Tax and Wealth Preservation
Income Tax - FAQs
What is income tax?
Introduced to finance the Napoleonic wars income tax has remained largely unchanged. It is a tax charged on taxable income at the rates in force for a year of assessment (year ended 5th April).
What rates is it payable at?
In the current year of assessment ending on 5th April 2011 income tax is charged in bands as follows:
For individuals:
- the first £37,400 at 20%, £37,401 (basic rate) to £150,000 at 40% and the remainder at 50%;
- in certain circumstances savings income may be taxed at 10% where earned income and savings income is less than £2,440 combined;
- dividends falling within the basic rate and middle rate bands are taxed at special rates of 10% and 32.5% respectively. The rate is 42.5% for individuals taxed at the highest 50% rate.
Trustees pay: at the rate applicable to trusts at 50% for general income and 42.5% for dividends.
Personal representatives: pay income tax at basic rate.
When does it arise?
The liability for income tax arises when income is receivable. Income may be earned income or investment income. Income may be paid without deduction of tax or it may be taxed at source and in both cases is declared on annual self-assessment tax returns where the liability is quantified.
What type of income is it payable on?
Earned income may arise from employment in the form of wages or salaries or may be represented by pensions or profits from self-employment or partnerships. Examples of investment income may be interest on savings, or dividends from shares in trading companies. Not all income is taxable. Some state benefits are specifically exempted from income tax for example attendance allowance, child benefit and the first 28 weeks of incapacity benefit.
Who has to pay it?
Income tax is generally payable by individuals, personal representatives (ie executors and administrators) and trustees. In addition employers account for payment of tax deducted from their employees via the pay as you earn scheme (PAYE). Some companies will also account for income tax deducted from interest distributions (for example banks and building societies). UK dividends are received net of a 10% tax credit.
When does it have to be paid?
Where tax is deducted at source it is borne when the income is received. In all other cases there are two payment dates on 31st January and 31st July. Payments on account may be due, depending on the amount of tax payable and how much is deducted at source.
Are there any exemptions or reliefs?
Every individual has an annual personal allowance that may be deducted from income in the most tax efficient way. This is currently £6,475 in 2010/2011 and may be increased to £9,490 if you are aged between 65 and 74. If you are over 75 this increases again to £9,640. These age allowances may be abated to the basic personal allowance if income exceeds certain limits. The personal allowance will be reduced at a rate of £1 of allowance for every £2 of income over £100,000 and withdrawn if you earn over £150,000.
A married couple’s allowance is also available to married couples or civil partners where the elder partner is over 65. This too is increased where either partner is aged 75 or over.
A blind person’s allowance is available to those registered blind and the figure for 2010/2011 is £1,890.
When should I be looking to get advice on income tax planning?
There are various times when income tax planning may be sought after. However, this may be summarised by saying whenever circumstances change. This could for example be as part of an investment review, year end planning to ensure claims for full entitlements to allowances are made, transactions between spouses or civil partners, the timing of expenditure to maximise relief for trading losses, and admissions or retirement of partners.
For advice on income tax please contact a member of our Tax and Wealth Preservation team.
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