well as work.   

HMRC told The Times it had no precise figures on the number of P87 claims it had received, but agreed that the volume had increased significantly.

Want a refund without the hassle? Get in touch with us if you want us to complete the form for you.

WHATSAPP US IF YOU HAVE ANY QUESTIONS

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.

RG & Co

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Name: RG & Co Chartered Accountants
Email address: richard@cloudaccountingni.com
Phone: +447868663538