Forgive me for starting off on a down note but I think it’s fair to say that there’s almost nothing interesting about tax. One of the only two certainties in life, tax is about as sexy as a dressing gown – or the lounge wear you’ve been donning for 90% of lockdown.
And yet each year, each month, each purchase – we pay tax.
We pay tax on most goods and services through VAT. We pay tax on some energy-saving products and alcohol and tobacco and fuel. We pay tax on our homes in the form of council tax so that our bins get collected, and through stamp duty when we’re buying a property, and on rental income (unless you’re a live-in landlord and receive less than the rent a room limit of £1000). We get taxed on our insurance (usually smuggled in the price paid to your provider) in the form of Insurance Premium Tax, with higher rates applying for travel insurance, vehicles and things like gas central heating.
We pay income tax, are taxed on our savings (over our saving allowance) and on some grants (like the self-employment income support scheme or coronavirus job retention scheme), and most pensions, and any income from a trust, and of course any capital gains. We’re taxed for inheritances. And we’re taxed in the form of national insurance (we love you NHS). In fact, when you look at a scale, income and national insurance are the largest sources of revenue collected by the government, with the third being VAT and the fourth corporation tax.
Taxes are a key part of our day-to-day living. But for most of us, most of the time, we really think about taxes only when necessary. After all, if you’re working for an employer then you’re taxed on your salary before the money even hits your accounts. And whilst you may occasionally need to ask for a VAT receipt, generally when shopping the tax is hidden in the total bill so you don’t even need to think about it.
There’s no way to write everything possible about tax in one article. To do so would be relentless and probably leave you a little numb between the ears. However, there are a few things that everyone should know about tax – not least what to watch for so you can approach them feeling in control of your money and well-prepared for the paperwork.
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Check your tax code
First things first. Your tax code tells your employer (or pension provider) how much tax you should be paying. It also defines how much pay you can be paid free of tax – tax is taken off the rest. Occasionally, the tax office will therefore write to you explaining how the code was worked out. It’s always worth checking that they have given you the right code, and that you’re receiving the right allowances. If in doubt, query anything that you don’t understand – especially if you’ve changed jobs or salary band. One story that emphasises why this is so important is from earlier this year where a woman received thousands back after she realised that she was being taxed as if she was receiving child benefits. Moral of the story: always check your tax codes.
Claim back that overpaid tax
So, say you look at your tax code and realise you’ve been overpaying tax or that the code is wrong. What then?
Generally, if you’ve not paid the right amount in tax at the end of a year, the HMRC will send you a P800 or a Simple Assessment tax calculation. This letter will detail the income you should have paid tax on – pay, pensions, state benefits, savings interest and employee benefits – and will explain how you can get a refund or pay any tax you owe. You can compare the figures in the letter to your P60 or a bank statement in order to triple check the information. You can find more information about this on the government website here.
Tax on investments
Just like the money that you earn via a salary, investments that earn you money may result in you needing to pay tax. This could take the form of Income Tax, Capital Gains Tax, or Stamp Duty Reserve Tax.
When you invest, you can receive income in two ways: via dividends and via interest payments. Dividends are paid out by some companies to shareholders, whereas if you hold government or corporate bonds you may receive interest payments. If you receive either of these then you may need to pay Income Tax, the amount of which will depend on your tax band and if you’re investing via an ISA.
For dividends, your tax-free allowance is £2000 for the tax year 2021/22, with basic-rate taxpayers paying 7.5% on dividends, higher-rate taxpayers paying 32.5% and additional rate taxpayers 38.1%.
Tax on interest payment is different again, instead being based on your personal savings allowance. For basic rate-payers, this means you have an allowance of £1000, so you won’t pay interest on the first £1000 you earn via interest. However, higher rate taxpayers have an allowance of £500 and additional rate taxpayers have no allowance at all. Tax on any interest above your allowance and based on your tax band means that basic, higher and additional rate taxpayers will pay 20%, 40% or 45% respectively.
Capital Gains Tax
Capital Gains Tax is a tax on the profit made when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value. Or in this case, the selling of an investment that has increased in value. Crucially, it’s only the gain you make that’s taxed, not the amount of money you receive – and as usual, the tax rate you use depends on the total amount of your taxable income.
Capital Gains Tax can become quite complicated, so if you feel overwhelmed or unsure, it’s always useful to speak to an accountant or tax expert. There’s also an extensive article solely on Capital Gains from Crunch that is worth a read.
Stamp Duty Reserve Tax
It’s likely you’re more familiar with Stamp Duty Land Tax, which is the tax when buying or selling a property, but if you purchase UK shares online, you will usually pay a Stamp Duty Reserve Tax (SDRT) of 0.5%. This also applies if you’re buying shares through a stock transfer form if the transaction is over £1000. Online, it is automatically taken at the time of the purchase – a bit like how we pay VAT on our groceries without really thinking about it. Still, it’s worth acknowledging and factoring into any budgeting or planning that you want to do.
