November, 2010

Savings Interest – 5 Things You Should Know About Savings Tax

Do you pay tax on your savings?

If you are a basic rate taxpayer, the tax on your savings interest should be deducted at source.  However, if you are a higher rate taxpayer, you may have a further tax liability.

Here are five things that you should know about paying tax on your savings.

Four rates of tax might be payable

Any income that you receive from savings interest is added to your other income and taxed after your ‘tax-free allowances’ have been taken into account.  In the tax year 2010/11 the rules are:

  • taxable savings income that falls within the £2,440 starting rate for savings Income Tax band is taxed at 10 per cent (assuming the rate band has not been used up by other income, as savings income is taxed last)
  • taxable savings income that rises above the £2,440 starting rate for savings Income Tax band, but falls within the £37,400 basic rate band, is taxed at 20 per cent
  • taxable savings income that rises above the £37,400 Income Tax band, but falls within the £150,000 higher rate band, is taxed at 40 per cent
  • taxable savings income that rises above the £150,000 Income Tax band, is taxed at 50 per cent

Basic tax is normally deducted at source

Savings income normally has 20 per cent tax deducted at source.  Your savings account statement will normally confirm this with the entry ‘net interest’.

If the entry shows only ‘gross interest’ then no tax has been deducted.

How to ask for your interest to be paid tax free

If you are a non-taxpayer, you can request that your savings interest is paid tax-free.  To do this you must complete a form ‘R85 – Getting your interest without tax taken off’.  If the tax had always been deducted, you will be able to claim it back.

Paying additional tax on interest if you’re a higher rate taxpayer

If you are a higher rate taxpayer you have to let your Tax Office know what savings interest you have received in order that they can collect the additional tax that is due.  You do this by:

  • Declaring your savings interest on your tax return if you self-assess
  • Paying the tax through PAYE based on the most recent information HMRC has
  • Completing a P810 Tax Review (normally issued every three years) and paying the tax through an amended tax code

If you are an additional rate (50 per cent) taxpayer you’ll need to declare your savings on your tax return so that you pay the extra tax due.

Using ISAs to save

Every individual adult in the UK can save up to a certain amount (currently £10,200) tax-free in an Individual Savings Account (ISA).

£5,100 of this can be saved in a traditional bank or building savings (or ‘cash’) ISA whilst an additional £5,100 (or up to the total £10,200) can be invested in a ‘stocks and shares’ ISA.

Interest on savings in a cash ISA are not subject to income tax or capital gains tax.

Inheritance Tax – 4 Gifts That Are Exempt

Is your estate worth more than the Inheritance Tax threshold?

If your estate is worth more than £325,000 (in tax year 2010/11) then you may find you have an Inheritance Tax (IHT) liability.  So, it is important that you make the most of the exemptions during your lifetime that allow you to make gifts to other people and not have to pay tax on them when you die.

Here are four gifts that are exempt from Inheritance Tax.

Annual Exemption

One of the easiest ways to avoid Inheritance Tax is to give away gifts during your lifetime.  You are able to give away gifts up to the value of £3,000 in each tax year and these gifts will be exempt from IHT when you die.

In addition, you can carry forward any unused part of your annual £3,000 allowance to the following tax year.

Gifts to ‘exempt beneficiaries’

It is possible to make gifts to certain people and organisations either during your lifetime or in your will.  You won’t pay any IHT on ‘exempt gifts’ to:

  • A qualifying charity
  • Your wife, husband or civil partner (as long as they have a permanent home in the UK)
  • National institutions such as the National Trust, museums and universities
  • A recognised UK political party

Remember that any gifts you make to a partner that you are not married to (or in a registered civil partnership with) are not exempt.

Small Gifts

You are also able to make small gifts up to the value of £250 to as many people as you like.  You can’t use the ‘small gifts’ exemption in addition to another exemption when giving to the same person, and you can’t give a more valuable gift and claim for the first £250.

Potentially Exempt Transfers

It is possible to gift anything to an individual and not pay any Inheritance Tax as long as you live for seven years after making the gift.  These are called ‘potentially exempt transfers’.

If you make a gift and then die within seven years, and the gift is valued at more than the IHT threshold, you or your estate will have to pay Inheritance Tax.  If you die within seven years and the total value of gifts is lower than the IHT threshold, the value of the gifts is added to the total value of your estate.  Any IHT due will have to be paid.

The rules for ‘potentially exempt transfers’ can be quite complicated.  For example, if you gift your home to your children but keep living there rent-free, the gift may not be ‘potentially exempt’.

