Idiot's Guide to British Income Tax

Hartson_2

Hi there,

I've joined MSE forum recently and found it incredibly useful and enlightening. I just wondered if people could clarify something re income tax?

On various threads I've read posts along the lines of how your taxable income at 20% is ON TOP of your personal allowance. I just wanted to clarify in no uncertain terms that this is the case?

So in effect, until the end of this tax year it's £7,475 @ 0%, then everything between £7,475.01 and £42,475.01 is taxed at 20%?

Some of you may think this is a basic query, but I think many might be surprised by just how many people think that everything earned over a SALARY of £35,000 gets taxed at 40%. I've been looking at the government website, and an untrained eye could be forgiven for thinking that (or at least it would have caught me out!)

McKneff

You missed out a basic element. Tax is obviously paid weekly/monthly for those employed so

£7475 is divided by 52 for weekly paid, when you have the answer to that anything earned weekl over that amount then tax is paid on it weekly.

Same for monthly ie divide by twelve and yu pay tax on anything over that on a monthly basis.

It always amazes me how little grasp so many people have on the basic tax system.

I also meant to say 'Hi and welcome to the boards':wave:

Hartson_2

McKneff wrote: »

You missed out a basic element. Tax is obviously paid weekly/monthly for those employed so

£7475 is divided by 52 for weekly paid, when you have the answer to that anything earned weekl over that amount then tax is paid on it weekly.

Same for monthly ie divide by twelve and yu pay tax on anything over that on a monthly basis.

It always amazes me how little grasp so many people have on the basic tax system.

I also meant to say 'Hi and welcome to the boards':wave:

Thank you very much. So if you have the same job (employed not self employed) for over one year, does it even itself out? Even if in practice it is ironed out across the year, do you effectively still only pay the 40% on the earnings above £42,475?

CLAPTON

yes the HMRC website is very unhelpful; although the facts there are correct, it lacks examples to clarify how the figures add up.

mrcow

Hartson wrote: »

Thank you very much. So if you have the same job (employed not self employed) for over one year, does it even itself out? Even if in practice it is ironed out across the year, do you effectively still only pay the 40% on the earnings above £42,475?

Yes it does.

And yes you do.

CLAPTON

Hartson wrote: »

Thank you very much. So if you have the same job (employed not self employed) for over one year, does it even itself out? Even if in practice it is ironed out across the year, do you effectively still only pay the 40% on the earnings above £42,475?

the aim of dividing 7475 by 12 and giving a monthly allowance is so that if you earn more or less the same each month then your take home will be more or less the same

but it does indeed work out the tax exactly, so whatever the fluctuating in your income from month to month, by year end your tax is exactly correct and you do not pay 40% until your yearly earning are over 42,475

jem16

Hartson wrote: »

So in effect, until the end of this tax year it's £7,475 @ 0%, then everything between £7,475.01 and £42,475.01 is taxed at 20%?

Yes basically that's the main idea.

However there are some things that can make a difference.

One is any taxable benefits that you may receive from your employer. This usually has the effect of reducing your tax code so that you will start to pay tax sooner. So for example if you had medical insurance provided by your employer that was worth £1000pa, your personal allowance would be reduced by £1000 so the basic rate tax band would be bewteen £6475 and £41,475.

The second is that pension contributions entitle you to tax relief so if you paid £3000 in pension contributions and had £1000 in medical benefits, you would have to earn over £44, 475 before paying higher rate tax.

Of course gross savings interest and dividend payments should also be added to your total income as well.

xylophone

http://www.hmrc.gov.uk/incometax/intro-income-tax.htm

maximise

http://www.moneysavingexpert.com/tax-calculator/