Income tax is the government’s largest revenue and is collected by HM Revenue and Customs. The Act that allows the government to collect this money is the Income Tax Act 2007, though there are other Acts that apply.
How to manage your income tax
Income tax is paid by employees, sole traders and partners and the rate at which it is paid depends on the amount of income that the person has.
Every individual gets a personal allowance on which they do not pay tax; following this the rate at which the tax is paid is 20%. A higher earner will pay 40% on their earnings over a certain threshold, but this can change depending on the government.
Income tax planning can allow any person working the UK to manage their assets, so that they pay the least amount of income tax possible. Whilst the amount of money that can be saved is greatest for high earners, most people will benefit from an understanding of how to manage their income to avoid paying too much tax.
What constitutes taxable income?
The HMRC outlines what types of income are liable to be taxed. The following are subject to income tax:
- Earnings from your employment or self-employment
- Most State, company and personal pensions
- Interest on your savings
- Income relating to company shares or dividends
- Rental income
- Income relating to trusts
If a person works for an employer, that employer will pay the tax directly from the wages under the Pay As You Earn (PAYE) scheme. When paying tax under PAYE, your personal allowance will be considered each time you are paid, so that you will receive tax relief on each pay packet.
If, however, you stop working part way through the tax year, your remaining personal allowance should be offset against the money you have already earned. HMRC are often not good at noticing this and it is always worth filling in the relevant form to claim your rebate of tax paid.
Income tax planning can be very complicated depending on how much income you have and its source. Certain investments may produce an income, but you may not be required to pay tax on this at all, or only at a reduced rate.
As a business, it is even more vital to seek specialist advice from a financial advisor or tax solicitor to ensure smooth running of the cash flow to your business. The benefit of seeking specialist advice means that you may be able to actually decrease your tax deductions by making changes to your business structure, allowing you to take home more money each month.
Need more information? See our page on completing your income tax return.
Are you looking for a tax solicitor specialising in income tax to help you with a dispute? Contact Law works with a variety of tax specialist solicitors who can help you whatever the level of your dispute. Please call us on 0800 1777 162 or complete the web-form above.
- Last Updated on 17/10/2013