If you die between three and seven years after making a gift, any Inheritance Tax due on that gift is reduced on a sliding scale under an exemption known as ‘Taper Relief’.

Registering for self assessment – what is form SA1?

Do you have to file your own UK tax return?

Even if you are not self-employed, there are many reasons why you may have to complete your own tax return under the self assessment system.  Many employees have to complete their own tax return, particularly if you have income from other sources in addition to your main job.

And, if you have to register for self assessment as an employed person, you will be asked to complete a SA1 form.  Our guide explains when you have to complete this form and what it involves.

When do you have to register for self assessment if employed?

There are several reasons why you may have to file your own tax return even if you are employed.  The most common reasons are:

  • You are a company director
  • You have income from savings and investments of £10,000 or more
  • You are a minister of religion
  • You have income from property of over £10,000 or more (or over £2,500 after deducting allowable expenses)
  • You have any foreign income liable to UK tax
  • You earn £100,000 or more
  • You are a trustee or personal representative
  • You have Capital Gains Tax to pay

Registering for self assessment

If you do have to complete your tax return, you have to register for self assessment with HMRC.  To do this, you will have to complete a SA1 form.

There are two ways to register for self assessment.  You can either call the HMRC helpline who will run through the contents of the SA1 form with you over the phone.  Alternatively, you can print a SA1 from the HMRC website, complete it and return it by post.

The SA1 form

The SA1 form is relatively straightforward.  You will need to provide information including:

  • Your personal details (name, address, telephone number)
  • Your National Insurance number – you must have a NI number to register for self assessment
  • Any previous Unique Taxpayer Reference (UTR) if you have used the self assessment system before
  • The reason that you are registering for self assessment, including any dates from which these reasons became applicable

Filing your tax return

Once HMRC have received your SA1 form, they will use you with a Unique Taxpayer Reference (UTR).  You will also receive any tax returns that have to be completed immediately.

Once you are registered, you will automatically receive your tax return every April.  If you have chosen to submit your tax return online, you will receive a document called a ‘Notice to File’ instead.

What Everyone Should Know About Paying Tax When Working Overseas Or For A Non UK Employer

Do you work overseas for a UK employer?  Or do you work for an overseas employer in the UK?

If so, your tax rules and regulations may be more complicated than most people.  In these situations, the tax you will pay depends on where your employer is based, where you work and your residential status in the UK.

Our guide will help you determine what tax you will have to pay, and where.

Resident, ordinarily resident and domiciled

The tax rules are largely dependent on your tax status in the UK.  Most people fall into one of three categories:

  • Resident – You are a ‘resident’ for tax purposes if you are in the UK for more than 183 days in a tax year.  You are also a ‘resident for tax purposes from your date or arrival if you come to live in the UK permanently or you intend to remain for three years or more.  And, you are also treated as a ‘resident’ if you are in the UK for an average of 91 days or more in a tax year (worked out over a maximum of four consecutive tax years)
  • Ordinarily Resident – If you are a ‘resident’ for tax purposes in the UK year after year, you will generally be treated as ‘ordinarily resident’.  If you intend to stay in the UK for more than three years when you arrive, you will normally be treated as ‘ordinarily resident’ from the date of your arrival
  • Domiciled – ‘domicile’ is the most complicated tax status.  Your domicile is normally acquired at birth, but this is a general law concept covering a range of factors

It is possible that more than one of these definitions can apply to you – or even none of them at all.

What happens if you are ‘non resident for tax purposes’?

If you are ‘non resident’ in the UK for tax purposes, you will not pay any UK tax for the work you do overseas.  However, this work may be taxable in another country.

You will have to pay UK tax on any overseas earnings from work you do in the UK.  This will normally be paid via the Pay as You Earn (PAYE) scheme or you may have to complete a self assessment tax return.

What happens if you work entirely outside the UK for a UK employer?

In this situation, if you are ‘resident’ and ‘ordinarily resident’, you will pay tax on all your earnings.  If you are only ‘resident’, you will only pay tax on the earnings that you bring into the UK.

What happens if you work partly in the UK and partly outside the UK for a UK employer?

Here, if you are both ‘resident’ and ‘ordinarily resident’, you will pay tax on all your earnings.  If you are only ‘resident’, you will pay tax on all your earnings for work you do in the UK.  For the work you do overseas, you will only pay tax on the earnings you bring into the UK.

What happens if you work wholly outside the UK for an overseas employer?

