August, 2011

How Much Tax Do I Pay?

As Benjamin Franklin once famously remarked: “In this world nothing can be said to be certain, except death and taxes.”  We pay tax on everything from our income to our home and our groceries and so our guide looks at how much tax you can expect to pay.

Income Tax

There are several different tax bands and rates depending on your income.  The question “How much tax do I pay?” will therefore depend very much on your specific personal circumstances such as the tax allowances that you are eligible for and where your income comes from.

Typically, you’ll pay the following tax in the 2011/12 tax year:

  • 0% on the first £7,475 that you earn (this is your Personal Allowance)
  • 20% on the next £37,400 that you earn
  • 40% on the next £112,600 that you earn
  • 50% on anything over this

National Insurance Contributions

The amount of National Insurance contributions that you pay will depend on whether you are employed or self employed.

If you’re employed you pay Class 1 National Insurance contributions at the following rates:

  • if you earn more than £139 a week and up to £817 a week, you pay 12 per cent of the amount you earn between £139 and £817
  • if you earn more than £817 a week, you also pay 2 per cent of all your earnings over £817

If you’re self-employed you pay Class 2 and Class 4 National Insurance contributions at the following rates:

  • Class 2 National Insurance contributions are paid at a flat rate of £2.50 a week
  • Class 4 National Insurance contributions – you pay 9 per cent on any profits between £7,225 and £42,475, and a further 2 per cent on profits over that amount

VAT

Value Added Tax (VAT) is a tax that you pay when you buy certain goods or services.  Most goods and services in the UK are subject to VAT and the tax is payable at one of three rates:

  • Standard rate (20%) – Most goods and services attract VAT at this rate
  • Reduced rate (5%) – On certain goods such as children’s car seats and gas and electricity for your home
  • Zero rate (0%) – There are some goods on which you don’t pay any VAT such as most foodstuffs, books, children’s clothes, magazines and newspapers

Other Taxes

As well as these three main taxes there are other taxes that you may pay.  Again, the rates vary depending on your specific circumstances.

The main other taxes are:

  • Inheritance Tax (IHT) – Payable if your estate (including any assets held in trust and gifts made within seven years of death) is valued over the current Inheritance Tax threshold (£325,000 in 2011-12).  The tax is payable at 40%
  • Capital Gains Tax (CGT) – Payable on capital gains’ (any profit that you make when you sell or give away an asset if it has increased in value.  The tax is payable at 10%,18% or 28% depending on your circumstances
  • Road Tax – Payable if you want to take a vehicle on a public road.  The rate varies from £0 to over £1,000
  • Council Tax – Payable based on the value of your home.  The rate payable is determined by your local authority

Tax on Selling a Property

If you want to sell a property that isn’t your main home then you may have to pay some tax on it. Our guide looks at when you do and do not have to pay tax when you sell a house or flat.

Selling your own home

You do not have to pay any tax when you sell your own home, providing:

  • The property was your only home whilst you owned it (ignoring the last three years of ownership)
  • You bought it primarily to use as your own home
  • You used it as your home during the time you owned it and used it only as a home for yourself, your family and up to one lodger
  • The garden/grounds do not exceed 5,000 square metres including the site of the house

If you are married or in a civil partnership (and not separated) you and your spouse or civil partner can have only one such main residence between you.

Selling a property that isn’t your main home

If you sell a property for more than you paid for it then you will normally have a ‘chargeable gain’ and you may have to pay tax.

However, in the 2011/12 tax year, the first £10,600 of your total taxable gains are tax free.

Factors that you should take into account when working out the tax payable include:

  • You can deduct some of the costs of buying, selling and improving the property when working out your ‘chargeable gain’ (profit)
  • You can transfer property to your spouse or civil partner without paying Capital Gains Tax (if you are living together)
  • Any loss made on the property could be offset against other chargeable gains you make

You should also bear in mind that if you give property or sell it cheaply to your children or to others, you may be liable to pay Capital Gains Tax.

