June, 2011

How Much Tax Should I Pay?

As Benjamin Franklin once famously remarked, “in this world nothing can be said to be certain, except death and taxes.”

All of us pay some sort of taxes whether it is on our income, our home or the goods and services that we buy.  Our guide looks at the main income taxes in the UK and how much tax you should pay.

Income Tax

The amount of income tax that you pay depends on two factors: the amount that you earn and the amount of ‘tax allowances’ that you are entitled to claim.  Everyone in the UK is entitled to claim their personal allowance – the amount you can earn before you start paying tax – and there are also other allowances for married couples and people who are registered blind.

In simple terms, in the tax year 2011/12 you should pay no income tax if you earn less than £7,475 (the amount of the personal allowance).

You will then pay 20 per cent tax on the next £35,000 that you earn, 40 per cent tax on the next £115,000 after that and 50 per cent on any further earnings.

For example, if you earned £15,000 in the tax year 2011/12 and you had the basic personal allowance, you would pay tax as follows:

  • £0 – £7,475 – No tax (this is your personal allowance)
  • £7,475 – £15,000 (equivalent to taxable income of £7,525) taxed at 20 per cent = £1,505 tax

If you earned £60,000 a year and had the basic personal allowance, you would pay tax as follows:

  • £0 – £7,475 – No tax (this is your personal allowance)
  • £7,475 – £42,475 (equivalent to taxable income of £35,000) – 20 per cent – £7,000
  • £42,476 – £60,000 (equivalent to taxable income of £17,524) – 40 per cent – £7,010

Here, your total tax bill would be £14,010.

National Insurance Contributions

As well as paying income tax on your earnings you will also pay National Insurance Contributions (NICs).  The amount of NICs that you pay depends on whether you are employed or self employed.

If you’re employed, you’ll pay the following NICs in the tax year 2011/12:

  • Earnings of £0 – £139 per week – Nil
  • Earnings of £139 to £817 per week – 12 per cent
  • Earnings above £817 per week – 2 per cent

If you’re self employed, you’ll pay the following Class 4 NICs in the tax year 2011/12:

  • Annual profits under £7,225 – Nil
  • Annual profits of £7,225 to £42,475 – 9 per cent
  • Annual profits above £42,475 – 2 per cent

In addition, if your profits are over £5,315 you will pay Class 2 National Insurance contributions of £2.50 per week.

Tax Allowances for 2011/12

Each Budget, the Chancellor of the Exchequer makes changes to the tax free allowances of every taxpayer in the UK.  The tax allowances changed again at the start of the 2011/12 tax year and every taxpayer should know exactly what allowances they have.

Our guide outlines the main tax allowances for the 2011/12 tax year.

Personal Allowance

Each taxpayer in the UK has a personal allowance.  This is the amount of money that you’re entitled to earn each tax year before you pay any tax.  It generally rises every year although there was a significant rise in the personal allowance for the tax year 2011/12.

If you are over the age of 65 you may receive an additional personal allowance.

The three levels of Personal Allowance in the 2011/12 tax year are:

  • Basic – £7,475 (with an income limit of £100,000) – up from £6,475 in tax year 2010/11
  • Age 65-74 – £9,940 (with an income limit of £24,000) – up from £9,490 in tax year 2010/11
  • Age 75 and over – £10,090 (with an income limit of £24,000) – up from £9,640 in tax year 2010/11

If you become 65 or 75 during the year to 5 April 2012, you are entitled to the full allowance for that age group.

If you are aged 65 and over and your income is between £24,000 and £100,000, your age-related Personal Allowance is reduced by half of the amount – £1 for every £2 – you have over the £24,000 limit, until the basic allowance is reached.  For example, if you’re 68 and have income of £25,000 – £1,000 over the limit – your age-related Personal Allowance is reduced by £500 to £9,440.

From the tax year 2010-11, if your income is over £100,000, your Personal Allowance is reduced by half of the amount – £1 for every £2 – you have over that limit.  If your income is large enough, your Personal Allowance will be reduced to nil.

Blind Persons allowance

If you are registered blind with your local authority, your Blind Person’s Allowance is added onto your Personal Allowance to work out the amount that you can earn without paying tax.

In the 2011/12 tax year, Blind Person’s Allowance for the tax year is £1,980 irrespective of your age or income.

So, if you are under 65 and claim both allowances, you can earn £9,455 (£7,475 Personal Allowance plus £1,980 Blind Person’s Allowance) before you pay any tax.

Married Couples Allowance

You can claim Married Couple’s Allowance if you’re a taxpayer, you’re married or in a civil partnership and you or your spouse or civil partner were born before 6 April 1935.

