Individual Income Tax in the UK

Every individual must pay tax on their income made in the UK regardless of their immigration status. The tax year runs from 6th April from one year to 5th April the following year, hence the tax year 2020/2021 runs from 6 April 2020 to 5 April 2021.

Individuals pay tax on income like:

  • Employment income
  • Self-employment income
  • Pension income
  • Rental income
  • Non-monetary benefits
  • Trust income
  • Interest income
  • Dividend income

The ways in which individuals can pay income tax are through:


The government has placed some tax relief and allowances so that individuals can balance their income, expenses and tax payment.

Tax rates and bands for taxable income may vary from year to year.

For the tax year 2020/2021, the tax rates and bands are as follows:

Taxable income Bands (£)

Rates of Tax

0 – 12,500

0% (Personal Allowance)

12,501 – 50,000

20% (Basic Rate)

50,001 – 150,000

40 % (Higher Rate )

Above 150,001

45 % (Additional Rate )

Every individual must pay tax on their income made in the UK

Taxable Income:

Taxable income is the sum of all income which is liable for income tax. For example, if individual A has income from the following sources, then his taxable income will be £22,000.

  • Employment income – £15,000
  • Self-employment income – £5,000
  • Rent income – £2,000

Personal Allowance:

Personal Allowance is tax free income on which individuals don’t have to pay income tax. For example, if individual B has an income of £12,400 for the tax year 2020/2021 then his taxable income for this tax year is less than his personal allowance (£12,500), therefore he does not need to pay income tax.


Basic Rate:

Individuals pay 20% income tax on taxable income up to £50,000.

For example, if individual C has taxable income of £45,000 then he pays income tax as follows:

£12,500 – 0%

£32,500 -20% (£45,000 – £12,500)


Higher Rate:

Individuals pay 40% income tax on taxable income above £50,001 and up to £150,000.

For example, if individual D has taxable income of £100,000 then he pays income tax as follows:

£12,500 – 0%

£37,500 (£50,000-£12,500) – 20%

£50,000 (£100,000-£50,000) – 40%

Does everyone get the same amount of personal allowance?

The standard personal allowance is £12,500 which is the income for which you do not have to pay tax.

This can be higher if you claim marriage allowance or blind person’s allowance. It might also be smaller if your taxable income is over £100,000, or might be none if your taxable income is above £125,000/annum.

Personal allowance will reduce by £1 of every £2 you earn above £100,000. For example:

If your taxable income is £110,000, then the reduction in allowance will be £ (110,000-100,000)/2. So, your revised personal allowance becomes £7,500 (12,500-5000).

If your taxable income is £125,000, then reduction in allowance will be £ (125,000-100,000)/2. So, your revised personal allowance becomes £0 (12,500-12,500)

Hence, anyone who earns over £125,000 doesn’t get any personal allowance. They have to pay income tax on everything they earn.

Is there any way to reduce taxable income to save personal allowance?

Yes, you do so by doing: 

  • Gift aid donations
  • Pension contribution

You can find all the detail information on gov.uk.


What is marriage allowance?

If you are married or in a civil relationship and your partner’s earning is below £12,500 or they are unemployed, and you are a basic rate taxpayer that has income that is below £50,000, then the lower earner can transfer 10% of their personal allowance to their husband, wife or civil partner.

For example, if a husband has an income of £10,000 and his wife has £25,000, the husband can transfer his 10% allowance to his wife. By doing this they can save up to £250 per annum.


Different types of income and related tax free allowance.            

Some income has additional tax-free allowances and different rates of tax. Interest income, dividend income and trading income have some additional tax-free allowance and dividend income has a different rate of tax.

Income which is not categorised under interest and dividend income are called non-saving income. Interest incomes are also called saving income.

Self-assessment tax return

Self-assessment tax return is a system HMRC uses to collect income tax

 Who needs to file a self-assessment tax return?

  • Self-employed as a sole trader and earn more than £1,000. Because up to £1,000 is tax free income for a sole trader.
  • A partner in a partnership business.
  • Has rent income above £1,000.
  • Has tips and commissions income.
  • Income from saving, investments and dividends.
  • Foreign income.
 

All income needs to be disclosed in a self-assessment tax return and any changes of circumstances have to be reported.

Deadlines for self-assessment tax return.

 

Self-assessment

Deadline

Registration

5 October following tax year

Paper tax return

31 October following tax year

Online tax return

31 January following tax year

Tax payment

31 January following tax year

What happens if you don’t meet the deadlines for tax return?

You will get a penalty if you miss the deadlines for submitting your tax return or paying your tax bill. If your tax return is up to 3 months late you will need to pay a late penalty fee of £100. Even if you miss it by only one day you will automatically get charged a penalty fee of £100. You will have to pay a larger fee if it is more than three months late. You will also be charged interest on late payments.

 

Can you appeal the penalty decision?

Yes, you can appeal against penalty if you have a reasonable excuse.

 

What happens if you don’t pay what you owe to HMRC and what excuses can’t be accepted as reasonable excuses?

If you do not pay your tax bill on time and cannot make an alternative arrangement to pay, HMRC can take ‘enforcement action’ to recover any tax you owe. You can usually avoid enforcement action by contacting HMRC as soon as you know you’ve missed a tax payment or cannot pay on time.

They may agree to let you pay what you owe in instalments or give you more time to pay. Otherwise, there are a number of enforcement actions HMRC can take to get the tax you owe. They can:

 

Tax computation can be complex due to the circumstances of an individual and you may need help. For further assistance or enquires, call us on +44 (0)1213681277 or alternatively email info@taxcare.org.uk.