Income tax is charged primarily on individuals whether they are unemployed, retired, employed, directors, self-employed or engaged in a partnership business. It is administered by the Inland Revenue, through local tax offices (find the local one in your telephone directory).
It is based on your taxable income for each tax year which runs from 6th April to 5th April - the 2003/2004 tax year runs from 06/04/03 to 05/04/04.
Taxable income is easily defined as any form of income unless the government has announced that they are non-taxable.
Example of taxable income are:- unemployment benefits, state pensions and some other benefits, private pensions, wages and benefits, business profits, bank and building society interest, dividends etc.
Some examples of non-taxable income are:- Tessa, PEP and ISA interest and gains, working family tax credits and family allowance.
State benefits are probably the most complicated type of income when deciding whether they are taxable or not. Some invalidity and incapacity benefits are taxable, some are not. If you are in doubt, you should ask the Inland Revenue or consult an accountant.
Each living person is entitled to a certain level of taxable income "tax free" - for 2003/2004, this is £4,615 - this means that the first £4,385 of taxable income in the 2000/2001 tax year is free of tax. If your income is less than this figure, you do not need to pay tax and should be able to claim tax deducted from your income (if any).
There are then various rates of tax, according to your taxable income.
Tax is payable at 10% on your income between £4,615 and £6,575
Then at 22% on your income between £6,575 and £35,115
Finally at 40% on all your income over £35,115
Different rules apply to dividend income - tax deducted at source from your dividends is no longer recoverable, and additional tax is payable on your dividend income if your total income exceeds £35,115.
Most people have tax deducted from their wages, pensions, interest and dividends and have no further tax liabilities - most small underpayments and overpayments of tax are dealt with through tax codes.
If you have untaxed income, from self employment, state benefits, property rental, foreign sources, or any other source, you are likely to have a tax liability. Tax is payable in two instalments - in the January of the tax year and in the July following the end of the tax year - estimates of the liability are based on the previous tax year and any underpayments or overpayments are settled before the next January after the tax return is completed.
Interest and surcharges are payable on tax paid late.
If the Inland Revenue have sent you a tax return to complete, you must do so. You will be liable to a fine if you don't. Even if you have no tax liability, you must still complete and return the form.
Even if the Inland Revenue do not send you a form to complete, you must ask for one if you think that you have a tax liability. The onus is on you, as the taxpayer, to tell the Inland Revenue - you cannot sit back and wait for them! Penalties and fines are charged if you fail to do so.
Since 1997, there is a system of self-assessment where the taxpayer has to complete his tax return, calculate the tax due, and pay the tax due on the due dates. This is required by law - taxpayers can no longer wait for bills from the Inland Revenue.
If you have any form of income, other than simply from an employment, that is not taxed at source, you are likely to be required to complete a self assessment tax return.
If your affairs are simple, you should be able to complete the self assessment tax return yourself with the help of the guidebooks which either come with the return or are available from the helpline.
The Inland Revenue will provide help if you telephone or call in at their offices. This help is usually restricted to helping you understand the tax return and what should be entered on it - they will not prepare your business accounts or make other calculations to arrive at figures to enter on the form.
People who are self employed or have many sources of income will probably need professional help from an accountant or tax specialist. The costs of these services will be borne by the taxpayer. Your local accountancy practice will probably be the best place to go if your affairs are relatively simple. Many tax return completion services are now available via the internet, but may not be much cheaper.
If you cannot afford professional help you could contact the local citizen's advice bureau for their advice. They may either be able to help themselves, or be able to put you in contact with a local firm of accountants or tax advisers who would do the work in return for a percentage of any refund obtained - unlikely to be possible if no refunds are due!
It is vital that you keep all relevant records - dividend vouchers, bank and building society passbooks and bank statements, payslips, annual certificates of pay and tax deducted, invoices for expenses to be claimed against your taxable income, and most importantly complete and accurate business records of all income and payments.
No one, not even professional advisers, can help you complete the tax return if you have not kept the paperwork to support the figures to be entered on the tax return. It would be very time consuming and expensive to request copies of all the relevant information
You should seek help and advice from your local tax office or accountant sooner rather than later. Delays will cost you money in fines and penalties. The Inland Revenue will never go away and leave you alone! Some businesses and individuals have been forced into bankruptcy by the Inland Revenue for simply failing to complete tax returns - even where no tax is due - the Inland Revenue don’t know that tax is not due until you complete your tax returns!
It is important to emphasise that the Inland Revenue are not aiming to bankrupt you - they are usually happy to help you - but only if you take steps to help yourself! If you ignore their letters, phone calls and demands, their only course of action is through the courts. Legal action is usually always avoidable by talking to the Inland Revenue and making an effort to provide the information they require!
Don't bury your head in the sand