Here, if you are ‘resident’ but not ‘domiciled’ you will only pay tax on earnings you bring into the UK.  If you are both ‘resident’ and ‘domiciled you will pay tax on all your earnings if you are ‘ordinarily resident’ but only pay tax on earnings you bring into the UK if you are not ‘ordinarily resident’.

What happens if you work partly in the UK and partly outside the UK for an overseas employer?

In this situation, if you are both ‘resident’ and ‘ordinarily resident’, you will pay UK tax on all your earnings.  If you are just ‘resident’, you will pay tax on all the earnings you receive for work you do in the UK, but only be taxed on earnings you bring into the UK for work you undertake overseas.

Where To Find A Tax Return Form

One of the most common questions that is asked about tax in the UK is ‘where do I find a tax return form’?

The simple answer is that a tax return form will generally automatically be sent to you, if you have to complete one.  And, if not, they are available for download from the Revenue and Customs (HMRC) website.

Our guide explains when you have to complete a tax return form and where you will find one.

Who needs to complete a tax return?

There are a number of reasons why you may have to complete a UK tax return.  You will most commonly have to complete your own tax return if you are self-employed, but there are other situations where you will have to file a tax return.  The most common reasons are:

  • You have income from property of £10,000 or more (or £2,500 or more after deducting tax expenses)
  • You are a minister of religion
  • You have income from savings and investments of £10,000 or more
  • You have Capital Gains Tax to pay
  • You want to claim some specific tax expenses, such as large professional subscriptions or over 65 age related allowances
  • Your total income is £100,000 or more
  • You are not resident in the UK

Registering for self assessment

If you are someone who has to complete a tax return form, you will first need to register with HMRC by completing a form.

  • Self-employed – you need to complete form CWF1 to register as self-employed and tell HMRC about your business. You can do this by telephone or online, and when you register as self-employed, you’ll be registered for Self Assessment at the same time
  • Employed – you need to complete form SA1 to let HMRC know how your circumstances have changed

HMRC will set up tax records for you and issue you with a Unique Taxpayer Reference (UTR).  If any tax returns need completing immediately, you will also receive these.

Where to find a tax return form

Once you have registered for self assessment, HMRC will automatically send you the relevant tax return.  You will ordinarily receive your self assessment tax return in April each year.

If you have elected to complete a paper based tax return, this will be sent to you.  However, if you prefer to file your tax return online, HMRC will instead send you a document called a ‘Notice to File’.

If you haven’t received your tax return or ‘Notice to File’ by the end of April, you should get in touch with your Tax Office.

So, it should not be necessary for you to find a tax return form as you will receive one automatically from the Tax Office.  However, if you need to download a blank one for reference – or, as many people do, to complete a ‘first draft’ before submitting their final return – you can do this through the HMRC website.  Head to and go to the ‘forms’ section to find a series of downloadable tax return forms.

How To Transfer An Inheritance Tax Threshold To A Spouse Or Civil Partner

Inheritance Tax (IHT) has been payable in the UK since 1796.  However, in recent years there have been many changes to the rules surrounding the liability for this tax.  Changes to the law in October 2007 made it possible to transfer any unused inheritance tax threshold from a late civil partner or spouse to the second civil partner or spouse when they die.

Our guide explains how you transfer an unused IHT threshold.

The inheritance tax ‘nil rate band’

Every individual in the UK has an inheritance tax ‘nil rate band’.  This is the amount that your estate can be valued at before you have to pay any IHT.  In the tax year 2010/11 this threshold is £325,000.

Married couples and registered civil partners are also allowed to pass assets from one spouse or civil partner to the other during their lifetime or when they die without having to pay inheritance tax.  HMRC call this ‘spouse or civil partner exemption’ and there is no IHT due, irrespective of the value of the assets that are passed on.

The person receiving the assets must have their permanent home in the UK.

Transferring the nil rate band

If a deceased person leaves their estate to their spouse or civil partner, it has two advantages.  Firstly, no IHT is payable on their death.  Secondly, it also means that they have not used any of their own IHT ‘nil rate band’.

It is then possible to increase the IHT ‘nil rate band’ of the second spouse/civil partner when they die.  This means that their estate can be worth up to £650,000 in tax year 2010/11 before any IHT is due.

To transfer the unused threshold, the executors or personal representatives of the second spouse or civil partner to die, need to send certain forms and supporting documents to HM Revenue & Customs (HMRC). HMRC calls this ‘transferring the nil rate band’ from one partner to another.

When can the ‘nil rate band’ be transferred?

The ‘nil rate band’ can only be transferred on the second death, which must have occurred on or after 9 October 2007.

