Either you are an individual or business, The HMRC requires you to report your income, profits, all losses, and deductions through tax return files. You are also supposed to include your tax refund and liability in the return file. The HMRC makes use of the Self-Assessment System as an official tool to collect your financial information in order to deduct relevant tax from your earnings automatically. Being a business owner, you are required to file a tax return at the end of every tax year till 5th of the April of the respective year.
What Is Self-Assessment Tax?
No one enjoys matters like paying taxes and particularly facing penalties due to failing to meet the deadlines or making erroneous calculations. A lot of people do not know either they are required to pay tax or not. If you are among such people and are uncertain about your tax responsibilities, here, you can get useful information in this regard.
All those people who fall under the self-assessment category are required to file a tax return yearly. On the tax return form, you are required to provide details, including your taxable income, capital gains, and tax payables for the respective tax year. Through this form, you can also claim tax reliefs and allowances for which you are entitled. After filling the tax return, you can send it to HMRC both online or via manual postage. After receiving your tax returns, HMRC will be calculating your tax liabilities. All of this process is called self-assessment.
Who Should Complete Tax Return in The UK?
The self-assessment tax system only applies to the self-employed people only as employed people get tax deductions through PAYE. You have to complete your tax return in case if you fall under any of the following categories;
– You are self-employed (Sole Trader with £1000 turnover)
– You are a partner in any partnership business
– You are the director of a profitable company
– You are a minister of a denomination or religion
– You are a trustee or executor of an estate
– You hold untaxed income like income from rents
– You are entitled to a yearly income from a trust or settlement
– You hold taxable foreign income
– Your claims for expenses exceed £2500
– Your annual income exceeds £100,00 before tax
– Your investment income and savings exceed £10,000
Calculate Your Income Tax Rate
Being an income-earning citizen of the UK, you are responsible for paying income tax on all of the income you earn during the year and which is over your personal allowance. People consider income tax rate calculation a complicated thing, and here our role becomes very important. 101Accountant always facilitates its clients in every possible way and for calculating their tax rates too. We always make it easy for you to understand what personal allowance is and how to differentiate between total and taxable income of yours.
Personal Tax Allowance
According to the income tax laws set in the UK, everyone is entitled to take advantage of the personal tax allowance that HMRC has set the personal tax allowance for the tax year 2020-21 at £12,500, and you will become responsible for paying taxes if your annual income exceeds this limit. Amounts above the personal allowance will be taxable at the set tax rates.
Other than the stated allowance, there are certainly other ways or special cases in which you can claim allowances and can reduce your tax payables. For example, blind people are entitled to an additional allowance of £2,500 for tax year 2020-2, married couples or people in a civil partnership are also entitled to grab a marriage tax allowance that is £1,250 and can cause a cut to payable tax up to £250. It allows couples born on or after 6th April 1935 to share a part of their personal allowance. However, 10% of the allowance is later deducted from your annual income. In such a case, for couples married before 5 December 2005, the allowance will be worked out from the husband’s income. However, for couples married after this date, this will be deducted from high earning spouse’s income.
Understanding Income Tax Bands in the UK
After the deduction of your personal allowance, every penny of your income is taxable, depending on set three marginal income tax bands as per the 2020-21 tax years. Your personal allowances start to diminish once your total annual earning hits £100,000; the income tax brackets vary, starting from the basic rate of 20%, a higher rate of 40%, and an additional rate of 45%.
However, this tax rate is not applicable in Scotland. In Scotland, tax brackets start from 19% for starter, 20% for basic, 21% for intermediate, higher rate 41%, and top-rate of 46% currently.
Calculating the 2020/21 Income Tax Rate
If you are living in England and Wales or Northern Ireland, you can follow the below table to calculate your income tax rates for the current year.
And if you are residing in Scotland, the following table can help you calculate your income tax rates.
The above stated marginal tax rate bands allow you to pay a specified amount of tax on the portion of your salary. For example, if your wage is in the higher tax rate bracket, you are supposed to pay 40% for the portion of your wage that falls in the higher tax rate category, and for the rest of your salary, the basic of 20% will be charged.
