Tax is something that we all need to keep on top of, but for many people it is an incredibly confusing process that is better left to a professional. This isn’t always the case however, and some people like to tackle their personal tax head on. If you are planning on completing a self-assessment this year then it’s important that you are aware of the basics behind your tax return and that you have an understanding of exactly how much tax you need to pay and why you need to pay it. Without this knowledge you could end up putting yourself through a great deal of stress and could end up paying a hefty tax bill if your tax isn’t done correctly.
Income Tax Threshold
In general, the amount of income tax that you pay depends on how much you earn each year and this is divided into income tax thresholds. There is also a tax-free threshold which means that if you earn under a certain amount you don’t pay tax at all. It also ensures that everyone is able to earn a certain amount without having to pay any tax at all. Currently this tax-free threshold sits at around £8,105 or just over £10,000 for people over the age of 65.
The basic rate for tax once this amount has been reached is 20% and this increases incrementally until you reach a top level of 50% for any amount that you earn over £150,000.
National Insurance contributions
In addition to your personal tax you are also responsible for ensuring that you pay the right amount of National Insurance contributions and these must be paid by anyone who is residing within the UK as a contribution towards public healthcare and the public pension scheme. National Insurance works in a similar way to the tax thresholds, except that the National Insurance threshold is slightly lower at £7,592.
To complete your tax within the UK you will be required to complete a self-assessment form, this highlights how much money you have earned and how much tax you are therefore required to pay on this income. As a result you will either end up with a tax bill if you have no paid enough tax, or you could receive a tax return if you have paid too much.
Tax is important and regardless of your situation, if you are a private business owner or self-employed then you need to ensure that you have your tax affairs in order to ensure that you don’t end up with a hefty bill at tax time.
About the author
Amanda Walls understands that personal tax matters can be confusing at the best of times and she hopes this article will help others to get a basic understanding of how the tax system works.