Have you ever wondered why you pay the tax you do? Maybe you think you're on the wrong tax code? I hear so many people throwing incorrect “facts” around about income tax! This post is to discuss the facts, and importantly the myths, of your UK income tax! (Information most useful to PAYE employees, rather than self-employed self-assessment tax)
Standard tax code
Employers have to deduct a specific amount of tax from each pay cheque and send it to the government for use in their schemes. If you are the employee of a company, the most likely tax code you have is 747L (due to change to 810L in April). 747L means that you are entitled to £7475 a year before having to pay any tax (the tax year is 6th April - 5th April). This is known as your personal allowance.
If you are aged 65-74, you are entitled to a larger personal allowance of £9,940 (your tax code will end in a P), although if you receive more than just £24,000 you will have to pay tax on all of your income. If you are 75 or over, your personal allowance is raised to £10,090 (tax code ends in a Y).
Rather than waiting until you've earned £7475 then taxing you heavily, HMRC (Her Majesty's Revenue and Customs) divide the allowance between each pay cheque. If you are paid every week, your weekly allowance would be £7475 / 52 = £143.75. If you are paid monthly, it would be £7475 / 12 = £622.92.
Incomes up to £35,000
If you earn less than £35,000 a year, you will be charged 20% on anything above the allowance. For example if you earned £243.75 one week, that would be £100 over the £143.75 personal allowance, so you would pay £20 (20% of £100) in tax that week.
If you earn £120 one week, but £200 the next week, you would not be charged any tax on the first week but would pay tax the second week.
High earners (£35,001 to £150,000)
If you earn between £35,001 and £150,000, you will pay 40% of whatever you earn over your personal allowance. If you earn more than £100,000 a year, you are not eligible for the personal allowance and will pay tax on all your earnings.
Extremely high earners (£150,000+)
If you earn more than £150,000, you do not have any personal allowance and will pay 50% of whatever you earn as income tax.
MYTH: You pay so much tax on a second job that it's not worth doing!
If you have a second job, your tax code will be BR (Basic Rate) and you will pay 20% tax on all your earnings (unless you're earning more than £35,000 in your second job). This is because your personal allowance is all allocated to your first job and it is assumed that you will reach the £7475 income threshold.
You are paying exactly the same amount of tax as you pay on whatever you earn over your personal allowance at your first job, so your time is worth the same wherever you put in the extra hours!
If you are paid more at your second job, you should get in contact with your local tax office, who will be able to switch the allowance over to the higher paying job. This means you will not be paying as much tax overall.
If you do not receive more than £7475 for either job, you can ask the tax office to split the personal allowance between the two jobs, so that you receive some tax-free income from both employers.
MYTH: Students don't pay tax
The most common misconception I hear about tax is that students (either full-time or part-time) don't pay tax. RUBBISH! Students have the same tax code as anyone else, but because they often only work a couple of days a week, they generally do not earn enough to reach the £7475 personal allowance boundary.
A common problem for some students is actually paying too much tax! This can occur when you work full-time in the holidays, but don't work during term time. You are charged 20% tax on whatever you earn over the personal allowance each pay cheque (£143.75 a week, £622.91 a month), but you don't earn the full £7475 a year. This means that you are owed tax back at the start of the next tax year (6th April).
Claiming tax back
If you started a new job after the 6th April, or you have been on the wrong tax code for part of the year, there is a good chance that you have paid too much tax and are owed a refund by the government. Don't wait for HMRC to come to you, cheque in hand. They are supposed to, but I waited two years before taking matters into my own hands!
You can check how much tax you are owed by using the form (P60) you are given at the end of a tax year. This sheet shows you how much you earned and how much tax you paid. You can use the online tax-checker provided by HMRC to calculate whether you are entitled to a refund.
If you find you are owed money, you should ring HMRC on the number provided on your pay slip, or call 0845 300 0627 (8.00 am to 8.00 pm, Monday to Friday, 8.00 am to 4.00 pm Saturday).
Please note: You can only claim tax back for the past six years. If you discover you are owed tax, claim it back ASAP!