The maximum amount of Married Couple’s Allowance for the 2011/12 tax year is £7,295 and the minimum amount is £2,800.

You receive 10 per cent of the allowance amount – which means your tax saving (based on a full year’s eligibility) is at least £280 and up to £729.50. The actual amount depends on your personal income.

Which countries pay the most tax

Related Infographics: Which Jobs Pay the Most Tax

Brits paying some of the world’s highest income tax rates

New research this week has found that Britain is charging some of the highest tax rates in the world for its richest and poorest workers.  Out of twenty major economies, Britain is ranked seventh for the amount of tax it takes from its very highest and very lowest earners.

Experts are concerned that high tax rates in the UK are driving away high earners to other countries where the tax rates are much lower.

British government takes more tax than many other nations

The research published in the Daily Telegraph found that Brits earning over £122,000 a year take home just 60.9 per cent of their pay after paying tax.  In Russia they would keep 87 per cent and in Egypt 80.4 per cent, whilst earnings in Dubai are tax free.

Britain is ranked seventh highest in terms of the tax it takes from its workers.  Italy has the highest tax rates for the wealthy as workers earning £122,000 keep just 54.1 per cent of their earnings.  High earners in the Netherlands keep 54.7 per cent of their pay whilst in Ireland and Germany they would take home just 56 per cent.

Francesca Lagerberg, head of tax at accountants Grant Thornton, said: “This provides evidence of the detrimental effect of high tax rates on high earners.  For Britain to be competitive, action is needed to discourage a brain drain.”

Mark Giddens, a partner at UHY Hacker Young, agrees: “The 50 per cent tax rate on people earning more than £150,000 a year, combined with increases in national insurance, has undoubtedly made the UK less attractive to high earners.  Many of these people will be highly skilled and they are usually very mobile.”

He added: “What is surprising to us is the wide difference between countries in terms of tax burden placed on high earners.

“With the exception of Israel, the countries which tax high earners the most are EU members. The countries with the lightest tax burden on high earners – with the exception of Japan and the United States – are emerging economies.”

Britain also taxing low earners more heavily than other nations

The figures from accountants UHY also found that Britain takes more tax from its lowest earners than thirteen other major countries.  People earning under £15,242 in the UK keep just 83.2 per cent of their earnings compared to 95.7 per cent in Ireland and just over 90 per cent in the USA and Japan.

The research found that only Mexico, Estonia, France, Germany, Italy and India deduct more tax and national insurance contributions from their lowest paid workers than Britain.  German workers get to keep 72.6 per cent of their income whilst low paid French workers keep 75 per cent.

How Much Is Car Tax?

If you use a vehicle on the roads in the UK then you will have to have a valid tax disc for that vehicle.  Whether you drive a car, van, motorcycle, bus or articulated lorry you will need to have a valid tax disc.

Our guide looks at the cost of road tax for cars from 1 April 2011.

Cars registered before 1 March 2001

If your car was registered before March 2001 there are just two rates of road tax, depending on the engine size of your vehicle:

  • Engine size is under 1549cc you’ll pay £130 for 12 months tax and £71.50 for 6 months
  • Engine size is over 1549cc you’ll pay £215 for 12 months and £118.25 for 6 months

Cars registered after 1 March 2001

Vehicle tax rates for cars registered on or after 1 March 2001 are now split into 13 bands depending on the car’s CO2 emissions.  The amount of road tax you’ll pay depends on which band your car is in. The lower the CO2 emissions from your car, the lower the car tax payable on it.

To find out the CO2 emissions of your car, you can either check your registration certificate (V5C) or enter the model and registration number of your car at the DVLA website.

For cars with CO2 emissions up to 100g/km, no car tax is payable.  There are then 12 further bands and the cost of car tax rises as the CO2 emissions increase.

For example, a standard 2 litre diesel Toyota Corolla registered in 2004 would be in band G with 151g/km CO2 emissions.  You would pay £155 for 12 months tax on this vehicle, or £85.25 for 6 months.

Cars with CO2 emissions under 225 g/km (or cars with higher emissions registered before 23 March 2006) will pay a maximum of £250 for 12 months tax.

Cars with high CO2 emissions pay significantly more road tax under the current scheme.  Cars emitting 226-255 g/km of CO2 pay £425 for 12 months car tax while those emitting over 256 g/km pay £450 every year.

Enhanced car tax for cars first registered after 1 April 2010

Brand new cars registered after 1 April 2010 with CO2 emissions of over 130 g/km attract a higher rate of car tax in the first year.

For example, the tax on a brand new car with CO2 emissions of 210 g/km would be £580 in the first year, compared to £250 if the car was several years old.

Tax Rates for 2011/12

Do you know what rate of tax you are paying?