How to transfer the ‘nil rate band’

The transfer should be applied for by the executors or personal representatives of the deceased person’s estate.

Firstly, you have to work out what portion of the ‘nil rate band’ you can transfer.  If the whole estate was all left to the surviving spouse or civil partner, you can transfer the full percentage when the second spouse or civil partner dies.  However, if the deceased person made non-exempt gifts during their lifetime, the proportion of the ‘nil rate band’ that can be transferred may be lower.

You will then have to submit some documents and supporting information to HMRC, including:

  • A copy of any will
  • A copy of the grant of probate or death certificate

You will then need to complete HMRC form IHT402 to claim the unused ‘nil rate band’ and return this with HMRC form IHT400 and the supporting documentation.

You must make the claim within two years from the end of the month in which the second spouse or civil partner dies.

Four Things You Need To Know About the Annual Capital Gains Tax Allowance

If you have sold or disposed of an asset and made a profit, you may have a liability to Capital Gains Tax (CGT).  However, one of the ways that you can avoid paying Capital Gains Tax is to use your annual CGT allowance.  This means that you can make a certain amount of capital gains every year without having to pay any tax.

Our guide tells you everything you need to know about your annual Capital Gains Tax allowance.

The Capital Gains Tax Allowance

In every tax year, most people with a liability to Capital Gains Tax benefit from an annual tax-free allowance.  This means that you only pay Capital Gains Tax if your overall gains for the tax year (after deducting any losses and applying any reliefs) are above this amount, called the ‘annual exempt amount’.

Nearly everyone who is liable to Capital Gains Tax gets this tax-free allowance.

There is one Annual Exempt Amount for:

  • Most individuals who live in the UK
  • Trustees for disabled people
  • Executors or personal representatives of a deceased person’s estate

In the current tax year (2010/11) the ‘annual exempt amount’ for individuals, personal representatives and trustees for disabled people is £10,100.

Executors and personal representatives

If you are acting as a personal representative (or an executor) for a deceased person’s estate you are entitled to get the full ‘annual exempt amount’ during the administration period.  This is the time it takes to settle the deceased person’s financial affairs and obtain a grant of probate.

In this situation, you are entitled to the ‘annual exempt amount’ for the tax year in which the person died, and for the following two tax years.

Trustees for disabled people

Disabled persons (for the purposes of capital gains tax) are those with mental health problems or who receive the middle/higher rate of Attendance Allowance or Disability Living Allowance (DLA).

If you are acting as a trustee for a disabled person you are entitled to use the full ‘annual exempt amount’.

Other trustees that do not fall into the category above are entitled to a lower Capital Gains Tax allowance.  In the 2010/1 tax year this allowance is £5,050.

People who are ‘non-domiciled’ in the UK

If you are ‘non domiciled’ in the UK – for example if you were born in another country and it is your intention to return there – you are not eligible for the ‘annual exempt amount’.  As HMRC say, however, ‘issues of domicile and tax on foreign gains are complicated. A lot depends on the facts of each case… speak to your Tax Office about your specific circumstances.’

UK tax system ‘costly and inequitable’

A major review of the UK’s tax system has found that the UK tax system is “ripe for reform in ways that could significantly increase people’s welfare and improve the performance of the economy”.

The Mirrlees Review for the Institute of Fiscal Studies has made a number of recommendations to improve Britain’s ailing income tax system.  According to The Guardian, the review ‘argues that a coherent vision for the tax system is needed and lays out recommendations for radical reform.’

Separate tax and National Insurance is too complicated

The review says that a system which includes two separate taxes on earnings – income tax and national insurance (NI) – is unnecessarily complicated.  The Guardian reports that ‘the review recommends the rate structure for income tax should be simplified and merged with NI’.

However, not all experts have welcomed the proposals.  Angela Beech, a partner with chartered accountants Blick Rothenberg, said such a move would introduce, rather than reduce, complications: “Merging income tax and NI will produce a plethora of ridiculously complex rates of tax, from 0%, then 12% rising to 32%, then 42% and 52%.

“It also takes no account of the reduced rate for married women. Merging the two can only result in more confusion and difficulty for those trying to understand and verify that their payslips are correct.”

Richard Murphy, an adviser to the Tax Justice Network and the TUC, agrees.

“Many of the recommendations in this report would have a very negative impact on people on low incomes,” he said. “Merging income tax with NI would be very unfair to the elderly, who don’t pay NI.”

