Until 2005, the Inland Revenue was a department of the Government responsible for collecting tax, including income tax and National Insurance contributions. Today, this responsibility falls to HM Revenue and Customs. Below is a guide to the different taxes used by the UK Government and who has to pay them.
Income Tax is a tax that you pay on income that you receive, but you don’t pay it on all types of income.
You pay income tax on things like:
- money earned from being employed
- self-employed profits
- some state benefits
- the majority of pensions
- interest on savings
- rental income with the exception of live-in landlords
- income from a trust
Most people in the UK receive a Personal Allowance- this is the amount of income that you can have before you pay tax. Tax reliefs can also be used to reduce the amount of tax that you pay.
The majority of Income Tax is paid through PAYE (pay as you earn) meaning that it is automatically calculated and deducted from your wages before you receive them.
For more complex tax affairs, you may have to complete a Self Assessment tax return.
Self Assessment Tax Returns
Self Assessment is a system used by HMRC to collect Income Tax, particularly from people with businesses or other income who cannot use the PAYE method. If you need to send a self-assessment form, you fill it in after the end of the tax year (April 5). You must send it by the deadline of the 31st January if you have filed online or 20 days later for paper returns.
When filling in your return, you must have kept records such as bank statements or receipts to ensure that you fill it in correctly. You can get help by an accountant or by HMRC itself to do this. Based on what you report, HMRC will send you a bill of what you owe- how much you pay depends on which Income Tax band you are in.
People who need to send a tax return generally include:
- self employed (you can discount allowable expenses)
- receiving £2,500 or more in untaxed income.
- making profits from selling things such as shares.
- living abroad and having a UK income.
- an income over £100,000.
You can also fill in a tax return to claim money back from HMRC for:
- donations to charity
- private pension contributions as a higher rate tax payer.
- work expenses over £2,500.
Corporation Tax is paid by companies on their taxable profits. Profits of up to £1.5 million mean that your Corporation Tax has to be paid 9 months and one day after your accounting period ends, but for profits over £1.5 million, you must pay your corporation tax in instalments.
You can pay via online/telephone banking, Direct Debit, at the Post Office or by your building society.
If your company or organisation pays too much Corporation Tax, you may be eligible for a refund and HMRC will pay back what you have overpaid, their interest rate is 0.5%.
HMRC will pay you interest if:
- You decided to pay your Corporation Tax early, such as 6 months after your accounting period ends.
- If you have paid more than you owe.
- If you pay in instalments.
VAT is charged on things like:
- Selling goods or services as a business.
- Hiring or loaning goods to someone.
- Selling business assets.
- Items sold to staff.
- Business goods for personal reasons.
- Nonsales such as part exchanges.
Businesses who are VAT registered must charge VAT on their services or goods.
You must report to HMRC the amount of VAT that you have charged and paid. This is done through your VAT Return, which is submitted around every three months.
HMRC also deals with Tax Credits. There are two types of tax credits: Child Tax Credit and Working Tax Credit. Child tax credits are given to families with children under a certain age, whereas working tax credits are used to supplement workers who have a low income. You can apply for both types of credits online.