A UK Tax Primer (101); Income Tax, slightly beyond the basics
Although the concept of UK income tax is simple enough, the execution can get a bit involved, especially if you do not fit one of the easy categories or you have “complex” tax affairs.
In the last 101 article on Income Tax, I emphasised that you need to be sure that the tax code assigned to you was correct. For tax to be calculated correctly, you must check it yourself, (or have it checked on your behalf), as HMRC accept no responsibility for errors in coding and limit your ability to get things changed if they have been wrong for some while.
If you are a basic rate taxpayer on PAYE, with little or no investment income, you can be reasonably confident that year on year you will be paying the right amount of tax. If you earn less than £10,600 in the 2015/16 tax year or move into the higher rate or additional rate bands, you can be reasonably confident that you are paying the wrong amount of tax without further work as the system has its blind spots.
For the lower paid, (under £10,600 for 2015/16), you do not need to pay income tax on your savings. Unless you have previously advised your bank and building society, they will be paying your interest net and you will be overpaying tax. At this level of income you should also explore tax credits and see if you qualify, as these are consistently under claimed.
For the higher paid, over £42,385 per year in 2015/16, you will need to claim the tax relief on pension contributions you have made, as these are not recovered automatically. Just looking through the details of the last 10 new clients we took on who did not have a tax accountant or IFA in the past, we see that none of them recovered the tax paid without our prompting!
Everyone, whether lowly or highly paid would be wise to do a back of the envelope tax calculation every year to ensure that they are not over or underpaying tax. If you have multiple incomes, from annuities or part-time jobs, if your tax code is not allocated correctly, then there is considerable scope for errors. Use an online calculator, like http://www.moneysavingexpert.com/tax-calculator/, or http://www.listentotaxman.com to get an estimate of what you should pay.
Remember to include all of your income sources, check your benefits in kind, (company cars being a major problem), get your allowances right and, after all that, if it makes no sense at all, seek professional help. Paying more tax than you need to is just a waste – HMRC does not send you a thank you card!
Contact me with queries
If anyone is looking for general advice, then please write in to the blog and I would be happy to help with anonymous advice posted here. Alternatively, please call us on 0116 253 5600 and ask to speak to an IFA, (Independent Financial Adviser), for a no-obligation discussion.
If you know you need formal advice, have a look at http://bankfield.net/personal/tax-planning/income-tax/, or ask around for a recommendation, it might even be me.