The UK tax system is complex and ever-changing. It therefore, stands to reason that having a good idea of the taxes that may fall upon you is a wise idea to ensure your financial security. We know that tax is one of the areas many of us struggle to understand and so we have prepared a brief explanation of how this certainty in life may affect you.
Knowledge is power.
When it comes to taxes, knowing the basic information about the different areas which affect you will ensure you are not only contributing fairly to the tax system but also protect your finances in the best way possible. Increasingly, the responsibility lies with the individual to ensure they are abiding correctly by tax requirements – meaning no longer can we rely upon this to be arranged for us.
Knowing where to begin can be tricky. That’s why we have explained some of the most common areas of tax confusion and how you can avoid being caught out.
Your annual income is the biggest and most common area of your financial affairs to be taxed. As an employee, or as a business owner, your personal income will be taxed at a rate to contribute to the UK economy. Whilst it’s easy to see this as losing your hard-earned money, taxation is both necessary and inevitable for a healthy society.
In most cases, we contribute from our salary is straight forward. However, if you earn a yearly income over £150,000, then this is where the complications can come in. If you earn more than this threshold then you can expect to see your tax rate jump to 45%. Your personal tax-free allowance is currently £11,000, can also be reduced by £1 for every £2 you earn over £100,000 – which effectively means you’re paying a marginal tax rate of 60%. Being aware of these rules can mean it makes sense to try to reduce your income below the thresholds. This can be done changing your income stream to a non-taxable channel – for instance by deferring your earnings, moving income to a legal spouse or making charity payments instead.
Salary sacrifice in exchange for less tax.
Employer schemes that allow workers to exchange their money for tax- free incentives are becoming increasingly popular. Often referred to as salary sacrifice schemes, you can receive benefits, discounts or share options. Investigating what’s on offer for you can be a wise move and help you to spread other costs and reduce your tax bill. Employees who exchange part of their salary will have a reduced income but may also receive tax-free pension contributions and therefore make savings for the future at the same time.
A perk of the job, your company car may not strictly be yours but the tax upon it can still fall with you. The Co2 emissions on your car will dictate the amount of tax owed and can rise by each year at 1%. It therefore, makes sense to review your usage of your company car and consider using your own car for business. Many employers allow you to claim tax-free mileage which may make more sense for you. Some employers do offer fuel for private use but it may be better for you to have this reimbursed to your employer rather than paying a fuel scale charge.
The rate of tax on your dividend income – for example, that which is not invested in an ISA or similar scheme – can be upto 38.1% for top rate tax-payers. Moving your income around may be a wise idea or even deferring may help you reach the nil rate band and therefore be more effective. In these circumstances, seeking professional financial advice is a sound investment to ensure you are being taxed in the most efficient way for you.
Investments and returns.
Any investments or assets that you have can also be taxed – so don’t think that these are exempt. Reviewing these and considering moving funds can be a good idea to keep your capital at the lowest possible tax rate. You could also consider rearranging your investments to achieve a tax-efficient return. Keep in the mind the income tax rate of 45%.
Surprised to learn about some of these rules? No doubt you are not the only one. Taxation is an area that can be increasingly confusing, the more that you earn. Sometimes we take employee benefits and incentives for granted and without due consideration…it’s completely normal, actually anything else is abnormal, but a bit of abnormality can go some way in optimising your tax affairs.
Disclaimer: The information contained within this article are provided as illustrative purposes only based on legislation at the time of publication. Nothing in this article should be construed as advice or guidance to one’s personal situation. The value of your investments may go up and down, similarly, other aspects of your wider lifestyle and financial context may impact on your objective. In a nutshell, don’t rely on blogs and the articles for personal advice, and always seek advice from a qualified professional.