The Viking Blog

Life Skills – Managing Your Taxes

Life Skills – Managing Your Taxes

Between algebra, coordinates, and complicated equations, one
pretty essential thing that was always forgotten in maths lessons is taxes.

You leave school able to plot a graph like an absolute pro,
but that percentage of your wage that disappears every month? That remains a
total mystery. Don’t worry – we’re here to clarify everything you need to know
as part of our ‘Life
Skills
‘ blog
series.

Working with the experts at
HMRC
, we’ve put together a thorough explanation of taxes, how
they work, and what exactly they pay for.

What are
taxes?

Taxes are the contribution you pay
to a number of services when you earn over a certain amount of money. A
percentage of your wage is taken by HMRC (Her Majesty’s Revenue and Customs)
which is then distributed between various avenues, including:

  • the NHS
  • the armed forces
  • building schools and colleges
  • your state pension
  • paying teachers’ salaries
  • the police
  • and public benefits

There is a total of 39 different
taxes that you pay, most of which are paid in combination, rather than
individually.

When do I start paying taxes?

You begin paying tax on your
earnings once your income exceeds your Personal Allowance: the amount of money
you can earn that is exempt from tax.

For the majority of people, their
Personal Allowance is £11,000. However, claiming certain benefits may affect
the size of your Personal Allowance, and it will be smaller if you earn more
than £100,000.

How much will I pay?

The amount of your wage that is
taken as tax will depend on how much you earn. Up to £11,000 is tax-free, but
above this you will pay a set percentage.

Between £11,001 and £43,000, you
pay a ‘basic rate’, which is 20%.

A ‘higher rate’ of 40% is paid if
you earn between £43,001 and £150,000.

Over £150,000, you pay an
‘additional rate’ of 45%.

HMRC’s tax
calculator
can help you estimate how much tax you should pay based on
your tax code and salary.

200-300-1

What is National Insurance?

Those who were born and reside in the UK receive notification of their National Insurance number before their 16th birthday. This number is unique to them, and will be used throughout their life by HMRC, the Department for Work and Pensions, and the Electoral Registration Offices amongst others.

Every taxpayer earning over £155 per week (or, for those who are self-employed, a profit of over £5,965 per year) pays a National Insurance tax. This is to cover a variety of benefits, including a state pension, maternity allowance, and bereavement benefits.

What happens when I start a new job?

When you start your first job, HMRC sends you a tax code which indicates what your Personal Allowance is. Your employer will use this to calculate how much you will pay, and when. If you pay too much tax over the course of the tax year, your code will be used to make adjustments and you could receive a tax rebate.

This is the case if you start a permanent job in which you pay PAYE (pay as you earn) tax. Your employer will have either an in-house or consultant accountant who organises the company finances and communicates with HMRC on your behalf to organise your tax.

If you are on a temporary job contract, then your tax will automatically be deducted, and upon receiving your P45 at the end of your contract, you can contact HMRC to discuss whether or not you are due any money back.

What if I am self-employed?

Self-employed workers are responsible for organising their own taxes, whether that’s doing everything themselves or hiring an accountant and providing them with all relevant information.

This is the case whether you operate as a sole trader (running your business yourself) or within a partnership, in which both parties are equally accountable for managing finances.

 There are three crucial stages when it comes to self-employed finance:

  • Register your business with HMRC.
  • Keep records – whether that’s hard copies or electronic versions – of all your income and expenditure. This includes all invoices and receipts. You are legally required to store all information regarding your finances for six years, and be able to provide this evidence when required by HMRC.
  • Complete an annual self-assessment tax return at the end of each tax year. The deadline is April 5th, and you will incur a paid penalty if you are late submitting your documents.

Once you have notified HMRC of your position as a self-employed taxpayer, you will be provided with all the support necessary to ensure you pay your tax and NI in full and at the right time.

You can calculate an estimate of how much you will pay in tax using HMRC’s ready reckoner. This will allow you to budget for your tax return every April and reduce the surprise when you discover how much tax you owe.

Should I pay tax on my side-line project?

If you earn money from a service you provide, then you ought to be paying the appropriate amount of tax. Failure to inform HMRC of a profitable activity is against the law, and is often referred to as the “hidden economy”: money earned by workers that they do not declare in order to avoid paying tax.

This is sometimes done intentionally, but other times, it is simply because people are not aware that the hobby they earn a bit of money for has become what HMRC would call a ‘business’. If you are in doubt as to whether or not the money you earn should be taxed, it is best to consult HMRC to discuss your situation and get the opinion of an expert.

What is VAT?

Value-added Tax (VAT) is a consumption tax placed on the sale of almost all goods and services provided by UK businesses.

If your company’s taxable turnover will exceed £83,000 over a 12-month period, then you must register for VAT with HMRC. You can choose to register if your turnover is less than this, but once it goes over the threshold, you are legally required to inform HMRC.

Once you have registered, you have to charge the appropriate amount of VAT on any goods or services you provide, keeping constant records of all sales and purchases, and submit the relevant return to HMRC.

When you predict your turnover to exceed the threshold, you have a responsibility to register your business for VAT within 30 days. Therefore, it is wise to get in the habit of checking your turnover on a regular basis to assess how close you get to this figure.

The threshold is not a permanently fixed sum – whilst it is currently £83,000, this may change in future. As a business owner, you are responsible for being aware of the current threshold, and exactly which items are VAT exempt in order to comply with HMRC conditions.

Taxes will play a significant role in your financial affairs throughout your life, so it’s important to make sure you are fully informed of what you have to pay and when.

Maintain records as efficiently as possible so you can keep track of your taxable outgoings, and ensure all earnings are being declared appropriately to relevant parties, whether that is your employer’s in-house accountant or a consultant you hire to manage your start-up business’s finances.

Keep all your payslips and tax statements in one place to prevent losing anything important. One of our folders or boxes can easily become your designated storage space for all your relevant documents.

Have you found this advice useful? Do you have any tips that you want to share? Get in touch on Facebook and Twitter!

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