The Beginners Guide To UK Tax

Tax refunds, tax returns, PAYE, Self Assessment: it’s tough to get your head round HMRC’s tangled world of tax. Every time you think you’ve got it straight, the taxman changes the rules on you. What’s more, he kicks up serious grief if you don’t keep up. If you can’t speak his language like a native, you can quickly end up choking on fines, penalties and worse.

Welcome to our no-nonsense guide to UK tax. Whatever tax questions or worries you’ve got, a quick read should set you straight.

PAYE

What is a tax code?
How's my income tax worked out?
What’s a tax return and do I need to do one?
What happens to my tax if I leave my job?
What’s a Marriage Allowance? Would it save me money?
Do I pay tax on my benefits?
I live abroad. Do I still have to pay UK tax?
Am I owed a PAYE tax refund?
What key PAYE dates and deadlines do I need to know about?
How long does it take to get a tax refund?
What’s the difference between a tax return and a tax refund?
How much is my tax refund worth?

Self-Assessment

What’s Self Assessment? Do I need to file a tax return?
I’ve just become self-employed. How do I tell HMRC?
How does Self Assessment work?
How do Self Assessment expenses work?
What are the main Self Assessment dates and deadlines?
What are payments on account?

Tax and PAYE

Pay As You Earn (PAYE)

For most UK workers, the Pay As You earn (PAYE) system is the way HMRC grabs its slice of the cash coming in. Under PAYE, your employer takes a cut of all the money you’re making and sends it straight to the taxman. It’s not much fun, but at least it does mean you’re not stuck filling out a ton of forms every time there’s tax to pay.

As for how much money you’re losing every payday, that’s down to your tax code.

WHAT’S A TAX CODE?

A tax code is a little string of letters and numbers that tells your employer how much cash to hack off your pay before forking it over to you. You can find it on a bunch of documents - and it’s worth keeping an eye on it, since it can and will change once in a while. Look out for your tax code on:

Your payslips, P60 or P45.
Your yearly PAYE Coding Notice from HMRC.
Your pension advice slip.

If you spot a change in your code and don’t understand it, getting some expert advice from a professional accountant is a great idea. A good accountant can explain exactly what it all means, and sort it out for you if the taxman’s got his wires crossed. If you change your name or decide to work for yourself, for instance, you’ll need your tax code fixed so you don’t end up on the wrong side of HMRC.

HOW’S MY INCOME TAX WORKED OUT?

The amount you’re coughing up to HMRC comes down to 2 basic things: how much you’re earning and what your Personal Allowance is. Your Personal Allowance is listed in your tax code. Whatever you earn up to that amount each year, the taxman can’t lay a finger on it.

After your Personal Allowance is used up, the next chunk of your pay is taxed at the Basic rate. Once you hit the upper limit of that, anything more you earn gets hit with the Higher rate. Really big earners can find the top end of their pay being taxed at the even higher Additional rate.

As of the 2018/19 tax year, the Personal Allowance and Income Tax bands are:

On top of your Income Tax, you’ll also find yourself coughing up National Insurance contributions (NICs). Again, your employer handles this before you get your pay. If you’re on PAYE, you’ll be paying Class 1 NICs, which go toward stuff like your State Pension and a bunch of benefits you might find yourself claiming from time to time. Gaps in your payment history can lead to trouble down the road, but you can sometimes make voluntary payments to catch up.

Again, because the taxman loves his little codes, the NICs you pay are worked out from your National Insurance category letter. You can generally find this on your payslips, but most people using PAYE will be in category A. Here’s what they all mean:

A: Most employees.
B: Married women who qualify for lower National Insurance.
C: Employees over the State Pension age.
J: Employees already paying their NICs in another job.
H: Apprentices under 25.
M Employees under 21.
Z: Employees under 21 who are paying NICs in another job.
X: Employees who don’t pay NICs at all.

WHAT’S A TAX RETURN AND DO I NEED TO DO ONE?

