Trying to understand how taxes work and how they affect your daily life can be quite a headache. There are taxes that are levied from all quarters, starting with your salary and for every item we purchase to inheritance. There are also times we are eligible for rebates and refunds. It is important to note that if you are not aware of the tax laws and how they affect you, you might lose out big time. In order to better look after your loved ones and plan your future, you need to be well versed in tax laws. Let’s get started on the basics.
There are countless types of taxes that are levied on the citizenry periodically. We’ll look at the most common types.
This is tax levied on all income. The income could be from;
Employment earnings, which include benefits in cash and kind
Self employment earnings
Pension income (state, personal and occupational)
Social security benefits
Income from investments such as rent, shares, trust, etc
It is important to note that the tax is solely dependent on the amount of income and not any other parameter. There are certain amounts of income that do not attract taxes.
Taxable and Non Taxable Income
It is advisable to be conversant with the kinds of income that are taxable and those that aren’t. If you are planning on cutting your tax bill, you might as well get acquainted with tax reliefs and allowances.
Here is a brief summary of the non taxable income.
Interest from such investments as children trust fund, insurance policies etc
Other income such as tax credits, adoption allowances, education grants, bravery awards, etc
Taxable income include
Work related income
Pension and social security income
Interests on savings
You can check out Citizen’s Advice for a whole list of all taxable and non-taxable income so that you are better prepared financially.
Tax Allowances and Reliefs
All tax payers are entitled to a certain degree of tax free personal allowances. It is up to you to determine your tax bracket, as well as find out how much you are entitled to in terms of tax free allowances.
Some tax payers are entitled to tax reliefs on top of tax allowances. Reliefs are usually given against the tax bill based on certain outgoings that make you eligible for a relief. You can check out the reliefs you are entitled to depending on your income and outgoings.
This refers to the amount paid on the value of assets left behind when the owner dies (usually called an estate). The amount is usually paid if the value of the estate exceeds £325,000. However, the exception to this rule is if the estate is left to the spouse. If you need to pay the tax, you may need some professional assistance for proper inheritance tax planning.
This is a local tax that is levied on domestic property. The local authorities set and collect these taxes, exempt other property owners as well as issue discounts based on the property valuation bands.
A valuation band simply refers to tax class of the property based on the value. Each band has a pre-set class that determines how much will be paid. The local authority has a list of the properties in their area, as well as their value (even when house price rises) and appropriately assigned class. This list is open to the public, and is accessible from the local authority’s office. It is important to find out if your property is among those that are tax exempt.
Have You Overpaid Taxes?
Tax refunds are issued when you have overpaid your tax. There are endless circumstances that can lead to tax overpayment. There are several instances where tax refunds apply. These are:
PAYE and self assessment refunds
Refunds following death
Refunds on savings interest
Refund on overpaid income tax on pensions
When claiming a refund, it is important to note that t is time-framed. The limit is capped at 4 years after the year the overpayment was made. A financial year runs from 6th April to 5th April of the following year. Therefore, place your claims before the time runs out on you.
UK Tax System
The taxation system in the UK involves payments at three different government levels; central government, devolved national government, and local governments. Central government is responsible for collecting income, corporation, and value added taxes in addition to national insurance contributions and fuel duty. The local government collects fees and charges such as parking, property and the council taxes as well as gets grants from the central government.
Planning Your Financial Future
Taxes, and today’s tougher tax rules, are a huge part of future proper financial planning. If you are not sure of how to go about the system, pay the right amount of taxes and get refunds for overpayments, you need to engage the services of an experienced tax attorney.