Welfare benefits also too difficult to understand

The Review also found that the UK’s welfare benefits are too difficult and complicated for people to understand, in addition to them imposing very high tax rates on some low earners.  The review recommends that a single integrated benefit should be introduced to replace all or most current benefits.

For example, the zero rate of VAT applied to many goods and services is criticised in the reports as ‘an expensive and highly inefficient’ way of helping people on low incomes.  Stamp duty land tax, and council tax are also criticised by the report.

Nobel laureate Sir James Mirrlees, who chaired the review, said: “Some of the recommended reforms involve tweaks to current policy; others involve radical change and are probably for the longer term. It is undeniable that some of the proposed changes would be politically difficult. But failure to reform imposes enduring costs.”

Non UK Resident?
Claim Your Tax Back

Missed the Tax Return Deadline? Head Online

Have you missed the 31st October deadline for your paper based tax return?

If so, don’t panic.  Whilst 31st October may be the deadline for sending in your paper based tax return, you still have until 31st January to submit a return through the HMRC website.

Our guide explains the online tax return deadlines and the penalties for failing to file your return on time.

Online tax return deadline – 31st January

If you plan to file your tax return online, it must reach HMRC by midnight on 31 January.

You are only allowed to submit your return later than this date if you received the notice to file your tax return after 31 October. In this case you will have three months from the date you receive the notice to send your return online.

If you submit your tax return online, you will receive an on screen acknowledgement that your return has been received.

Penalties if you miss the 31 January deadline

If HMRC receives your tax return after the 31st January deadline, you will be charged an automatic £100 penalty.  If it is a ‘partnership’ tax return, each partner will face a £100 penalty.

However, if you have a reasonable excuse for not submitting your tax return on time, you may not have to pay the penalty.  Reasonable excuses typically include things like:

  • Vital documents being lost in a fire or flood
  • The death of your partner shortly before the filing deadline
  • A life-threatening illness that prevents you sending in your tax return

Deadlines for paying your tax

If you have a tax bill, you must pay any outstanding tax by 31st January of the year immediately following the tax year where the liability became due.  For example, for the tax year 2009/10 (ending on 5 April 2010) you must pay any tax due by 31 January 2011.

The payment due will include one or both of:

  • A ‘balancing payment’ – the amount of tax for the previous tax year that you owe
  • A ‘payment on account’ – an advance tax payment for the current tax year

When you file your tax return online, you will normally receive a statement that shows the amount of tax that you are due to pay.  In the event that you do not receive this before the 31st January deadline, you will have to work out the tax that you owe yourself.  This is another benefit of submitting your tax return online as you can register for the internet based ‘self assessment service’ through which your tax liability will be calculated for you.

Four Things You Should Know About Claiming A Tax Rebate When Someone Dies

Dealing with the affairs of a deceased love one can be a stressful and tricky business.  Often, the loss of a friend of family member is traumatic enough without you having to deal with their personal affairs.

If you are the personal representative of a deceased person, dealing with their tax may be one of your responsibilities.  There may either be a tax bill to pay or, often, a tax rebate may be due.

Here’s our guide to dealing with the tax matters of a deceased person.

Get in touch with the Tax Office

If you are the personal representative of someone who has died, you should first get in touch with the deceased person’s Tax Office.  They will talk you through what you need to do and send you the appropriate forms to complete.

If you cannot find details of the deceased person’s Tax Office amongst their papers, get in touch with the HMRC Enquiry Centre.  If you provide the deceased person’s name, address (and National Insurance number) they should be able to assist.

You will need a form R27

In order to work out whether a tax rebate is due, you will need the HMRC form R27 (called ‘Potential repayment to the estate’).  As the personal representative, you have to sign this form.  The R27 form asks for several pieces of information about the deceased person’s income, including:

  • State and other pensions
  • Paid employment
  • Other earned income
  • Annuities
  • State benefits
  • Savings and investment income such as share dividends or building society interest
  • Other taxable income such as rent from property

If the person paid tax through PAYE, you will have to complete the R27 form to complete.

If the deceased person paid tax through Self Assessment, you can opt to fill in the R27 form in full.  Alternatively, you can part complete the R27 form and then complete a Self Assessment tax return immediately or at the end of the tax year.

If you elect to complete the R27 form in full, the Tax Office may still need to ask you to fill in a self assessment tax return at a later date).

Claim Your Tax Back

If there is a tax rebate due, you will need a R40 form

HMRC have a specific form for claiming tax rebates – the R40 form.  When dealing with a deceased person’s tax affairs you can either complete this form immediately or at a later date when you definitely know that there is a tax rebate due.