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Don’t let Personal Tax be Taxing – (Emma Reid)

The government has made personal tax very straightforward for the majority of individuals by deducting tax, via payroll, every pay period through Pay As You Earn (PAYE). However, if you start your own business or have earnings from other sources, it is helpful to get to grips with personal tax. This article aims to demystify the basics.

Tax Year

The tax year runs from 6th April of one year until 5th of April the next year. Generally, the government will make any changes, which affect personal tax, become effective at the beginning of each tax year (i.e. on the 6th April).

Personal Allowance

This is the amount that is deducted from your annual income (employment income, trade income, property income, savings income and dividend income) before tax is calculated. For the 21/22 tax year, the personal allowance is £12,570.

When you lose your personal allowance – If you have income that exceeds £100,000 annually, the personal tax allowance will be reduced by £1 for every £2 your income exceeds £100,000. For example, if your total income is £110,000, this exceeds £100,000 by £10,000 so your personal allowance will be reduced by £5,000 and will be £7,570 (i.e. £12,570 less £5,000).

Tax Rates

Tax is a percentage of income. The tax rate changes depending on the type of income.

England Tax year 21/22Non-Savings income (employment income, property income, trade income)Savings IncomeDividend Income
Nil rate band (Savings income up to £5,000, Dividend income, £2000)N/A0%0%
Basic Rate Band (£12,570 to £50,270)20%20%7.5%
Higher Rate Band (£50,270 to £150,000)40%40%32.5.%
Additional Rate Band (Over £150,000)45%45%38.1%

There is a common misconception that if you move up a tax band you will end up worse off than if you were paid less and remained in a lower tax band. For example, if you had trade income of £60,000 it would be taxed as follows:

 Income – Employment incomeTax RateTax DueIncome after tax
Personal Allowance£12,5700%£0£12,570
Basic Rate Band (£12,570 -£50,270)£37,70020%£7,540£30,160
Higher Rate Band (£50,270 – £60,000)£9,73040%£3,892£5,838

As you can see, only the final £9,730 of income, which exceeds the £50,271 threshold, is taxed at 40%.

Important dates

The Self-Assessment Tax Return is due by the 31st January following the end of the tax year. Therefore, for the 21/22 tax year, the return is due on the 31st January 2023.

Payments on Account

Unfortunately, the payment schedule is complicated and has a number of rules attached, so do seek expert advice if you are unsure.

You must make two payments on account every year unless your last tax bill was less than £1,000 or you have already paid more than 80% of the total tax you owe.

Each payment is half of the previous year’s tax liability: the first instalment needs to be paid by 31st January following the tax year end, the second instalment must be paid by 31st July. If the previous year’s liability is less than the current year tax liability, you will need to pay a “balancing payment” which is the difference between what you have already paid and what you owe.

This is not financial advice and if you need help submitting your Self-Assessment Tax Return or any other tax advice, please get in touch with the team at Freedman, Frankl and Taylor Chartered Accountants and Business Advisors. We would be very pleased to hear from you.

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