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Wednesday 5 May 2010

Are You Paying The Right Amount Of Income Tax?

In the UK; the tax year runs from April 6 until April 5. If you are in employment you should receive a tax certificate (known as a P60) from your employer around the April-May period (if you have more than one job you should receive a P60 from each employer). The P60 certificate shows the total amount of income you have earned with that employer in the year and the corresponding amount of income tax you should have paid.

You should only be paying income tax if you have earned more than what's known as the Earnings Threshold (ET); this is also known as the Personal Allowance. For the past tax year of 2009-2010 and this new tax year of 2010-2011 the earnings threshold is £6,475. If you earn more than £6,475 in a year then you should be paying income tax; at one of three rates -

Any income up to £37,400 will be taxed at 20%
Any income between £37,401 and £150,000 will be taxed at 40%
Any income over £150,001 will be taxed at 50%

Take for example a single male that works as a retail manager, earning £30,000 a year - this person should be paying income tax at a rate of 20% of what has been earned over the earnings threshold/ personal allowance:

Income tax=
  • = £30,000-£6,475
  • = £23,525
  • = 20% of £23,525
  • = £4,705

Usually your employer should deduct the income tax from your pay regularly, therefore the amount of income tax paid should be correct - and thus you wouldn't be entitled to a tax refund/rebate. If you are self-employed, you must register yourself as so to the HMRC if you haven't already; then you have to fill out a tax return form to work out the amount of income tax you may be liable for paying. For more info about self-employed income tax; go here.

There are different thresholds/allowances that apply depending upon your circumstances, such as if you are in a married couple, working over age of retirement, if you have a certain disability etc. These conditions are what determines the tax code your earnings is assessed on. The general tax code for the past tax year of 2009-2010 and this new tax year of 2010-2011 is 647L (this should be the code for the example of the single male above). Please go here for more about tax codes. If your circumstances change then you should tell your employer as soon as possible so they can adjust your tax code and subsequent income tax deductions accordingly.

You can work out your income tax by going to the official HMRC tax calculator.

If you are unsure whether you have paid the correct amount of income tax, or are wondering if you are entitled to a tax refund/rebate, then contact your local tax office.

Please note that the P60 certificate relates mainly to income tax; for other matters such as VAT or National Insurance please visit their respective areas on the HMRC's site.

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