The Chancellor changes the tax rates every year and the current tax year 2011/12 was no exception.  Our guide looks at what income tax and National Insurance contribution rates you will pay this tax year.

Income Tax

In the 2011/12 tax year, everyone receives their ‘personal allowance’ of £7,475.  This means that you can earn up to this amount without paying any income tax.  People over the age of 65, blind people and married couples born before April 6, 1935 also receive an additional ‘tax free’ allowance.

You then pay tax on any earnings you earn above and beyond your total personal allowance.

The tax rates for 2011/12 are:

  • Basic rate (20 per cent) on the first £35,000 of your taxable income
  • Higher rate (40 per cent) on your taxable income between £35,001 and £150,000
  • Additional rate (50 per cent) on your taxable income above £150,000

For example, if you earned £25,000 a year and had the basic personal allowance, you would pay tax as follows:

  • £0 – £7,475 – No tax (this is your personal allowance)
  • £7,475 – £25,000 (equivalent to taxable income of £17,525) – 20 per cent – £3,505

If you earned £50,000 a year and had the basic personal allowance, you would pay tax as follows:

  • £0 – £7,475 – No tax (this is your personal allowance)
  • £7,475 – £42,475 (equivalent to taxable income of £35,000) – 20 per cent – £7,000
  • £42,476 – £50,000 (equivalent to taxable income of £7,524) – 40 per cent – £3,010

In this example you’d pay total income tax of £10,010.

National Insurance Contributions

The amount of National Insurance Contributions that you pay depends on whether you are employed or self employed.

If you’re employed, you’ll pay the following National Insurance contribution rates in tax year 2011/12:

  • Earnings of £0 – £139 per week – Nil
  • Earnings of £139 to £817 per week – 12 per cent
  • Earnings above £817 per week – 2 per cent

If you’re self employed, you’ll pay the following Class 4 National Insurance contribution rates in tax year 2011/12:

  • Annual profits under £7,225 – Nil
  • Annual profits of £7,225 to £42,475 – 9 per cent
  • Annual profits above £42,475 – 2 per cent

In addition, if your profits are over £5,315 you will pay Class 2 National Insurance contributions of £2.50 per week.

What Tax Do You Pay When You Buy A House?

If you are planning to buy a property in the UK then you should be prepared to pay Stamp Duty Land Tax (SDLT) on the purchase.  You pay this tax on the purchase of any house, flat, other building or land above a certain value.

Our guide looks at what Stamp Duty Land Tax is, when you pay it and how much you have to pay.

What is Stamp Duty Land Tax?

SDLT is a tax that you pay on the purchase price of property and land.  It was introduced in December 2003 to replace its predecessor, Stamp Duty.  You may have to pay SDLT when you take on a lease or when you buy a property in the UK.

When is Stamp Duty Land Tax payable?

Generally speaking, you will pay SDLT if you buy a leasehold or freehold property and the purchase price is more than £125,000.

If the property or land you buy is under £125,000, no SDLT will be payable.

If you are a first time buyer then the threshold for paying SDLT is higher.  If you have never owned a flat or house anywhere in the world (including the UK) then you will only pay Stamp Duty Land Tax if the purchase price of the property is over £250,000.  The higher threshold applies for any purchases made between 25 March 2010 and 25 March 2012.

What Stamp Duty Land Tax will I pay?

The amount of SDLT that you pay is dependent on the purchase price of the property:

  • Between £0 and £125,000 – 0 per cent
  • £125,001 to £250,000 – 1 per cent (unless you are a first time buyer in which case the rate is 0 per cent as above)
  • £250,0001 to £500,000 – 3 per cent
  • £500,0001 to £1 million – 4 per cent
  • £1 million or more – 5 per cent

The tax is not staggered.  For example, if you buy for £300,000, you don’t pay 1 per cent on the first £250,000 and then 3 per cent on the remaining £50,000.  You pay 3 per cent of the £300,000 purchase price as SDLT.

What is SDLT Disadvantaged Areas Relief?

If you buy a property in an area that has been designated as ‘disadvantaged’ by the government then you may qualify for Disadvantaged Areas Relief.  This means that you don’t pay any SDLT on a purchase of up to £150,000.

You can determine whether the area you are buying in is deemed ‘disadvantaged’ by checking on the HM Revenue and Customs (HMRC) website.

What if I am buying a ‘zero carbon’ home?

If you are buying a house which has sufficient additional renewable power to cover the average consumption of a property in a year – highly insulated and including renewable energy sources such as solar panels or a wind turbine – you will not have to pay any SDLT on purchases up to £500,000.

Zero carbon homes bought for over £500,000 will have their SDLT bill reduced by £15,000.