What paperwork you should keep

HM Revenue & Customs (HMRC) recommends that you keep the following information/documents:

  • Copies of valuations to calculate gains/losses
  • Contracts for sale and purchase
  • Evidence of the costs of purchase, sale or improvements to the property

4 Reasons You Could Be Able To Claim A Tax Refund

Have you made a claim for a tax refund?  Or, has HM Revenue and Customs has received new information about your income or your entitlement to tax allowances that suggests you may be entitled to an income tax refund?

Here are four common reasons that you could be eligible for a repayment of tax.

You were only employed for part of the tax year

Often, your tax is worked out assuming that you earn the same amount of money for the entire tax year.  In order that your take home pay remains broadly the same every week or month, the tax free allowances are spread out throughout the entire tax year.

If you therefore only work for part of a tax year, you could find that too much tax was deducted during the time you were working.  This is because your tax code assumed that your allowances were spread equally throughout the year.

Your tax return was wrong

If you have made a mistake on your Self Assessment tax return or think you have paid too much tax, you may be able to claim it back.

If you make a mistake on your tax return you have normally got 12 months from 31 January after the end of the tax year to correct it. For example, for the 2010/11 tax return you have until 31 January 2013 to make an amendment.

If you want to correct a mistake after 12 months you have to write to HMRC and tell them about the mistake instead of amending your tax return.

Your other income changes

If you are employed and you pay your tax through the Pay as you Earn (PAYE) scheme, your tax code is likely to take into account any other income that you receive.  This could include savings interest or income from a rental property.

If this income reduces during the tax year and you don’t let HMRC know, you could well ending up paying too much tax and have to claim a refund at the end of the tax year.

Your tax code is wrong

If your income changes during a tax year, you take on a second job or earn some additional income or the amount of untaxed income you receive changes, you could find yourself on the wrong tax code.

If you don’t let HMRC know about these changes your incorrect tax code may mean that you pay more tax than you should.  You may therefore be eligible for a refund at the end of the tax year.

How Much Is My Car Tax?

If you have a car that you use on a public road in the UK, you are obliged by law to buy road tax and to display a tax disc.

In the past, the cost of car tax was the same for everyone.  However, recent changes mean that there are now several different car tax bands depending on the age of your car and on its carbon dioxide (CO2) emissions.  Our guide answers your question ‘how much is my car tax?’

Cost of car tax if your car was registered before 1 March 2001

If your car was registered before 1 March 2001 there are two car tax bands depending on the engine size of your car.

If your engine size is less than 1549 cc you’ll pay £130 for 12 months tax and £71.50 for 6 months.  If it’s over 1549cc you’ll pay £215 for 12 months and £118.25 for 6 months tax.

Cost of car tax if your car was registered on or after 1 March 2001

Car tax rates for vehicles registered on or after 1 March 2001 are split into 13 bands depending on the CO2 emissions of your car.  The lower the CO2 emissions, the lower the car tax that you pay.

You can find out the CO2 emissions of your car by checking your registration certificate (V5C) or by entering the make/model and registration number of your car into the online ‘vehicle enquiry’ section on DVLA’s Electronic Vehicle Licensing website.

The information below shows the costs of car tax depending on your band and whether you want 6 or 12 months tax.

  • Band A (up to 100 g/km) – No car tax payable
  • Band B (101 to 110 g/km) – £20 car tax per year (no 6 month option)
  • Band C (111 to 120 g/km) – £30 car tax per year (no 6 month option)
  • Band D (121 to 130 g/km) – £95 car tax per year or £52.25 for 6 months
  • Band E (131 to 140 g/km) – £115 car tax per year or £63.25 for 6 months
  • Band F (141 to 150 g/km) – £130 car tax per year or £71.50 for 6 months
  • Band G (151 to 165 g/km) – £165 car tax per year or £90.75 for 6 months
  • Band H (166 to 175 g/km) – £190 car tax per year or £104.50 for 6 months
  • Band I (176 to 185 g/km) – £210 car tax per year or £115.50 for 6 months
  • Band J (186 to 200 g/km) – £245 car tax per year or £134.75 for 6 months
  • Band K (201 to 225 g/km) – £260 car tax per year or £143 for 6 months
  • Band L (226 to 255 g/km) – £445 car tax per year or £244.75 for 6 months
  • Band M (over 255 g/km) – £460 car tax per year or £253 for 6 months

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 different rate of car tax in the first year.  For example, the tax on a brand new car with CO2 emissions of 190 g/km would be £445 in the first year, compared to £245 if the car was several years old.

