This topic gives you a very simple insight of the UK tax structure, income bands, tax rates and few tips on how very intelligently you can save tax on your annual income.
This is helpful for self-employed freelancers who are interested in finding ways to save your hard-earned cash!
So let’s first begin with familiarizing oneself with the basic points:
– 6 April 2015 to 5 April 2016 << This is the current financial year that we’re discussing for tax purposes.
– Your tax is calculated over and above the personal allowance and we have different tax rates for different income bands.
– Personal allowance is an amount on which you do not have to pay any tax and the standard amount is £10,600 (note-this stood at £10,000 in the last financial year so an increase of £600 this year, winning!).
– Any income above that is taxable based on the basis the income band that it falls in.
– The threshold for personal allowance is more for those born prior to 6 April 1938 or if one is eligible for Blind Person’s Allowance.
– The threshold for personal allowance is less if your income is greater than £100,000. It reduces by £1 on every £2 above £ 100,000. For instance if your income is £121,200 or above, then no personal allowance.
– There are certain types of incomes on which one need not pay any tax.
Tax Rate and Income Bands
– Income between £0 to £31,785 – Applicable tax rate is 20% after personal allowance deduction of £10,600.
– Income between £31,786 to £150,000 – Applicable tax rate is 40% after personal allowance deduction of £10,600.
– If income is above £150,000, then an additional tax rate of 45% applies.
Now that you have a fair idea on the tax calculations, let’s have a look at ways which can help you minimize tax burden.
– In case you seem to be falling in the 40% tax bracket, to help lower it, you could decide to run as a limited company and pay yourself a salary from the company. You can claim the personal allowance, and you get the salary expense allowance.
– Claim all your expenses of your business that are tax deductible including the costs of running your car and even capital expenditure as you are eligible for Annual Investment Allowance.
– File your Income tax returns on time to avoid penalties.
– Be familiar with allowances on capital gain tax. It stands at £11,100 for the year 2015-16 and tax rate is 18% or 28% depending on your tax band. Jointly owned properties in name of couples can get double allowance amounting to £22,200.
– This one is often overlooked >> The business loss of the previous year can be carried forward to next year and can be adjusted against profits. This is why it’s crucial to do your bookkeeping and accounting for the year, even if you aren’t making a profit.
Happy Saving and Wealth Building – isn’t it simple!
If you’re self-employed or a freelancer and you would like to speak about tax savings in more detail CLICK HERE to contact us today for a free consultation.
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