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Banks & Taxes in the UK
Income Tax in the UK
Alas, there is no getting around doing your taxes. From HMRC over NI to PAYE, you will learn a whole new vocabulary along the way. As an expat moving to the UK, you also have to deal with such concepts as residence and domicile. Our introduction to taxation in the UK offers a succinct overview.
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How to Figure Out Your Income Tax Rate
Once you have worked out which kinds of income you receive, you can figure out which tax bracket you fall in; your tax rate depends on your total annual income.
For the fiscal year of 2016/17, these are the current tax rates in the UK:
- The starting rate for savings income is 10%. However, if your non-savings income (e.g. from employment) is above the limit of 5,000 GBP, after you have deducted your Personal Allowance, the 10% rate does not apply. Basically, this rate only covers the savings of low-income taxpayers.
- The basic rate is 20%, for all sorts of income up to 32,000 GBP per year.
- The higher tax rate of 40% applies to income from 32,001 GBP to 150,000 GBP a year.
- Income above the 150,000 GBP limit is taxed with the additional rate of 45%.
For example, let’s assume that you earn 60,000 GBP a year from your new job in the UK. In this case, the starting rate on any interest from savings does not apply. On the first 32,000 GBP of your 60,000 GBP a year, you will pay 20% in taxes. The higher income (60,000 GBP minus 32,000 GBP) is accordingly taxed with a rate of 40%.
Your actual taxable income will be lower than the 60,000 GBP in the example above, though. When you calculate your income and figure out the respective tax rate, don’t forget to deduct any allowances and tax relief first.
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How to Calculate Your Personal Allowances
The most basic form of tax allowance in the UK is the Personal Allowance. There are other kinds of individual tax allowance, but these are somewhat rarer.
Your Personal Allowance is determined by two factors: your age and (most of) your income before taxes. The Personal Allowance is based on the “adjusted net income”, i.e. total gross income, minus charity donations through Gift Aid and pension contributions.
In 2016/17, the rates for Personal Allowance in the UK are as follows:
- 11,000 GBP for those born before 6 April 1938, with an income of 27,700 GBP a year (maximum)
- 11,000 GBP for those born between 6 April 1938 and 5 April 1948, with an annual income of 27,700 GBP (maximum)
- 11,000 GBP for those born after 5 April 1948, with a yearly income of less than 100,000 GBP
If your adjusted net income is above the limit, you may still be able to get some Personal Allowance, though not the full amount.
For instance, if you were born after 1948 and earn 120,000 GBP a year, you have to adjust your income first. You contribute 10,000 GBP a year to a pension plan and donate 2,000 GBP to charity. This still leaves you with an adjusted net income of 108,000 GBP — 8,000 GBP above the income limit.
This difference is divided by two — makes 4,000 GBP — and your Personal Allowance is reduced by this amount. You are thus entitled to a tax allowance of 7,000 GBP (11,000 GBP minus 4,000 GBP).
If you earn significantly more than 100,000 GBP a year, the allowance will gradually decrease to zero.
If your income tax is deducted from your salary on a PAYE basis, the Personal Allowance should be automatically included in these calculations. If you think that it has been forgotten or if you’d like to claim tax expenses, get in touch with HMRC or file a Self-Assessment tax return.
Allowable Tax Expenses
Now let us assume that you have decided to hand in a tax return. Which other forms of tax deductions, apart from the afore-mentioned allowances, will you be able to claim?
- Even if charity donations though Gift Aid don’t influence the amount of your Personal Allowance, they might help you get into a lower tax bracket. Moreover, there are special tax relief schemes for donors with the two highest tax rates, in order to encourage their charitable contributions.
- There is tax relief on pension contributions as well. Company pension plans are generally financed through deductions from your gross salary. If you pay into a private pension scheme from your net income, most insurance providers will claim a tax deduction back from the government and use this sum to top up your funds on an annual basis. However, in some cases, you have to claim that money back from HMRC yourself, and then you can add it to your private pension plan.
- Employees and company directors can claim business expenses in their Self-Assessment, such as costs for transport or driving in the UK (not related to their daily commute), membership fees for professional associations, subscriptions to specialist business media, costs for tools and work uniforms, capital allowances for work-related assets, like the PC in your home office, etc.