How much can you earn before paying tax in 2011?

Each year, almost everyone in the UK is entitled to earn a certain amount of money before you start paying tax.  This is called your Personal Allowance.

The amount generally changes every year and so here is our guide to how much you can earn before paying tax in 2011.

Personal Allowance

The amount of your personal allowance depends on your age and your total income in the tax year (including pensions, interest, rental income etc).

If you are under the age of 65 and you earn less than £100,000 per year, the Personal Allowance is £7,475.  This means that you can earn up to this amount before you start to pay tax.

If you are aged between 65 and 74 the Personal Allowance is £9,940 and if you are 75 or over it is £10,090.  If you are over 65 and earn £24,000 or more your Personal Allowance will be reduced by £1 for every £2 you earn over £24,000.

If you already pay tax through your job or pension, or if you complete a Self Assessment tax return, you should receive a Personal Allowance automatically.

Most people in the UK are entitled to the full Personal Allowance.  However, if you have underpaid tax in previous tax years or you have other jobs, income or benefits to take into account your Personal Allowance may be reduced to take these into account.

Blind Persons Allowance

Blind Persons Allowance is available to you if you are certified blind and are on a local authority register of blind persons.  The allowance for the 2011/12 tax year is £1,980 and this is in addition to any Personal Allowance you receive.

Married Couples Allowance

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

In the 2011/12 tax year, the minimum amount is £2,800 and the maximum amount of Married Couple’s Allowance is £7,295.  You receive 10 per cent of the allowance amount – which means your tax saving is at least £280 and up to £729.50. The actual amount depends on your income.

How To Pay Your Self Assessment Tax Bill


Once you have submitted your Self Assessment tax return you then have to arrange to pay any tax that you owe.  HM Revenue and Customs (HMRC) accept various methods of payment and these are the most common and popular ways that you can pay your tax bill.

Paying your tax by Direct Debit

You can arrange to set up a Direct Debit to pay your tax bill online if you are registered for the Self Assessment Online service.  Setting up a Direct Debit means that your tax will be collected in a single payment on 31 January and on 31 July.

HMRC will only ever collect the amount you ask them to by Direct Debit.

Paying your tax online by credit and debit card

If you have a UK debit or credit card, you can pay your Self Assessment tax online using the BillPay service.  Credit cards incur a non-refundable transaction fee of 1.4 per cent.

To make a payment you will need your debit or credit card details and your self assessment reference number.  This is shown on the payslip HMRC sends you.

A BillPay payment takes three bank working days to reach HMRC.

Paying your tax by telephone or internet banking

You can use your bank or building society internet or telephone banking service to pay your tax bill. You will need the HMRC bank account details (find these online) and your Self Assessment reference number.

If you pay using any of these methods, your bank will transfer your money direct to HMRC’s bank account.  It normally takes three working days for the payment to reach HMRC although it may be longer.  You should check with your bank or building society.

Paying your tax at a Post Office

You can make a Self Assessment payment at the Post Office by cheque, cash or debit card without charge.  You should take your HMRC payslip with you and make any cheques payable to ‘Post Office Ltd’.

You should allow at least three bank working days for your payment to reach HMRC.

Paying your tax by post

If you want to pay your tax by post you should make your cheque payable to ‘HM Revenue & Customs only’ and then write your Self Assessment reference number.

You should send the unfolded payslip and cheque to HMRC and leave at least three working days for your payment to arrive.


How Much Is Tax?