Most people on PAYE never need to deal with the taxman directly to pay their normal tax. However, sometimes, HMRC’s going to want to stick its beak a little deeper into your business. Maybe you’ve got some extra cash coming in outside of your PAYE job, or maybe you’re trying to claw some money back through a tax refund. When that happens, you might find yourself filing a Self Assessment tax return. Here are some examples of people who need to send returns:

Company directors or partners.
People making over £100,000 a year.
People getting £10,000 a year from investments.
People making foreign or rental income.
Self-employed people.
People claiming tax refunds with over £2,500 in expenses.
Anyone else the taxman demands a return from.

That last point’s a big one. If you ever get a letter from HMRC demanding a tax return, don’t ignore it. Even if you’re sure it’s a mistake, it’d be an even bigger one to leave the taxman waiting.

WHAT HAPPENS TO MY TAX IF I LEAVE MY JOB?

When you leave a job you get a form called a P45. This pretty much just tells you what you’ve earned so far in the tax year, and how much of it HMRC got its mitts on. You’ll be able to double check stuff like your National Insurance number and tax code, too.

The main thing is knowing what to do next. If you don’t have another job to go to straight away, or if your new earnings are lower than before, you might be owed a slab of tax back. Basically, HMRC’s been taking tax from your pay on the assumption that you’ll keep making the same money for the whole tax year. If you stop work part-way through the year, you might well end up with a refund due.

There’s another important form called a P60. This one’s got the same kind of information in it, but it covers the entire tax year. If you don’t get one you need to kick up a fuss, since you might have a tougher time claiming back the tax you’re owed without it.

WHAT’S A MARRIAGE ALLOWANCE? WOULD IT SAVE ME MONEY?

The Marriage Allowance is a way of you and your spouse (or civil partner) shifting your Personal Allowances between you. Basically, if one of you isn’t getting the full benefit of their Personal Allowance, they can transfer £1,190 of it to the other. To pick an example, if your spouse is bringing in £10,000 a year with a personal Allowance of £11,850, they’re missing out on some of the benefit. In that case, they could shift £1,190 of their unused allowance over to you, meaning you don’t pay tax on over an extra grand of income. That’s worth £238 a year.

DO I PAY TAX ON MY BENEFITS?

We’re all used to the taxman taking a big bite out of whatever cash we’ve got coming in. When it comes to benefits, though, he’s a surprisingly fussy eater. Here are some of the payments he wants his share of:

State Pension and pensions paid by the Industrial Death Benefit scheme.
Jobseeker’s Allowance (JSA) and contribution-based Employment and Support Allowance (ESA).
Carer’s Allowance and Incapacity Benefit (from the 29th week).
Bereavement Allowance, Widowed Parent’s Allowance and Widow’s Pension.

While he’s stuffing his face on those, though, he’ll still manage to keep his hands off things like:

Housing Benefit and Income Support.
Working Tax Credit and income-related ESA.
Child Tax Credit and Child Benefit (depending on income).
Disability Living Allowance and Personal Independence Payment.
Severe Disablement Allowance and Industrial Injuries Benefit.
Guardian’s or Attendance Allowance.
Maternity Allowance
Pension Credit , War Widow’s Pension and lump-sum bereavement payments.
Winter Fuel Payments and Christmas Bonus.
Free TV licences for over-75s.
Universal Credit.

I LIVE ABROAD. DO I STILL HAVE TO PAY UK TAX?

Unless you’re living overseas pretty much permanently, HMRC might still chase you for tax on what you’re earning. It’s all about whether or not you count as a “UK resident” for tax. A lot of that comes down to how much time you’re spending in the UK each year. If you’re here more than half the time, chances are you’re a UK resident.

If your overseas employer’s a UK company, you’ll probably still be paying National insurance, too. For foreign employers, you might find yourself coughing up the local equivalent instead. To check what taxes you have to pay, HMRC has a few tests:

The Automatic Overseas test, which looks at stuff like where you spent the last 3 tax years.
The Automatic UK test, dealing with questions like whether you've got a "home" in the UK and how long you spend there.
The Sufficient Ties test, which asks about family, accommodation and so on.

