As we all know, paying income tax is just one of those unfortunate by-products of working! You might not like it, but the tax man is going to take away a chunk of what you earn regardless. So, to lessen that red-mist somewhat, it’s important to know exactly how much you should be paying, where your hard earned money is going, and how to claim it back if you have been paying too much.
What is income tax?
Income tax is the tax on…you guessed it, incomes! It is paid by anyone in employment (including the self-employed) when they are earning over a certain amount. You may also have to pay if you aren’t working but are still receiving income, this could be via pension, savings, or shares (dividends).
How do I know what tax code I should be on?
The good news is that nearly everyone who is resident in the UK for tax purposes receives a Personal Allowance, which is an amount of taxable income you’re allowed to earn or receive each year, tax-free!
This amount changes over time, depending on the tax year. The latest amount is always available online for reference and, if you earn less than this, you normally won’t have to pay tax at all.
This can be found on your payslip and is usually made up of several numbers and a letter. Your Tax Code is normally worked out by starting with your personal allowance, and then adjusted to take account of any income tax you may already owe (so income you haven’t paid tax on, from savings or a part-time job for example). The amount you are left with is the tax-free income you are allowed to earn in a year. There are a number of other factors that can affect things including when you are born, if you are blind, if you are self-employed or earn over £125,000.
But as an example, if you have uncomplicated financial affairs, are born after 5th April 1948 and have no deductions (income that you haven’t paid tax on) then your Tax Code is likely to be 1257L, which is your tax allowance of £12,570, your total deductions of £0 ÷ by 12.57. Simples!
Making sure your tax code is correct is the basic first step in ensuring you are being taxed correctly, so do the research. More information can be found here.
Please remember though, that not everyone is the same, so make sure you know exactly what your tax code should be, not just whether it is the same as the person you sit next to!