HMRC income tax return and allowance

There are certain exemptions or income from certain sources that fall under the non-taxable bracket. Also, income tax liability does not have any age criteria. The only thing that matters is the income earned and if the income is below or above the taxable limit. For a taxable individual it is imperative, by law, to keep all the records of income and expenses that are claimed against tax. These records will be required if HMRC instructs to complete a tax return.

How Income Tax is Calculated

The following steps will give an overview of how the taxable income and income tax payable is computed. Since, the rules for income tax are complex dns Accountants can help taxpayers with any tax issues they come across.

Step 1: Taxable income from all the sources, before tax, is added. For a fiscal year or financial year, this may include salary or take-home pay received or profit from self-employment, taxable social security benefits, rental income, interest on savings, and pensions. The non-taxable income is not included. This may comprise of pension credit, child tax credit, lottery winning, housing benefits, maternity allowance, working tax credit etc. This step will give a clear understanding of what is the total income for computing the payable tax.

While checking if the correct amount of tax has been deducted from the pay, it is also important to check if correct national insurance (NI) contributions have been deducted, so that the take-home pay amount is correct. NI contributions are computed on gross pay and it may vary for employees depending on the pension arrangements and income level.

For self-employed individuals, NI contributions have different rates, depending on the profits.

National Insurance Contribution Thresholds

For your reference:

• https://www.gov.uk/national-insurance-rates-letters
• https://www.gov.uk/government/publications/rates-and-allowances-national-insurance-contributions/rates-and-allowances-national-insurance-contributions

Step 2: Compute if there is any tax relief for the money spent during a financial year. The money spent can be towards pension schemes or paying employment expenses. Such expenses are taken out from the total income. For self employed individuals, business expenses are reduced to arrive at taxable profit

Step 3: HMRC Income Tax Personal Allowance – Verify the entitled tax free allowances. People living in the United Kingdom are permitted a basic personal allowance on a daily basis. People who are differently abled – blind individuals can get a Blind Person’s allowance. Deducting the allowances, tax is payable on the remaining income referred to as taxable income.

The above mentioned steps may not hold good if:

• an individual is self-employed and incurred a loss for the year.
• an individual was born before 6 April 1948, and made charitable payments under Gift Aid and because of the level of income, age-related personal allowances are reduced.
• an individual has an overseas income which is tax abroad

* In April 2013, the United Kingdom government cancelled all age-related personal allowance. During tax year 2015 – 2016 this was restricted to people born before 6 April 1948. However, this is the same for everyone now due to increases in the basic Personal Allowance.

The amount of income tax paid each year depends upon:

• the amount of income above the personal allowance
• how much amounts falls in each tax band

Some income is tax-free and individuals don’t pay tax on:

• interest on savings from savings allowance
• income from Individual savings accounts (ISA), National savings certificates (tax-exempt accounts)
• the initial dividend amount of £500 from company shares, and others

Tax-free personal allowance 2024-2025