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Unividual's ultimate guide to the 2022/23 tax year

Tax is an unavoidable part of life so it’s crucial to have the best understanding of how it impacts on you. This knowledge will help you plan how to live, work, save and invest. We take tax back to basics so you have everything you need to feel empowered with planning your finances.

An introduction to tax in the UK

Let’s face it, taxes have never enjoyed massive popularity. While we won’t argue that taxes are “fun”, they are an important part of making a society work. If you have a job, own or sell a property, leave something to loved ones after death, or simply want to do some shopping for the weekend, you’ll need to deal with the subject of tax.

Because there are so many types of tax and so many different ways they are applied, it can be a bit of a minefield to work out what you need to consider. That’s where the Unividual ultimate guide to tax comes in. We’re going to detail all the taxes, how they apply to you and everything you need to know to be ‘tax wise’.  We’ll also be looking at both personal financial advice and business finances. You might be paying personal taxes, business taxes or if you’re self-employed, both.  There are also personal, contextual things about you that impact on tax owed, like your relationship status and whether you have children or not. You might also have medical conditions or dependents who have additional needs that could impact on the taxes you have to pay. We’ll be covering that, too.

It’s these links, along with the complex details of exemptions, allowances, and tax tables, that give tax its reputation for being a bit impenetrable. So let’s take a closer look at this “money web” of earnings, taxes, savings and investments and how they might relate to your own situation.

Personal Tax

The UK operates a mostly progressive personal tax system, that sees the tax rates become higher as you earn more. The main UK personal tax is income tax, it is progressive and has different tiered rates. These different rates are called ‘bands’ and they are known as basic, higher income earners and additional rates. There is a second type of progressive tax called National Insurance Contributions (NIC). Like income tax it has different bands depending on how much you earn.

Other taxes applied in the UK are fixed rate taxes, a percentage of a total amount. They apply to nearly everything you buy and when you sell assets, such as shares, or buy a property. Tax is collected by your employer through pay slips, through self assessment if you have other sources of income, it is added on to things you buy and via a third party, for example a conveyancer who collects stamp duty when you sell your home and files it with HMRC.

Before looking at how tax directly effects you, we first break down income tax, national insurance, VAT, capital gains, inheritance tax, stamp duty, dividend tax and business taxes.

Income tax in depth

Income Tax is applied in bands. As of 2021, the bands break down like this:

  • Personal Allowance: Up to £12,570, 0% tax
  • Basic Rate: £12,571 to £50,270, 20% tax
  • Higher Rate: £50,271 to £150,000, 40% tax
  • Additional Rate: £150,000+, 45% tax

There are some changes in the 2022/2023 tax year, which we’ve covered in this tax table update.

You pay Income Tax on the money you earn in each band. For example, if you earned £53,000, depending on your personal situation and tax code, your Income Tax payments would be: £0 – £12,570: no tax, £12,571 – £50,270: 20% tax (£7540), £50,271 – £53,000: 40% tax (£1092). This gives a total Income Tax bill of £8632.

Additional allowances affecting your income tax

  • Married couple allowance: Whilst it is called this it also applies to civil partnerships. It allows you to transfer £1,260 of your Personal Allowance to your partner. This is useful if one earns over the Personal Allowance and one earns under. For the partner who earns under, their remaining allowance would be wasted. By transferring a portion to the other partner, you make better use of the Allowance.
  • Blind Person’s Allowance: £2,520 can be used directly to offset Income Tax or it can be transferred to a partner to add to their allowance.
  • Higher earners: For every £2 over £100,000 you earn, your personal allowance is reduced by £1. This means if you earn £125,140 your personal allowance is £0.

 

A word from the team: Cherise Tsang

“You shouldn’t assume that your income tax is correct. Even if it’s automatically totted up on your payslip, mistakes are made. Making sure your income tax is correct means talking to your employer to make sure all the factors have been accounted for. You also need to talk to the tax service to ensure all the tax credits and allowances you have are correct. You won’t be the first person to discover you’ve been over- or under-paying tax. Picking this up sooner rather than later makes it easier to sort out.”

Cherise Tsang is training to become a financial adviser on Unicademy, Unividual’s in house financial planner training school.

National Insurance Contributions

Paying National Insurance Contributions (NIC) allows you to claim certain benefits such as the state pension and maternity allowance. If you don’t keep up with your payments you may only be able to claim a reduced amount, or even not be able to claim at all. NIC has four classes that apply in different situations.

  • Class one: This is paid by both employers and employees. If you’re an employee it’s taken directly from your paycheck. 12% is taken for everything between £184 to £967 you earn a week and then 2% on everything above that. Your employer will also make a contribution, but that does not come from your pay.
  • Class two: This is a flat rate for people who are self-employed. It’s currently £3.05 a week.
  • Class three: A voluntary payment, of any amount, that is designed to bring your NIC account up to a specific level so that you can claim a particular benefit at a later date.
  • Class four: This applies to those who are self-employed and have profits over £9,569 a year. It’s charged at 9% on profits between £9,569 and £50,270 2% on profits over £50,270.

