Navigating personal tax in the UK can be overwhelming, but it doesn’t have to be. Our comprehensive guide breaks down the process and provides helpful tips for filing your personal tax return. From understanding tax codes to claiming deductions, we’ve got you covered.
Understand Your Tax Obligations
Before you can file your personal tax return in the UK, it’s essential to understand your tax obligations. This includes knowing your tax code, which your employer uses to calculate how much tax should be deducted from your pay. You should also be aware of any taxable income you have, such as rental income or self-employment earnings, and any deductions or allowances you may be eligible for. Taking the time to understand your tax obligations can help ensure you file an accurate and complete tax return.
Let’s have a look at what you’re required to pay taxes on as a UK resident: your income, savings, and investments.
Income Tax
Income tax is a tax on your earnings, including wages, salary, and self-employed income. The amount you pay is based on your earnings and tax code. There are a few things to take note of when looking at your income tax, including all your forms of income, your tax-free personal allowance and the different tax bands.
Personal tax Allowance
Everyone has a personal allowance, which is the amount of money you can earn before you start paying tax. As of April 2023, the current personal allowance is £12,570.
It is important to note that the Personal Allowance is reduced by £1 for every £2 earned between £100,000 and £125,140. In essence, this means that those earning over £100,000 in the Higher rate band (explained below) will be paying tax on a larger portion of their income, and those in the Additional rate band have no Personal Allowance and pay a 45% tax on all of their income.
TAX BANDS
The amount of income tax you pay depends on how much you earn. There are different tax bands for different levels of income, which are:
- Basic rate: 20% on earnings between £12,570 and £50,270
- Higher rate: 40% on earnings between £50,271 and £150,000
- Additional rate: 45% on earnings over £150,000
PERSONAL Tax Codes
Your tax code is used by your employer or pension provider to calculate how much income tax to deduct from your earnings. It’s based on your personal allowance and any other allowances or deductions you’re entitled to. The most common tax code is 1257L, usually for individuals with one source of income and who are eligible for the full personal allowance.
Where can I find my Tax Code?
You can find your tax code by registering with the HMRC and checking your tax code online. Alternatively, you can also find your tax code on your payslips. Payslip format differs from company to company, but it can usually be found at the top right of your payslip next to your name.
To check whether you are on the correct tax code, or get a better understanding of what your tax code means, you can read our guide on tax codes blog here: Understanding Tax Codes.
National Insurance Contributions
National Insurance contributions (NICs) are payments made by employees, self-employed individuals, and employers to fund state benefits, such as the state pension, unemployment benefits, and healthcare. NICs are calculated on your earnings, and there are different rates depending on your employment status and earning. These contributions are deducted from your earnings and paid to HM Revenue and Customs (HMRC) on a regular basis.
Who Needs to Make National Insurance Contributions?
In the UK, most people who are over 16 and earn over a certain amount of money need to pay National Insurance contributions (NICs). This includes:
- Employees earning more than £184 per week
- Self-employed people with profits over £6,515 per year
- People who earn money from renting out property
- People who receive certain benefits or tax credits above a certain level
- Some people who live abroad but work in the UK
- People who are over 16 and under the State Pension age who have income from savings or investments above a certain level.
There are some exceptions to this, such as people who are over State Pension age (66 years), people who earn less than the minimum threshold, and some people who are self-employed but have low profits.
NIC bands in the uk
In the UK, National Insurance contributions (NICs) are divided into different brackets, depending on how much you earn. The current NICs brackets for the 2022-23 tax year are as follows:
- If you earn less than £184 per week, you do not need to pay NICs.
- If you earn between £184 and £967 per week, you pay NICs at a rate of 12% on earnings above £184.
- If you earn more than £967 per week, you pay NICs at a rate of 2% on earnings above this amount.
For self-employed individuals, the brackets are slightly different, as NICs are based on your profits rather than your earnings. The current NICs brackets for the self-employed for the 2022-23 tax year are:
- If your profits are less than £6,515 per year, you do not need to pay NICs.
