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Personal Tax: A Beginner’s Guide

Taxation is a complex and often confusing subject for many individuals. Personal tax issues can be daunting, especially for those who are new to managing their finances or have recently relocated to the country.

Income Tax

Income Tax is charged on the total amount of income earned, including wages, pensions, interest, and other sources of income.

The amount of tax you pay depends on your level of income, with different rates applied to various tax bands:

Personal Allowance: The first £12,570 of your income is tax-free, known as the Personal Allowance.

Basic Rate: 20 per cent on income between £12,571 and £50,270

Higher Rate: 40 per cent on income between £50,271 and £125,140

Additional Rate: 45 per cent on income over £125,140

It is important to note that the Personal Allowance may decrease or be removed entirely for those with income above £100,000. Taxpayers with taxable income over £125,140 receive no Personal Allowance.

National Insurance Contributions (NICs)

National Insurance is another compulsory contribution made by employees and self-employed individuals.

National Insurance Contributions help fund state benefits such as the State Pension, unemployment benefits, and the National Health Service (NHS).

The amount you pay depends on your employment status and income level. Employed individuals pay Class 1 contributions, while self-employed individuals pay Class 2 and/or Class 4 contributions.

Self-Assessment Tax Returns

Self-employed individuals, sole traders, and those with additional income sources must complete a Self-Assessment tax return each year.

This process involves declaring your income, calculating your tax liability, and making any necessary payments.

The final deadline for submitting the tax return online and paying any outstanding tax is 31 January following the end of the tax year.

Capital Gains Tax (CGT)

CGT is charged on the profit made from the sale or disposal of assets such as property, shares, or valuable possessions.

There is an annual tax-free allowance (the Annual Exempt Amount) which allows you to make a certain amount of gains without paying CGT.

For the year 2023-2024 tax year the allowance is £6,000, but this will fall to £3,000 in April 2024. The rate of CGT depends on the type of asset and your Income Tax band.

Inheritance Tax (IHT)

IHT is charged on the value of an estate (including property, money, and possessions) after an individual’s death.

The tax-free threshold, known as the “nil-rate band,” is set at £325,000. Above this threshold, the estate is taxed at 40 per cent.

However, there are exceptions and reliefs available, such as the transferable nil-rate band between spouses or civil partners and the residence nil-rate band, which can substantially increase the size of the estate that can be passed on tax-free.

Navigating personal tax issues can be challenging, but understanding the basics of Income Tax, National Insurance, Self-Assessment, CGT and IHT can make the process more manageable.

Need help or advice on Personal Tax issues? Contact us today.


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