Personal Tax Returns
To understand the personal tax return, one must first identify how to distinguish between taxable income and non taxable income.Taxable income
Broadly classified under the five heads of income which are as follows:
- Income from Salary
- Income from House Property
- Income from Profits and Gains of Business and Profession
- Income from Capital Gains
- Income from Other Sources- like income received from a trust or interest earned on most savings or earnings from shares etc
Non-taxable income
There are certain earnings on which one does not need to pay tax. These include certain benefits, personal allowances, child benefits, income from tax exempt accounts, Working Tax Credit (WTC) and premium bond wins. These income sources are ignored altogether when working out how much Income Tax you may need to pay. This tax year (2009-10), the basic Personal Allowance or what is known as the non taxable amount is £6,475. One is also eligible for a higher personal allowance if aged over 65 year but being old does not mean that one does not need to pay taxes at all unless the only mode of income is basic rate retirement pension.
Non taxable blind person's allowance- If a person is blind and is unable to perform any work requiring eyesight, then he is also eligible for the non taxable Blind Person's Allowance.
Income Tax is only due on taxable income that's above your tax-free allowances.
However if one is employed in a company and is provided with some benefits, then he might be taxable for the benefits themselves. For example, the following benefits add onto the taxes for any employee:
- company provided vehicles
- fuel provided for your vehicle
- medical insurance
- living accommodation
- loans at low interest rates
Income of a person is classified under various heads because the rules of calculating the income under each head are different. For example rules for calculating income from salary are different from rules for calculating income from capital gains.
Rules for calculating income for one head can be applied only for calculating income from that head and not for calculating income from some other head. For example rules applicable for calculating income from capital gains cannot be applied for calculating income from salary.
Income is calculated separately under each of the sections. There are specific exemptions and deductions allowed under each head. Then these incomes are added together to arrive at the total income. Tax payable is then calculated on this total income.
Calculation of income tax due:
After taking into account the non-taxable income and allowances, income tax is then calculated on the final taxable amount as per the following tax slab:
Income Tax band | Income Tax rate on non savings income | Income Tax rate on savings | Income Tax rate on dividends |
£0 to £2,440 | NA | 10%
| n/a - see basic rate band |
£0 to £37,400 Basic rate | 20% | 20% | 10% |
£37,401 and above | 40% | 40% | 32.5% |
Income Tax is collected in different ways depending on the type of income and whether one is employed in an organisation or self-employed or not working. The different ways Income Tax is collected can be as follows:
- PAYE (Pay As You Earn)
- Self Assessment
- Tax deducted 'at source'. For example before paying of an interest from a bank or building society, the tax is already deducted and then interest is paid.
- One-off payments
If one is employed by a company, then the company itself if legally obliged to file taxes on behalf of its employees through the PAYE (Pay as you earn) system. But if one is self employed and not working with any organisation, then the person would be responsible to pay for his own taxes.
Nowadays online method has become very convenient to file personal tax returns. Tax return needs to be filed for declaring the taxes paid (or unpaid), capital gains and to claim tax relief. Following are some of the advantages of filing the income tax returns online:
- Online tax returns are faster both ways- first of all processing of taxes is done faster than paper returns and any money owed can also be refunded faster
- An immediate online acceptance receipt can be received once the filing of taxes is completed online which is unlike the case in paper returns
- it is secure and protected
- The deadline for online returns is 31 January - the deadline for paper returns is 31 October, 3 months earlier. This gives one three extra months to plan for investments.
- if you're on PAYE (Pay As You Earn) and want to pay any tax you owe (where this is possible) through your tax code, the deadline for filing online is 30 December instead of 31 October (the paper return deadline)
- Filing online has no time specifications and can be conveniently done at any time round the clock.
It is also extremely important to maintain the records for the current tax year until annual tax return filing is completed. The following documents need to be maintained:
- P45 - part 1A of this form
- P60 - pay and tax details for the tax year
- P11D- Details of expenses and benefits, such as a company car or health insurance. P11D is provided by the employer
- All Payslips
- Certificates for any Taxed Award Schemes
- Information about any redundancy or termination payment
- Details of any other benefits for example meal vouchers
These personal tax documents and records must be maintained for atleast 22 months after the end of the relevant tax year.
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