As another year passes, tax season is upon us. Forms arrive in the mail every day, and the filing process begins. For many people, this is the first time they are filing taxes. The process can feel overwhelming, especially if you don’t quite know what you’re doing, but you aren’t alone.
There are teams of tax lawyers, like Rotfleisch & Samulovitch, whose entire job is to help the average citizen understand and navigate tax law. In case you can’t quite afford a lawyer, here are some basic things you should know before you file this year.
The History of UK Tax Law
In 1783, Prime Minister William Pitt the Younger prioritized economic prosperity in the United Kingdom. At first, taxes were for the wealthy and focused on servants, carriages, and horses. The policy changed when the French Revolutionary Wars began. In 1799, Pitt introduced a tax directly on incomes.
Nowadays, taxes go towards maintaining social programs such as Welfare and the NHS. In 2019, citizens of the United Kingdom paid over 634 billion pounds in taxes. The average person only pays a small part of that, and the amount varies depending on your total income.
How to Calculate Your Income Tax
Everyone who lives in the UK gets assigned a code based on the type and amount of income you earn each year. Any salary from an employer or state benefits is taxable, but this isn’t the whole taxable income list. Your total earnings are your total yearly income. HM Revenue and Customs will give you a number based on your non-taxable allowance.
For the sake of brevity, this article will use the standard pre-taxable allowance of £12,500. You will receive the code 1250L. If you earn £12,500 or less a year, you will not have to file for taxes. If you earn more, you only have to pay 20% of the difference between your total income and £12,500. For example, if you make £30,000 a year, you’ll only pay 20% of £17,500, which totals to £3,500.
The most common type of income tax is PAYE, which means “Pay as You Earn.” Unless you oversee the payroll of your place of employment, PAYE taxes come out of your check each month before you even see the payment, which means you don’t have to worry about it.
If you get benefits from your employer like a company car or club membership, the total financial value of that benefit gets added to your overall income. You won’t receive the monetary equivalent. Instead, you get to enjoy the help. The value is called Benefit in Kind (BIK). You don’t pay tax on the whole BIK, only the taxable amount.
Things to Keep in Mind
While it would be nice to keep your whole paycheck, the amount you don’t see goes to helping the country. Making the process simple for yourself doesn’t mean changing all your habits. Keeping your paychecks in a file, or just being aware of your overall income will make the filing process faster. You can even file online. If doing it yourself is too complicated, consider hiring a personal accountant. Citizens must pay taxes every year, but it doesn’t have to be a nightmare.