One smart thing to do before you leave is check if you're owed a tax refund from HMRC. If you're leaving part-way through a tax year, you may not have used up all of your tax-free Personal Allowance. If you're registered for Self Assessment tax returns, don't forget to file one as normal after the end of the tax year.

HMRC has a special form for people who are going to be away from the UK for a complete tax year. Visit their site for form P85 "Leaving the UK - getting your tax right" in good time before you leave.

If you’re earning abroad, there’s a tricky catch to watch out for. Depending on your situation, you could actually end up paying tax in 2 countries at once! The UK’s got some “double taxation” agreements around the world to make this less painful, so it's worth checking with to see what you're letting yourself in for.

If it turns out you’re not a UK resident for tax, you’ll normally be off the hook for your foreign income. You’ll still be paying UK tax on anything you’re earning here, though – along with things like UK bank account interest or rental income.

AM I OWED A PAYE TAX REFUND?

There’s a bunch of reasons why you might find the taxman picking your pocket. Maybe you’ve stopped working or left the country part-way through the tax year. Maybe you’ve been forking out for work travel or other essential expenses from your own pocket. If your circumstances have changed, like switching to a lower-paid job, then you might have paid too much tax over the year. You might even have been put on the wrong tax code. All of these things and more can mean you’re due a tax refund from HMRC.

The thing is, the taxman’s not always going to hand it over automatically. For one thing, he won’t necessarily know how much you’ve been spending on things like travel for work. When you don’t get an automatic refund of what you’re owed, you have to make a claim yourself. That means working out exactly what you’re due, and backing it up with records and evidence. It’s a tough job for most people, and it takes a real tax expert to get the most from the refund system. A tax refund specialist can help find out what you're owed and claim it back. Even if you’ve never claimed before, you could still get back what you’re owed for up to 4-years.

WHAT KEY PAYE DATES AND DEADLINES DO I NEED TO KNOW ABOUT?

The key thing to know about HMRC’s calendar is that the taxman celebrates his personal New Year’s Day on the 6^th of April. Yes, it’s weird and clumsy, but it's got something to do with Pope Gregory XIII and the 11 days that went missing in September 1752. No, that’s not a joke.

Anyway, here are some of the main dates HMRC keeps circled:

5^th of April: Last day of the tax year and the cut-off point if you’re claiming a refund for 4-years back.
6^th of April: Start of the tax year.
31^st of May: This is when you should get your P60 for the last tax year. P60 is a statement of all the tax you’ve paid.
6th of July: This is when any P11d should be issued. P11d deals with any additional work expenses or benefits you get from your boss.

HOW LONG DOES IT TAKE TO GET A TAX REFUND?

The wheels at HMRC can turn pretty slowly sometimes, but they usually get there in the end. From start to finish, you’re probably looking at about 8-10 weeks to pry your refund cash from the taxman’s tightly clenched fist. Even so, there are a few things you can do to get your claim rolling as fast as possible:

Make sure you’ve got the important information to hand before you start. That includes your pay from your current and/or previous job, any work expenses you’re claiming for and any other cash you’ve got coming in. Depending on your situation, you might also need things like details of your pension providers. If there’s anything else the taxman needs to back up your claim, he’ll let you know what to show him.
Try not to hit any of HMRC’s busiest periods. Like anyone else, the taxman can get flooded around the end of the year. A lot of people end up stranded on helpline queues close to the 31^st of January deadline, for instance. If you run into a snag, it could be tough to get advice on short notice.
Think about making your claim through a tax refund specialist. The right advice and help can make a massive difference to how smoothly the process runs.

WHAT’S THE DIFFERENCE BETWEEN A TAX RETURN AND A TAX REFUND?

This is an easy one. A tax return is how you tell HMRC how much you or your business have made and spent in the tax year. Returns are used to calculate the tax you owe. Refunds are what you get back from the taxman when you’ve paid too much. Sometimes they’re worked out automatically, sometimes you have to do some legwork to claim them.