- If your profits are between £6,515 and £9,568 per year, you pay NICs at a rate of 9% on profits above the lower limit.
- If your profits are over £9,568 per year, you pay NICs at a rate of 2% on profits above this amount.
Where Can I find my National insurance number?
You can find your National Insurance number:
- on your payslip
- on your P60
- on letters about your tax, pension or benefits
- in the National Insurance section of your personal tax account
You can apply for a National Insurance number if you do not have one or find your National Insurance number if you’ve lost it.
Important Documentation and Forms for Personal Tax
Whether you are a sole trader, a PAYE employee or a director, there are a few things you should keep track of during the year to make your personal tax returns effortless and efficient.
PAYE Documentation and Forms
As a PAYE employee, there are a few things to take into account when completing a self-assessment. The “P” range of forms are important for you to keep track of all your expenses and benefits, as well as the codes you need to be aware of. A brief breakdown of these forms:
P800
You may receive a P800 form, also known as a ‘tax calculation letter’, if HMRC believes you have paid the wrong amount of tax – either too much or too little
P45
When you stop working at a job, your employer must supply you with a P45 form. This form details how much tax you have paid on your salary so far for that tax year. Tax years run from 6 April to 5 April the following year.
P60
The P60 form details how much tax you paid on your salary via PAYE. If you have multiple jobs, you will get a P60 from each of them. If you work for an employer on 5 April, that employer must provide you with your P60 by May 31st of that year.
P11D forms are used to report your ‘Benefits in Kind’ (or simply ‘benefits’) to HMRC. Benefits are anything given to you by an employer that has monetary value and is not wholly necessary for your work.
For a more detailed view of the PAYE forms, please see our guide: What are P800, P45, P60 and, P11D Forms?
Other important things to take note of are expenses that can offer tax relief benefits. You can read more about which expenses you can claim as a PAYE Employee in the following post: Save on Taxes – Tax Exemptions in the UK.
Sole Trader / Sole Proprietor / Entrepreneur
As a sole trader, you are trading as a business which means you may have additional business expenses and income that need to be listed. As a sole trader, there are many expenses that you can claim. See our guide here: What Expenses can I Claim for As Self Employed?
At CIGMA we love working with small businesses and helping them in the most tax-efficient way. We also want to make it easy for entrepreneurs to manage their taxes which is why we’ve created a bookkeeping spreadsheet to assist you in keeping your information in an orderly manner:
Download Our Free Bookkeeping Spreadsheet:
When Do You Need To Submit Personal Tax Returns to the HMRC?
There are clear guidelines as to who needs to submit a personal tax return and who should not. We’ve created an in-depth guide that you can read here: Do I Need To Submit a Self-Assessment?
However, in short, anyone meeting one or more of the following criteria is required by law to submit a tax return:
- Taxable income was over £100,000.
- Have a rental income of over £1,000.
- Received untaxed income over £2,500 (example: tips or commission).
- Savings or Investment income over £10,000.
- State pension as your only source of income and was over your personal allowance of £12,750 .
- Sole proprietor earning over £1,000.
- Earning any type of foreign income.
- Claiming child benefit and your or your partner’s income exceeds £50,000.
- You are a trustee of a trust or registered pension scheme.
How Do I Pay Taxes in the UK?
In the United Kingdom, individuals who meet the above-mentioned criteria must complete and submit a self-assessment to the HMRC. Never filed a self-assessment before? Not a problem. We’ve created a detailed guide to submitting your self-assessment here: Complete your Self Assessment Like A Pro.
A self-assessment takes into account your tax code, NIC, expenses and income to see whether you are eligible for a tax rebate. Tax rebates are usually paid within 5 days of your self-assessment being approved by the HMRC.
To have the best chance of receiving a tax rebate, it is advised to make use of a tax return specialist. At CIGMA we specialise in tax returns so we complete our client’s self-assessments by taking everything into consideration so that you have the best possible chance to get a tax rebate.
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