 

Value Added Tax & Duties In Depth

Value Added Tax (VAT) is a flat rate tax, applied as a percentage of the cost of something. It is actually applied at each stage of the goods and services chain as they pass from the producers to the consumers. As a private individual you can’t claim back VAT, unlike some businesses who can.  There are different levels of VAT — 20%, 5% and 0% — that are applied to goods and services. Things designed for children’s safety, and essential items like food, tend to have lower or zero rates applied. VAT is applied automatically to the things you buy, so you don’t really need to plan for it or think about it, but it’s good to understand how it works.  Duties on fuel, alcohol and tobacco are applied automatically to the things you buy. However, they are indirect, meaning they are applied to the manufacturer. The manufacturer then has to increase their price to the consumer. While the duty is automatically applied, it helps to be aware of what level the duty is at for budgeting your finances. We cover the budget each time it’s issued, you can see our coverage of the Autumn 2021 budget here.

Capital Gains Tax in depth

When you dispose of an asset, which means you sell something, for a greater amount than you paid for it, you may need to pay capital gains tax (CGT). This tax has two rates, one for assets and one for property. These rates also change depending on your income rate:

  • Basic-rate tax payer: CGT on assets is 10% and CGT on property is 18%
  • Higher or additional rate tax payer: CGT on assets is 20% and CGT on property is 28%

With property CGT you don’t pay it on your primary residence. Asset CGT is more complicated but only because it applies to pretty much everything you own. Wine, paintings, artwork, anything really. It’s not inflation adjusted, so if you paid for something 30 or 40 years ago, selling today will hit you harder due to inflation.

Beware it’s up to you to alert HMRC that you need to pay CGT, normally done using a self-assessment form. You only have a set period of time to report the sale.

If you’d like to know more about CGT, we’ve got an in depth piece you can read here.

A word from Simon Jones, Chartered Financial Planner

Be sure that disposing of an asset, especially stocks and shares, is the correct move before you press ahead. Disposing of the wrong asset at the wrong time can be a costly mistake and there is no “undo” button from a tax perspective. While getting a good understanding of tax is important, considering the whole picture of your income, assets, savings and investments really needs to be a personalised picture that is unique to you. Chatting to a financial advisor is a great first step to make this happen.”

Chat to Simon Jones about your asset portfolio and how it relates to your investment aims.

Inheritance tax in depth

Inheritance tax (IHT) is paid upon the death of an individual and is calculated on everything they own, which is commonly referred to as someone’s estate. If that estate is under £325,000, or they give everything to their married or civil partner, then there is usually no tax to pay. Above this amount, there is a flat rate of 40% tax. As you can imagine this level of tax can have an enormous impact on people’s lives making planning for death one of the most important elements of financial planning. It can sometimes force people to sell the inherited home even. If you give your home to a child, including step or adopted children, this allowance can rise to as much as £1,000,000.

There are also ways to reduce the amount paid, including:

  • Charitable donations in your will
  • Passing on money or assets before you die
  • Transferring assets to a business upon your death

Taxes on an estate are normally paid before selling any assets but it’s possible to arrange the sale of an asset if it will allow for payment of the inheritance tax. Inheritance tax is definitely a case where forward financial planning can make things so much easier. We’re written a much larger guide on inheritance planning and tax, which you can read here.

Understanding stamp duty

Every time you buy or sell property or land, you need to factor in stamp duty. This progressive tax is applied at different rates for various portions of the price. For first time buyers of homes valued up to £300,000, stamp duty on a main residence is 0% and for additional properties 3%. For properties up to £125,000 the rates are also 0% on main residence and 3% for additional properties. The rates then increase in value dependent on the price of the property and whether it is a main residence or additional property. Stamp duty is nearly always taken by your legal representation or conveyancer, but it’s your responsibility to make sure it gets paid.

Business Taxes

Corporation Tax in depth

All UK companies need to pay Corporation Tax on the trading profits they make. This rate is currently 19% but is due to rise to 25% in April 2023 for businesses earning profits of £250,000 and over. There are bands of corporation tax for smaller and larger profits but currently, there is only one simple ‘main rate’ in use at 19%. You are able write-off particular items such as machinery and equipment or costs for research and development and goodwill or unregistered trademarks.

Taxes on dividends

When a company distributes part of its profit to shareholders, it is done in the form of dividends. Any amount that a person receives of the personal dividend allowance of £2000 will have dividend tax applied to it. Like CGT, this tax is not automatically applied so you’ll need to tell HMRC, either directly or using self assessment, that tax is due. If you’d like to read more, we’ve got an in easy to understand breakdown of dividend tax you can read here. 