You pay tax on everything from your income to your groceries.  However, everyone in the UK pays a slightly different amount of tax.

So, our guide looks at the three main types of tax that you pay and what the current tax rates are.

Income Tax

There are four rates of income tax in the UK: 0%, 20%, 40% and 50%.

The amount of tax that you pay depends on the personal allowances that you receive and the amount that you earn.

The vast majority of taxpayers are allowed to earn a certain amount each tax year without paying any tax (your ‘personal allowance’.  In the 2011/12 tax year, this amount is £7,475.  However, you may also receive other allowances based on your age, if you are married or if you are registered blind.

You then pay 20% tax on the next £35,000 of your earnings over your personal allowance, 40% of the next £150,000 and 50% of any amount above this.

National Insurance contributions

The amount of National Insurance contributions you pay depend on your earnings and whether you are employed or self-employed.

Employed

If you earn under £139 per week, you won’t pay any National Insurance contributions.  If you earn more than £139 a week and up to £817 a week, you pay 12 per cent of the amount you earn between £139 and £817.  If you earn more than £817 a week, you also pay 2 per cent of all your earnings over £817.

Self-employed

If you’re self-employed you pay Class 2 and Class 4 National Insurance contributions.

You pay class 2 National Insurance contributions at a flat rate of £2.50 a week (unless your profits are expected to be under £5,315 when you may not have to pay any contributions).

Class 4 National Insurance contributions are 9 per cent on profits between £7,225 and £42,475, and a further 2 per cent on profits over that amount.

Value Added Tax (VAT)

VAT (Value Added Tax) is a tax that you pay when you buy goods and services in the European Union, including the UK.

There are three main rates of VAT in the UK: 0%, 5% and 20%.

There are some items on which you pay 0% VAT, such as most food items, children’s clothes and books, magazines and newspapers.

A VAT rate of 5% is charged on some items such as home gas and electricity and car seats.

Most items that you buy will have VAT at 20%.

How To Claim Petrol Expenses


Do you use your own vehicle for work purposes?

If so, it may be possible for you to claim petrol expenses.  Whether you are employed or self employed, you can often claim the cost of using your own car for work.

Our guide looks at how you claim petrol expenses if you are employed or self employed.

Claiming petrol expenses if you’re employed

If you use your own car, van or motorcycle for work, you can claim ‘mileage allowance relief’ on the miles that you travel.  However, you can’t claim all the mileage that relates to your work.  For example, you can’t claim the mileage between your home and your normal place of work and you can’t claim petrol expenses for any private mileage that you do.

However, you may be able to claim mileage if you use your own car to visit clients or you use your own van for collections and deliveries.

To work out the petrol expenses you can claim, you need to work out your total business mileage in your own vehicle.  If you use different vehicles (a car and a van, for example) you should total up the miles you have done in each vehicle.

You then need to find the ‘approved mileage rates’ from the HMRC website.  As of 2011/12, the rates are:

  • Car – 45p/mile for first 10,000 miles then 25p/mile thereafter
  • Motorcycle – 24p/mile
  • Bicycle 20p/mile

You then multiply your business miles by the approved mileage rate to work out the total ‘approved amount’.  Once you have done this, you should deduct the petrol expenses that you have already received from your employer.

If you’ve been paid less than the ‘approved amount’ you can claim mileage allowance relief on the difference.  If your employer has paid you more than the ’approved amount’ you may have to pay some tax.

Claiming petrol expenses if you’re self employed

If you are self-employed and use your own vehicle for work purposes, you may be able to claim petrol expenses as an allowable business cost.

You can use the same mileage rates as above.  You multiply your total business mileage by the mileage rate.

For example, if you had done 2,000 business miles in a car, you could claim £900 (2,000 x £0.45).

There is a maximum amount of tax relief that you are able to claim in one tax year, even if your travel expenses exceed this amount.  The annual limits are on the HMRC website.

You should ensure that you keep careful records of your business mileage as HMRC may want to see proof of the miles that you have done.