Don’t miss out on allowances
When you start digging into taxes, you’ll quickly spot various allowances and reliefs that are worth paying attention to. From the personal tax-free allowance (£12,570 for the tax year 2021/22) to the Capital Gains Allowance (£12,300 for 2021/22) or things like rent-a-room-relief limit and so on. The fact is that in many cases, particularly around investments, you need to be conscious and proactive about making the most of your allowances in order to save money.
Depending on your circumstances, it’s worth doing an audit of your finances to make sure you’re benefiting from all the allowances that you can. This can help reveal ways for you to save money, better plan your financial year, and feel more in control of your money no matter how complex your tax situation. For example, there may be certain times of the year where it’s better to sell or hold onto investments.
“You are allowed a tax-free capital gains allowance. However, if you don’t use this allowance you will lose it. If it makes financial sense to sell some of your investments, then doing so just before the tax year and just after the tax year will reduce your tax bill. Why? Because you get to use two allowances and defer the tax on the second sale. Depending on your level of gains, you may not pay any tax at all,” explains the team at UKTN. “[On the other hand] where your investments have not done well or have fallen in value, (as the case may be for many cryptocurrency or bitcoin investors), selling them before the tax year means that you will crystallise any losses you’ve made. This means they can then be used against any profits from your other investments or carried forward into future years.”
Just like if too much tax has been deducted from your income, if you’ve paid too much tax because you’ve failed to claim an allowance or tax relief, you can usually claim tax back within four years of the end of tax year in question.
A tax return is a form (paper or online) on which you report details of your taxable income and any capital gains if appropriate, as well as claim tax allowances and tax reliefs. Generally, you won’t need to send a return if your only income is from your wages or pension, but you may need to send one on any untaxed income – for example any income from savings, investments, and dividends, or renting out a property. If in doubt, it’s worth checking to find out if you need to fill in a self-assessment tax return. This can be checked online through the government’s overview on who needs to send a tax return.
Tax returns can feel extremely daunting – but preparation makes them far simpler and more manageable. There’s also help available to work out how much you need to pay and you can also speak to an accountant if you need help.
The key thing to know is that if you are sent a tax return for the tax year, you must fill it in by 31 October, or by 31 January if you do it online. The tax must be paid by 31 January each tax year. If you miss the deadline there’s an automatic £100 penalty, plus higher penalties after a further three months.
And finally – check out the Budget and keep an eye on the upcoming ‘tax day’ on March 23rd 2021
Oh yes, the Budget. Usually, there is one Budget per year on the 3rd of March, with an Autumn Statement which shares an update on the government’s plan for the economy around October. Of course, in the last year, we’ve also seen two “mini Budgets” around Covid-19 and the economic recovery – a theme that may continue in the future.
Budgets are important because they’re an expression of the government’s public policy. It lays out how the government plans to earn and spend, reflects their balance sheet, and reveals the current state of the economy. It also generally reflects what’s happening in terms of tax – giving details on any increases, decreases, changes or additional taxes, allowances or reliefs.
In the 2021 Spring Budget, Rishi Sunak, Chancellor of the Exchequer, laid out his three-point plan for Britain’s economy. Outlining several changes, Sunak highlighted several freezes to individuals’ personal allowance threshold hikes as well as a higher tax take from the biggest corporations.
It’s always worth digging deeper into the implications of the Budget too. For example, whilst the freezes might sound like a positive thing to some ears – no increases always sound good, right? – according to Stefanie Tremain, Director at Bick Rothenberg, ‘all taxpayers will feel the pinch when both the basic rate band and the personal allowance are kept at the same level for the next five tax years’ thanks to inflation. A neat summary of all tax changes announced in the Budget can be found here on FT Advisor.
With this in mind, we should also be keeping an eye out for March 23rd’s “tax day”, when the Treasury will publish a number of consultations on future tax policy.
Jesse Norman, financial secretary to the Treasury, told the FT, “The goal of making these announcements separately to the Budget, but still all on a single day, is to give a range of important but less high profile measures greater visibility among, and opportunity for scrutiny by, parliamentary colleagues, tax professionals and other stakeholders.”
Much of the tax day announcements are expected to be about technical administration of the tax system, such as the move to digital. But commentators are also bracing for Sunak to lay the groundwork for a string of possible tax changes. For example, any tax changes to things like Capital Gains (and Entrepreneur’s Relief) might come from these announcements, potentially seeing capital gains align rates more closely to income tax or restricting the range and value of exemptions available.
Tax treatment depends on your individual circumstances and may be subject to change in the future. Please note that the information provided in this article is of a general nature. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from a professional accountant or tax adviser before you take any action regarding your tax situation or refrain from such action.
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