Our experts at DSR Tax Refunds know how hard it is to find good, quality information about HMRC’s tax regulations that is easy to understand, and that’s why we have created these handy guides to tell you everything you need to know. Our aim is to make life easier for our clients and that is why we want to share our expertise with you. You can also call our friendly team on 0330 122 9972 – we’re the tax experts you can trust. Or you can check out our online calculator to see if you could be due a refund.
What is Income Tax?
Income Tax is a tax you usually have to pay on income you receive. Not all forms of income are liable for Income Tax. How much you must pay depends on how much income you receive.
Income Tax is payable on the following types of income:
- Money you earn from your job
- Profit you might make if you are self-employed – this includes income earned from selling services through websites or apps
- Most pensions, including the State Pension, company pensions, retirement annuities and personal pensions
- Some state benefits
- Benefits you receive as part of your job
- Income you receive from a trust
- Rental income, unless you are a live-in landlord and get less than the ‘rent a room’ limit, which is currently £7,500 for letting furnished accommodation in your own home (halved if you share the income with a partner or someone else).
You wouldn’t have to pay Income Tax on the following forms of income:
- Savings interest which is under your savings allowance
- Any income you receive from tax-exempt accounts, such as ISAs or National Savings Certificates
- Certain state benefits
- Premium bond or National Lottery wins
- Rent you receive from a lodger in your home, as long as it is below the ‘rent a room’ threshold
- The first £2,000 of company share dividends
Are there any allowances or reliefs?
Most people in the UK are entitled to a Personal Allowance of tax-free income. This means that you are entitled to earn up to a certain limit, currently set at £12,500, before you have to pay any Income Tax. You would then only pay tax on the income you receive which is above that Personal Allowance.
You might also be able to reduce the amount of tax you have to pay if you are entitled to any tax reliefs – these reliefs will either allow you to pay less tax if certain conditions are met or allow you to claim back tax you have already paid if you meet the tax relief conditions.
How do you pay Income Tax?
How you pay Income Tax depends on how you earn the income.
Pay As You Earn (PAYE)
Most people are taxed through the PAYE (Pay As You Earn) system. If you earn your income through an employer or a pension provider, your employer (or pension provider) deducts any Income Tax and National Insurance you owe from your wages before they give them to you. You will have a tax code and that code tells your employer how much tax to deduct from your earnings.
If you receive any state benefits, your tax code can take those into account as well so that any tax you owe from those can also be deducted automatically by your employer.
If your only income is your State Pension, HMRC will write to you if you owe any Income Tax. You might have to fill in a Self Assessment tax return to pay your taxes.
Self Assessment tax returns
If you are self-employed, or your financial affairs are more complicated than PAYE can handle (if you have a high income, for example, or income from a number of sources), you might be expected to fill in a Self Assessment tax return each year. From that tax return, HMRC will then calculate how much tax you owe and send you a tax bill. If you are registered for Self Assessment, you will have to fill in a Self Assessment tax return each tax year unless you notify HMRC that you no longer need to complete a tax return. If you have earned over £1,000 through self-employment or have over £2,500 in untaxed income (such as tips) you will have to complete a tax return.
Which state benefits are taxable?
It might seem strange that you can be taxed in state benefits you receive but actually, there is quite a long list of benefits that count as income as far as HMRC are concerned.
The following benefits are classed as taxable:
- State Pension
- Jobseeker’s Allowance
- Employment and Support Allowance (contribution based)
- Carer’s Allowance
- Incapacity Benefit (after the 29th week of receiving it)
- Bereavement Allowance
- Widow’s Pension
- Widowed Parent’s Allowance
- Industrial Death Benefit scheme pensions
If you receive any of these benefits, they will count towards your taxable income in any tax year.
The following benefits are tax-free so you won’t pay any additional Income Tax by receiving these:
- Housing Benefit
- Income Support (unless you are receiving it because you are on strike)
- Employment and Support Allowance (income related)
- Working Tax Credit
- Child Tax Credit
- Pension Credit
- Child Benefit (unless you are subject to the High Income Child Benefit Charge)
- Disability Living Allowance
- Personal Independence Payment (PIP)
- Severe Disablement Allowance
- Maternity Allowance
- Universal Credit
- Guardian’s Allowance
- Attendance Allowance
- Winter Fuel Payments/ Christmas Bonus
- TV Licences for over-75s
- Lump sum bereavement payments
- Industrial Injuries Benefit
- War Widow’s Pension
If you receive any of these benefits, they won’t count towards your taxable income in any given tax year.
How do you know if you need to pay Income Tax?
It’s pretty easy to work out whether you need to be paying Income Tax by following these simple steps.
Firstly, add together all of your taxable income, including from your employment as well as any taxable benefits you receive. Next work out your tax-free allowances, including the Personal Allowance of £12,500. Subtract your tax-free allowances from your taxable income – if there’s anything left, you should be paying Income Tax. If for some reason, you’re not already paying Income Tax, you need to contact the HMRC Income Tax helpline on 0300 200 3300 (textphone 0300 200 3319) and they will tell you what you need to do next.
However, if there’s nothing left after you do the above calculation, you shouldn’t be paying Income Tax so you might be entitled to a tax refund if you have been paying tax.
How do you know you’re paying the right amount of tax?
You can check you are paying the right amount of tax for this current tax by checking online with HMRC. By using the online service, you can check your Income Tax payments for the current tax year as well as work out how much Income Tax you should be paying.
By using HMRC’s online service, you can also check how much Income Tax you paid in the previous tax year as well as estimating how much Income Tax you should have paid in previous tax years.
If you can’t use any of HMRC’s online services for any reason, you can also call HMRC on their helpline number (0300 200 3300/ textphone 0300 200 3319) for help.
How can DSR Tax Refunds help?
We aim to make life as simple as possible for our clients and that includes giving you the information you need to make your taxes (and your life) simpler and less stressful. Our team of experts at DSR Tax Refunds are always on hand to help our clients and our excellent standing with HMRC means that we can make sure you don’t fall foul of their regulations, while claiming your maximum tax rebate. We can even take care of all that paperwork and deal with HMRC on your behalf too. Call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.
This page was last updated on 10/04/2019.