Employment Tax Issues
The issue of tax is something that often seems complicated to the majority of us yet taxes are unavoidable and it’s important to grasp the ‘essentials’. Fortunately there is help out there to simplify the process.
What can I be Taxed on?You are liable to pay tax on your earnings from work and this also includes any bonuses or tips you may receive. If you receive dividends from company shares, these are also taxable as is any interest you receive from taxable savings accounts you hold with your bank. You’re also taxed on your Jobseeker’s Allowance if you are out of work but this is deducted at source before you get your payment.
How do I Pay my Taxes?If you are employed by a company, your taxes will be deducted from your gross pay by your employer who will then send this on to the tax office. This system is known as PAYE (pay as you earn). Banks and building societies also deduct the appropriate amount of tax from the interest they pay to savers and send that directly to the Inland Revenue. However, if you are self-employed, you’re directly responsible for paying your taxes from any income you receive. There are several ways you can do this.
Having registered with the Inland Revenue as being self-employed, they will send you out a tax return form at the beginning of each financial year which begins on 6th April and then it is your responsibility to complete this correctly and return it to reach the tax office no later than the following January 31st, along with your payment. If you miss the deadline for repayment, you will incur penalty charges and pay more interest as a result. The accompanying booklet that you are sent with the form will explain how you can work out your tax. However, you may decide to employ the services of an accountant to do this all for you or the Inland Revenue themselves can work out how much you owe, if you’d prefer them to do that. In this instance, you need to request this within a specified period of time.
Furthermore, you can complete your self-assessment form online via the HMRC website and the beauty of this is that an in-built calculator on the website will work out how much tax you are liable for.
Can Tax be Avoided?There are perfectly legal methods to minimise or offset the amount of tax you must pay. However, you cannot avoid paying tax altogether. Mistakenly, there are many people who think that selling items at a car boot sale or selling fruit and vegetables that are home grown from your house, for example, means that they can keep all of the profits made from these enterprises for themselves but even in such cases, any profits you derive are liable to tax and you are breaking the law if you don’t declare your earnings to the tax office.
How Much of my Earnings Will I Lose to Tax and What if I End Up Paying too Much or too Little Tax?In the current tax year, 2007-8, you are liable to pay tax at the following rates:
- The first £5225 of your earnings is ‘tax free’. This is called your ‘personal allowance’ and so you do not pay any tax at all on this amountBeyond your tax free allowance, any additional earnings above £5225 are taxed at the following rates:
- Between £0 - £2230 – 10%
- Between £2231 - £34,600 – 22% (this is referred to as the ‘basic rate’)
- Over £34,600 – 40%
*From April 2008, the government will be scrapping the 10% tax band and lowering the basic rate to 20%At the close of each tax year, you will receive a P60 form telling you what you have earned within the previous tax year and how much tax you’ve paid. If you have overpaid, the tax office will send you a cheque to rectify the overpayment and if you’ve underpaid, they will usually increase the deductions over the course of the following tax year.
Keeping RecordsWhether you are employed or self-employed, you need to keep hold of all relevant records, such as a P45, P60, your payslips (if employed), receipts that are tax deductible (if self-employed), details of any taxable social security benefits you receive and all of your bank statements from the past 6 years. Record keeping is especially important if you are self-employed as your records can be asked for if the Inland Revenue wishes to check that your tax payments are proper and in order.As for VAT (value added tax), if you are running your own company and your turnover is more than £64000 annually, you must register your business for VAT.
If you are in any doubt about tax issues, you should seek specialist advice and/or visit the HMRC website which has lots of useful information.