Income Tax
This is probably the tax we’re most familiar with, as it’s the tax paid by individuals. If you’re an employee then you’ll see this deducted off your wage slip each pay period, and if you’re self employed then you pay this to HMRC as a percentage of your net profits. You will also pay income tax if you’re a landlord with a property that you let out, or if you have income from a pension.
Self Employed
Because HMRC don’t know how much you’re going to earn, you have to file a tax return and then pay tax on your net profits (basically your turnover less any allowable expenses). You are taxed on your profits within a “tax year”, i.e. 06 April one year until 05 April the following year. Any tax due then needs to be paid by the following 31 January. But beware! If your tax bill exceeds £1,000 you will also need to make “payments on account” towards the following tax year! These are split into two instalments – one due 31 January and one due 31 July.
So if this is your first year of being self employed, then you need to be aware that your first tax bill is basically doubled – the amount of tax you actually owe, plus the same again in advance for the following year.
Once you’ve made these payments, things get a bit easier, but this first year catches a lot of people out.
There is an option to reduce these payments on account (even to NIL if necessary) but you need to exercise caution when doing this, as you could end up having to pay interest if you reduce them by too much.
It can be a bit complicated to get your head around, so here’s a video showing a worked example which hopefully makes more sense!
National Insurance
This is basically another form of income tax – albeit under a different name. The way this is charged has changed massively over recent years, and for most people it’s just bundled in with the tax you pay – either through PAYE or via your tax return.
Tax Rates
Everyone in the UK has a personal allowance (currently £12,570) that they can earn each tax year without paying any tax. Income over and above this is taxed as follows (correct as at 2023/24 tax year):
Basic rate – next £37,700 (taking you up to a total of £50,270) is charged at 20%
Higher rate – between £50,271 and £125,000 is charged at 40%
Additional rate – anything above £125,001 is subject to tax at 45%
As an additional complication, if you earn over £100,000 then you start to lose your personal allowance at a rate of £1 for every £2 earned! So once you earn £125,140 you have no personal allowance left!
Contact Abacus Accountancy
As you can see, tax is very complicated, but thankfully at Abacus Accountancy we love it!
One of our favourite things in the world is helping our clients structure their tax affairs in the most effective way possible, so why don’t you get in touch and see how much we can save you?