If you are working full time or have done for a number of years, then you are probably extremely used to paying income tax out of your salary, as a percentage will be taken from your monthly pay packet before it even reaches your bank account. Income tax varies depending on the amount a person earns, and the higher a person’s wage, the more income tax they are expected to pay back to the state. If you earn below a certain amount, then you will not be required to pay income tax at all, and some income is even tax-free. There can often be confusion about how much income tax a person is required to pay, and it is important that every worker is aware of how much they should be paying, if any, to avoid overpayment to the tax office, resulting in an often lengthy wait to receive your money back.
The Income Stats
If you are earning an annual rate of £11, 000 or below, you will not be expected to pay any income tax on your earnings, this is known as a personal allowance, which is the amount that you are eligible to earn before you are legally a taxpayer. There are certain cases that your personal allowance will be higher than the average, such as if you claim a marriage allowance or a blind person’s allowance. No tax should be taken out of your pay packet if you are earning below your personal allowance, and if it is, it is important that you contact HMRC to rectify the issue, as you may have been put onto the wrong tax code by your employer. If you are earning between £11, 001 – £43, 000 per year then HMRC will take 20% of your earnings and will split this into monthly amounts. If you find yourself paying more than this, then again, you will have been placed on the wrong tax code. The £11, 000 – £43, 000 is known at the basic rate of tax payment. To be put onto the higher rate, you will need to be earning between £43, 001 and £150, 000 per year, which will mean you pay 40% of your earnings to the state and over £150, 000 you will be expected to pay an additional rate of 45% tax.
Inheritance tax is a tax on the property, money and possessions of someone when they die, but similar to income tax, there is a threshold that determines how much inheritance tax is owed, if any at all. The current threshold for the payment of inheritance tax stands at £325, 000, and so there is no inheritance tax to pay the assets of the person that has died are less than this, or they have left everything to their spouse, civil partner or charitable organisation. Marriage changes the rules slightly, and if you have assets worth £325, 000 or less and transfer it to a civil partner or spouse when you die, their threshold will then increase to double (£650, 000). If the value of your estate is above £325, 000, generally, you will pay 40% inheritance tax when you die. If you have a will, the funds will be paid by the executor, to HMRC.
According to recent research, the more homes that are worth above the inheritance tax threshold have increased to higher than ever before, and it is thought that one in four homes will now be expected to pay inheritance tax when their owner dies. The number of houses above the inheritance tax threshold has increased to one in four from a small 13% when it was first introduced in 2009. With the increase happening so quickly, there have been urgent calls for a shake-up in inheritance tax rules which will now see a nil-band rate introduced for when a house is passed down by the owner to their children or other direct descendants. As expected, it was London that has the highest number of properties above the inheritance tax threshold with central London seeing four out of five properties exceeding it. Outer London also saw two-thirds of its houses sold for above £325, 000 which is a significant increase of the 55% of last year. Altogether, 72% of properties in London are now exceeding the threshold.
The increase in housing prices has forced the government to realise just how ridiculous the current inheritance tax rules are, with more and more houses that owe the tax, it seems absurd that the property cannot be passed down to the owner’s children tax-free. From April 2017, this will no longer be the case, as many of people of Britain anxiously await the introduction of the new rules. The nil-band allowance rate is then set to increase by £25, 000 each year and so children will be able to inherit as much as £425, 000 from their parents, which can then be passed onto their spouse, pushing the possible nil-band boundary up to as much as £850, 000. This will eventually increase to £500, 000 meaning a combined marital inheritance can reach £1 million. In the event of downsizing, a person will be able to take the value of their current home and pass this down to their direct descendant, before the move takes place. Many people want to sort things before they die and so may give their houses up whilst they still have a while to live. If you do find yourself doing this, the most logical three things to do are; pay rent to the new owners, continue to live there yourself for the next seven years or pay your fair share of the bills.