HOW MUCH IS MY TAX REFUND WORTH?

How much tax you can pry out of HMRC’s clutches depends on your situation. On average, though, a typical yearly refund claimed through a specialist like RIFT is worth around £750. If this is your first refund claim and you’re claiming for the full 4-years, that adds up to over £3000!

Tax Returns and Self Assessment

Self Assessment

WHAT’S SELF ASSESSMENT? DO I NEED TO FILE A TAX RETURN?

Self Assessment generally is how people report any cash coming in that isn’t taxed PAYE. Self-employed people use the system to sort out their Income Tax and National Insurance – but a lot of other people have to file returns, too. For instance:

People claiming PAYE tax refunds with over £2,500 in work expenses.
Company directors.
People earning over £100,000 a year.
People making £2,500 or more from things like rental income or investments.
People claiming Child Benefit, if they or their partner earns over £50,000.
Basically anyone who gets a demand for a tax return from HMRC. Never ignore these, even if you’re sure it’s a mistake.

I’VE JUST BECOME SELF-EMPLOYED. HOW DO I TELL HMRC?

If you’re thinking of becoming your own boss, you need to let HMRC know quickly so you don’t end up choking on tax bills and penalties. That means registering online for Self Assessment by the 5^th of October. Depending on how you’re set up (Sole Trader / Limited Company, etc.), you might have some other paperwork to handle as well.

HOW DOES SELF ASSESSMENT WORK?

Once you’re registered and have a Unique Taxpayer Reference number (UTR), you can go online and fill in your yearly Self Assessment tax return on the HMRC site. There’s a hard deadline of the 31^st of January for filing and paying up what you owe. If that date blows by and the taxman doesn’t hear from you, you’ll be looking at a minimum of a £100 fine. The longer you keep him waiting, the worse the penalties get.

HOW DO SELF ASSESSMENT EXPENSES WORK?

When you’re running a business, a lot of the cash you’re spending on essential costs can be used to bring down the tax you owe. Unlike with PAYE, the taxman doesn’t have his sights set on every single penny you’ve got coming in. It’s your profits he’s interested in. Costs that are completely necessary to run your business count against the income you’re paying tax on. The more you’re spending on your business the less tax you owe.

To get Self Assessment right, you need to get comfy with keeping records. Every time you spend cash on your business, you need to keep some evidence of it. Treat your invoices and receipts as if they were money. When it comes to filing your tax return, that’s exactly what they’ll be.

As for what counts as an “allowable expense”, it all depends on what business you’re in. The basic rule is that if it’s completely necessary and only for business use, it probably counts.

WHAT ARE THE MAIN SELF ASSESSMENT DATES AND DEADLINES?

When you’re dealing with Self Assessment, the clock’s always ticking. Here are the big dates and deadlines to watch out for:

6^th of April: Start of the tax year.
31st of July: Deadline for paying your second payment on account.
5^th of October: Deadline for registering for Self Assessment.
31^st of October: Deadline for filing tax returns on paper.
31^st of January: Deadline for online tax returns and paying the tax you owe (including your first payment on account for the next tax year).

WHAT ARE PAYMENTS ON ACCOUNT?

When you’re paying your tax via Self Assessment, HMRC doesn’t like waiting. In fact, the taxman hates hanging around so much that he makes you pay tax in advance on money you might not have even earned yet! Here’s how it works:

HMRC looks at the Self Assessment tax return you've just filed, then calculates the tax you owe.
Blindly assuming that nothing's going to change in your next return, he guesses that you'll owe the same next time.
He cuts that number in half, then charges you two payments on account of that amount over the following year - the first by January 31st (along with the "balancing payment" for the previous year's bill), then another by July 31st.

The good side to payments on account is that, when the January deadline rolls around, you’ll probably have already paid most of the tax you owe for the year. The bad side is that the amount you’ve paid is based on estimates. If your income drops from one year to the next, you’ll have paid too much tax and will need to claw some back. Find a specialist accountant or tax refunds expert to help you out.

The Beginners Guide To UK Tax​