Paying Income Tax

I'm a freelancer, how do I pay tax?

Most freelancers are self-employed, so during each year, they're going to have to keep a record of all the income they receive, and all the expenses that they incur while doing their freelance activities. Then at the end of the year, they need to calculate their taxable profits, and send in the figures to the Inland Revenue. The Inland Revenue will work out the tax figures for them, or they can work out their own tax figures, and that tax is payable on the 31st of July and the 31st of January.

Will my employer pay my tax for me?

If you are an employee, then your employer will operate pay-as-you-earn, PAYE, on your earnings, so that every time you get the payslip, you'll see the tax and national insurance have been deducted before you got the money and all those will be paid directly over to HM Revenue and Customs.

I'm working full time, what's my income tax?

If you're a full time employee, then your income tax will depend on how much you earn and will be deducted through the pay as you earn system. If you're self employed, then your income tax will again depend on how much you earn, but that won't be based on the figure of your gross receipts. Instead, it will be based on the amount of your net profit - your income less your expenses that are allowable for tax.

I'm working part time, what's my income tax?

People who are working part time can be in a quite a complicated position. If they are part time employed, then they can generally get a code number from Inland Revenue, and will be subject to pay as you earn: PAYE. PAYE means their employer will deduct tax on each pay slip paid over to them. If they are part time self employed, then they are going to have to keep a record of all their earnings, all their expenses and complete a tax return at the end of each tax year. Then the tax figures can be worked out and paid on the 31st of July and the 31st of January.

I'm self employed, what's my income tax?

If you are self-employed, your income tax is based on the profits of your business. You have to go through three or four stages to get to your tax liability. First, you have to keep a record of all your business income. Second, you have to keep a record of all your business expenditure. Those records will enable you to work out the profits of the business. The next thing to do is to get your tax return and to work through the guidance notes to calculate what your taxable profit is. That might mean making some adjustments, claiming extra allowances, for example, for equipment that you use in the business and maybe cutting back some of the expenses that you've incurred on, such as depreciation or entertainment which are not tax allowable. When all that has been done, you can compute a figure of taxable profits. The amount of tax will then depend on the level of profits. The higher the level of profits, the higher the tax.

I'm in full time education, what taxes do I need to pay?

If you only receive a student grant and maybe some parental support, then there's no tax liability on those. If you have a part-time job then that would be treated as employment income and you will fall within the Pay-As-You-Own tax system. There are special rules to make life easier for students who have short-term vacation jobs within the Pay-As-You-Own tax system.

What is 'cash in hand' work?

Cash in hand work, literally is what it says. The person you're working for gives you cash, so he won't have deducted any pay-as-you-earn, or other taxes, or national insurance from the amounts he gives to you. It's down to you then to disclose that income to HM Revenue and Customs and pay the correct amounts of tax and national insurance that are due. If the person who's making the payment to you is actually your employer, then he'll be in trouble for not operating pay-as-you-earn correctly. If the person is a client or a customer of yours and you're self-employed, then you've just got to make sure that you keep a record of the cash payments, so that you can account for the tax correctly when you get to the end of the tax year. Cash in hand work used to be a very common feature in the construction industry. However over the years HM Revenue and Customs have clamped down on cash in hand payments. Now, if a subcontractor in the construction industry isn't part of the construction industry scheme operated by HM Revenue and Customs, then the contractor has to deduct tax when they make any payment to the subcontractor. That's all part of the way the Revenue protects its interests.

Do I have to pay income tax on Jobseeker's Allowance?

No, you don't have to pay income tax on Jobseeker's Allowance. But when you move from Jobseeker's Allowance to a job, the amount of allowance that you've had will be set off against the tax allowances to which you're entitled. The affect, therefore, is to mean that you pay a bit more tax in your first years' employment income or maybe your tax repayments might be reduced somewhat because of the way the allowance is set off against the income tax allowances.

Do I have to pay tax on profits from self-employment?

You do have to pay tax on profits from self-employment. For the self employed they have to, first of all, keep records, second, use those to prepare a tax return, from that the taxable profits can be computed. They then have to pay over both income tax and Class Four National Insurance Contributions to the collector of taxes, and those payments are due twice a year on the 31st of July and the 31st of January.

Do I have to pay tax on interest from savings?

Almost all savings income, such as interest from bank accounts, is taxable. The benefit for most people is that it's treated as being taxed by the banks before it's paid over to you. If you are a basic rate taxpayer, 22% rate tax payer, then you won't have to pay any extra tax on the interest that you receive.

Do I have to pay tax on dividends from bank savings?

If you received dividends from any company, then tax is payable on the dividend. The basic rate tax will be deducted as source before the dividend reaches you, so you'll only have to pay extra tax if you're a high rate tax payer at current figures. That is if you pay tax at forty percent, rather than twenty-two percent.

Do I have to pay taxes on cash in hand work?

If you receive cash in hand for work you've done, you do have to pay tax on it. If the person who's paying the cash to you is your employer, they should really be operating 'pay as you earn', and deducting income tax and National Insurance before they give you the cash. If they're not, they're going to be in trouble with the Tax Man. However, if you're receiving cash in hand for work that you do, you've got to disclose it to the Tax Man on the tax return.

Do I have to pay tax on my student loan?

No, you don't have to pay tax on your student loan. The student loan does however feature in the tax system. When you cease to be a student, and when your loan goes into repayment mode and your income is sufficient; then if you're employed your employer will collect for the government student loan repayments through the 'pay as you owe' system. That means that on your pay slip you'll see a deduction for the student loan repayment.

Do I have to pay tax on my housing benefits?

You don't have to pay tax on your housing benefits, but when they're received by the landlord, they're treated as part of the landlord's rental income as so taxable.

Do I have to pay tax on pocket money?

You don't have to pay tax on pocket money unless you earn it. But generally for payment from parents to children - minor children, there's no tax.