A FEWESSENTIALS
Introduction In the UK most income tax which flows into the Exchequer does so by deduction at source. The tax is taken from income before it is paid to the taxpayer and most of this happens by way of Pay as You Earn (PAYE). This collection system will no doubt be familiar to almost everyone who is in employment and also to those who receive pensions. Many of us, including children, the retired and working people will have interest from savings accounts of one sort or another and many also have shares from which income arises in the form of dividends. The savings allowance and dividend allowance may cover this for most people so that this income is taxable at 0%. As the circumstances described above cover the overwhelming majority of individuals, more than 80% of the population will have little or no regular contact with HM Revenue and Customs (HMRC), the organisation that administers and regulates all taxes in the UK. Over 11 million taxpayers have something more than just a regular income taxed under PAYE or income covered by the savings and dividend allowances. They might have income from their own business or receive rent from a property. Alternatively, it may be that their savings or dividend income is significant enough to result in tax being payable at the basic, higher or additional rates of tax. These taxpayers
may be asked to complete a self assessment return each year and have direct contact with HMRC. Practical Tip If you are not asked to complete a tax return, it remains your responsibility to advise HMRC if there is a new source of untaxed income, a capital profit that could lead to a tax liability or you are subject to the high income child benefit charge. Please contact us for further advice if this affects you. The personal allowance In principle, all individuals are entitled to a basic personal allowance before any income tax whatsoever is paid. However, some individuals on high incomes may receive a reduced or even no personal allowance. This is explained further below. The 2021/22 personal allowance is £12,570 and each individual may have taxable income up to £50,270 before they start to pay higher rate tax. See the devolved rates and bands for Scottish taxpayers set out later in this section. Losing the personal allowance Where an individual’s total income exceeds £100,000 the personal allowance is reduced by £1 for every £2 of income in excess of that limit. This means that an individual with an income of £125,140 or more will not be entitled to any personal allowance.
Tax Tip If your adjusted net income is in the £100,000 - £125,140 range the restriction in your personal allowance is the equivalent of a tax cost of 60%. You may want to consider making or increasing certain payments which are tax deductible tominimise this tax cost. Examples include pension contributions (whichmay be subject to restrictions) and charitable donations. Tax rates and allowances The income tax bands and rates for 2021/22 are determined by where you live in the UK and the type of income you have. For most UK residents the following tax rates and bands apply:
Income tax band £
Rate % Dividend rate %
0 - 37,700
20 40 45
7.5
37,701 - 150,000
32.5 38.1
Over 150,000
In addition, some taxpayers may be entitled to the starting rate for savings which taxes £5,000 of interest income at 0%. However, this rate is not available if non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit.
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A Few Essentials
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