VAT from a business perspective

If your turnover reaches £85,000 you need to register for VAT. If you are registered you need to keep records on all the VAT you pay suppliers and charge your customers. Once registered you can claim back the VAT you pay your suppliers. If you’re not registered, you’ll have to absorb this cost. Additionally, unregistered companies cannot charge their customers VAT. Being registered for VAT has various advantages and disadvantages that your accountant can explain to you.

Pay As You Earn and National Insurance Contributions for companies

Part of being an employer is running a weekly or monthly payroll. This means letting HMRC know the details of your employees. HMRC will issue you a tax code. Your payroll software or accountant will use this code to calculate the tax the staff member needs to pay, as well as any national insurance. These then need to be deducted from the employee’s payslip. You will need to pay that tax, normally on a monthly basis, to HMRC.

Taxes at your life stage: just starting out and looking for your first job

When you’re starting your career, it’s probable that your earnings will be low so your tax payments will be a lower percentage of your income. If you’re considering getting onto the housing ladder, then your first home will not attract stamp duty as long as it’s under £300,000. It might not seem like it but now is the perfect time to get into the habit of saving money. Be sure to arrange your savings into tax-efficient schemes like ISAs. Even if you only start to save £10 or £20 per week, it’s a great ‘money habit’ to get into and will serve you well for the rest of your life. Take some time to get used to the ebb and flow of the tax year to plan how you use and save your money.

Take a look at our guide to managing money in your 20s.

Taxes at your life stage: in your 30s and 40s

As your income starts to increase, make sure you remain tax-efficient. Keep up-to-date with pension rules and start to consider how you might want to arrange a pension if you don’t already have one.  While it might sound a little odd that we suggest planning for retirement this early on, it’s a really good idea to start early. We’ve written a guide on retirement planning that you can read here. While you only pay tax on a pension when you take money from the ‘pension pot’, you should start to factor it into your plans now.

Married and civil partnership couples

The big change here is the married couple allowance. As a rule, to qualify for this tax break:

  1. You need to be married or in a civil partnership. You can’t just be living together.
  2. One of you needs to be a non-taxpayer. This usually means you’ll earn less than the £12,570 personal allowance between 6 April 2021 and 5 April 2022.
  3. The other partner needs to be a basic 20% rate taxpayer. So that means earning less than £50,270, or if you live in Scotland, £43,662. Higher or additional-rate taxpayers can’t claim this allowance.
  4. You both need a birth date on or after 6 April 1935 (one of the less taxing requirements!).

If you feel you might start a family, then starting to plan on how you might save for your child’s future is a great idea.

Married with children

Having children allows you to claim child benefits. This is a non-means-tested benefit for each child. There are two separate amounts, with a higher amount for your eldest (or only) child. Currently, you get £21.15 a week for your eldest child and £14.00 a week for each of your other children. If either of the parents has an income over £50,000 you might be liable for a high income child benefit charge, which will effectively reduce the amount.

You can claim, entirely separately to child benefit, a child tax credit. You must already be claiming a Working Tax Credit. You can use the Tax Credit calculator on the HMRC site to help with this.

As well as the blind person’s allowance that we’ve already mentioned, those caring for disabled children can claim a disability element of child tax credit, normally £65.94 per child who qualifies. You should also check with your local council if you can claim some council tax relief due your child’s disabilities. This also applies to disabled adults living in a property, whether they are your children or not. 

People who are self-employed

If you’re self-employed then it’s time to start looking at how you plan to exit the business. Feel free to take a look at our Business Exit Planning guide for detailed information on that.

Whether you do or don’t have children as well as keeping retirement in mind, it’s also worth considering care plans as you get older. Making sure you’ll get the life you want after your working life is over can be a huge weight off your shoulders.

 

Taxes at your life stage: Retired or nearing retirement

As you start to claim your pension, you’ll need to be aware of how the money is taxed. Private pensions are tax-free in most situations but must be registered with HMRC to qualify for tax relief and there are limits in place:

  • Less than 100% of your earnings in a year
  • Your pension pot stays under £40,000 per year
  • You remain under the £1,073,100 lifetime allowance

Beyond these limits you might need to pay income tax at a higher rate. This doesn’t mean ofcourse you should aim to save less than £1,073,100 or that your pension pot should be less than £40,000 per year. You can work alongside a financial adviser to find the most tax efficient ways of saving as pensions are not the only strategy we use for retirement planning. Depending on how much income tax you pay, and at what rate, you may be able to get ‘relief at source’. Your pension provider will apply for this on your behalf. The government website provides really useful information on what tax you will pay on your pension or you can get in touch with a financial planner. 

What's next for you?

As you will have found from reading this guide, tax is a big subject. It’s an important area of life and you need to make a decision on how to manage tax and money yourself or get expert financial advice on all the areas that affect you. The rules around tax change often and you can’t assume that everything will continue on the same path as it has previously. If you would like to check your tax position with one of our chartered financial planners and how to make the most of the wealth that you earn or have earnt you know where we are.

 

The Financial Conduct Authority do not regulate inheritance tax planning.

Tax treatment varies according to individual circumstance and is subject to change.

 

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