Income Tax – What do you need to know?
Understanding Income Tax is essential for sole traders and partnerships.
You should be aware of the different rates and allowances available for this tax that could be beneficial for your finances.
Understanding Income Tax
Income Tax is a tax imposed on the earnings of individuals and businesses.
It is collected by HM Revenue and Customs (HMRC) and contributes to funding public services such as healthcare, education, and infrastructure.
Tax bands and rates
This operates on a progressive tax system, which means that tax rates increase as income rises.
As of the current tax year, which runs from April 6th to April 5th, the following tax bands and rates apply to most taxpayers:
Personal Allowance: The income threshold at which you start paying tax. For the tax year 2023/24, the personal allowance is £12,570. This means that the first £12,570 of your income is tax-free.
Basic Rate: Income above the personal allowance and up to £50,270 is subject to the basic rate of 20 per cent.
Higher Rate: Income above £50,270 and up to £150,000 is subject to the higher rate of 40 per cent.
Additional Rate: Income above £150,000 is subject to the additional rate of 45 per cent.
It’s important to note that these tax bands and rates can change from year to year, so it’s essential to stay updated with the latest information.
Allowances and deductions
In addition to the Personal Allowance, several other allowances and deductions can help reduce your taxable income.
Marriage allowance
This allowance allows couples to transfer a portion of their Personal Allowance to their spouse or civil partner if one of them earns less than the Personal Allowance threshold.
Dividend allowance
If you receive dividends from investments or as a company director, you have a tax-free allowance of £2,000. Any dividends above this threshold are subject to specific tax rates.
Pension contributions
Contributions to approved pension schemes are eligible for tax relief, meaning you can receive tax benefits on your contributions, depending on your income level.
National Insurance Contributions (NICs)
As well as Income Tax, individuals are also required to pay National Insurance Contributions (NICs).
NICs go towards funding state benefits and the National Health Service (NHS).
The amount of NICs you pay depends on your employment status and level of earnings.
Self Assessment and deadlines
If you are self-employed, earn income from renting out property, or have other untaxed income, you may need to file a Self Assessment tax return.
Self Assessment allows HMRC to calculate your tax liability based on your income, expenses, and any applicable deductions.
It is crucial to meet the deadlines for filing your tax return to avoid penalties.
For more advice on Income Tax and what it means for you, get in touch now.