The HMRC collects the taxes on behalf of the government, and the collected income tax is utilized to pay for multiple services for you, including education, the welfare system, NHS, and investing in public beneficiary projects like road construction, rails, and housing. As you can see in the above tables, the income tax slabs and thresholds are divided depending on income. Those who earn more, they pay more taxes, and it makes the tax payment procedure proportionate for every income earner.
Along with the basic income tax, each income earner is also supposed to contribute to the national insurance that is deducted from your income. The contribution takes place once you hit 16 years of age and are supposed to continue paying it up until you reach the state pension age limit. The following table demonstrates the 2020/21 national insurance rates.
These rates are only applicable to employed persons. For self-employed, the rates a little bit different and more complex. In case if you are self-employed, you were supposed to pay two kinds of NIC for Class 2 and 4 until 2019; however, from April 2019, you are required to pay for only class for national insurance contributions.
This cluster holds some very complex national insurance guidelines that require you to ask your accountants to clarify them for you.
How Much Tax Should You Expect To Pay On Various Forms Of Income?
It is stated that on the income within the personal allowance threshold, you do not have to pay any tax on your earnings. From the above tables, you may start paying your tax when your annual income exceeds the threshold. However, the HMRC income tax calculator takes your source of income into account to help to find how much tax you owe to the HMRC. This leads to the categorization of diverse personal income thresholds as the following.
Income Tax on Rental Property, Employment, and Pension
This is usually classified as a non-saving income, which is taxed in three different tax bands based on how much you are earning. In that case, your personal allowance and other deductible reliefs for which you are entitled are detracted from your total income to determine your taxable income. The following rates are used to estimate your 2020-21 tax relief.
– If your income adds up to £37,500, you come under the basic taxpayer’s class, and you are going to pay tax at the rate of 20%. In such a case, you can count your personal allowance of £12,500, which means that being a basic taxpayer, you will be having a threshold of £50000.
– If your taxable income is exceeding this threshold, then you are expected to pay your tax under a higher tax rate band of 40% on the income above the basic threshold and up to £150,000.
– On the earning above £150,000, you have to pay tax at the rate of 45%.
Tax Rates for the Self-Employed
If you come under the category of self-employed individuals, you will have to pay tax on your profits only instead of your gross income. Gross income is the total income before making deductions or allowances.
Rental Income Tax London
Property owners are essential to pay tax if they have rented out their properties. However, tax on the rental income depends on the sums of cash you are getting from rental properties. If your profits from the rented property are over £6,475 and consider your rental property as a business, you will be obligated to pay class 2 national insurance that is currently £3.05/week at a flat rate. In this regard, you have to;
– Be a landlord as your major
– You have more than one properties
– You are buying new properties to rent them out
In case if your annual profits are under the threshold, you are legally not bound to pay any tax; however, if you want, you can make a voluntary Class 2 National Insurance contribution. Although paying this is not essential, it can benefit you in getting a full state pension. If your annual profits from the rental property are less than £2,500, you should inform HMRC and must fill in the self-assessment return. And, if you had never sent your return to HMRC, you must be registering by 5th October stating the tax year you owned your rental property.
Declaring Unpaid Tax
In case if you have missed filing your tax return to HMRC from the past years, you should inform the HMRC before they find it out. In such an event, you will be facing easy penalties in comparison to if HMRC finds you skipping taxes on their own. After you report to HMRC, you will be given 3 months to sort out your tax liabilities.
If a property is owned by any company, then it will be taxed like any other business income. However, you can claim tax relief for;
– Commercial Properties
– Residential Properties
– Furnished Holiday Properties
In all the cases, the company has to pay tax on all the profit made from the respective property that will be measured by deducting all the expenses from the gross revenue. Deductible expenses could be;
– Interest on property loans
– Letting agent fees
– Accountant fee
– Legal fee for lets and leases
– Insurance fees for property
– Maintenance and repair expenses
– Utility bills
– Council taxes
– Service charges
You can also include expenses for the replacement of domestic items like fridges, sofas, carpets, beds, curtains, cutlery, and crockery to claim tax relief. In such a case, make sure that purchased items are under the usage of your tenants, and replaced items are no longer are in use within your property.