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Perhaps you are just starting your career and want a firmer grasp of different UK taxes to maximise your income. Alternatively, maybe you are approaching or in retirement and are keen to see if there are ways to make your financial plan more tax-efficient.
Regardless, in this short guide our financial advisers here at Cedar House will be outlining 5 important UK taxes which you should know about. If you would like more information about these and other crucial taxes regarding your financial plan, then please do get in touch to arrange a free, no-commitment consultation with a member of our team at Cedar House.
This is one of the UK taxes which seems most immediately-relevant to many people. In the 2019-20 tax year, the rules are as follows:
● Everyone is entitled to earn up to £12,500 per year without facing Income Tax (known as your Personal Allowance). There are certain situations where you might start to lose your allowance. For instance, for every two pounds you earn over £100,000 you lose one pound from your personal allowance.
● Any income you earn between £12,501 and £50,000 is likely to be taxed at the Basic Rate, which is 20%. So if your salary is £30,000, then £12,500 is likely to be free of tax. This leaves £17,500 to be taxed at 20%, which amounts to £3,500.
● Any income you earn between £50,001 and £150,000 is usually taxed at the Higher Rate, which is 40%.
● All earnings over £150,000 will be taxed at the Additional Rate (45%).
Bear in mind that when you retire, your retirement income is still regarded as taxable income. So, if you withdraw £25,000 from your pension in one tax year, then £12,500 will likely be subject to the Basic Rate of 20% (i.e. £25,000 minus your Personal Allowance).
Tax on Interest
Since April 2016 almost all UK adults have not paid tax on the interest they have earned from their savings. Nonetheless, it’s still important to understand how the system works in case it affects you.
Previously, if you earned £1,000 in interest you would lose £200 in tax (as a Basic Rate taxpayer). In 2019-20, however, Basic Rate taxpayers are entitled to a Personal Savings Allowance which allows you to receive up to £1,000 in interest without it being taxed. Higher Rate taxpayers can receive up to £500 tax-free.
Capital Gains Tax
This can be quite a complex area of tax. For many people, it becomes relevant when you sell a second home, business or shares which have risen in value since you first acquired them.
Broadly speaking, there are two main types of capital gains tax (CGT). The first is levied on property, and the tax rate is 18% if you are a Basic Rate taxpayer (28% for Higher Rate taxpayers). The second concerns the sale of “assets” (e.g. shares), and here the rate is 10% for Basic Rate taxpayers or 20% for those on the Higher Rate.
In 2019-20, you are entitled to a tax-free capital gains allowance of up to £12,000. If you are married or in a civil partnership, moreover, then each of you is entitled to an allowance, which effectively increases it to £24,000.
If you own one or more shares in a company, then you will likely earn an income from them when the company turns a profit (via a dividend). So, if you own 10% of the shares in Company X and they decide to distribute all profits to shareholders for that year, then you get 10%.
This income is subject to dividend tax, which is lower than income tax in 2019-20. If you are a Basic Rate taxpayer than the rate is 7.5%. For Higher Rate taxpayers it is 32.5% whilst for Additional Rate taxpayers, it is 38.1%.
Bear in mind that everyone is also entitled to a Dividend Allowance. In 2019-20, this allows you to earn up to £2,000 in dividend income without it facing tax.
So you will likely face at least one of these taxes throughout your life. Yet at the end of it all, you will still likely need to pay tax! This is where inheritance tax (IHT) comes to the fore.
In 2019-20, IHT is levied at 40% on the assets of your estate once they exceed £325,000 in value. So, if you are single (never married) and own a £600,000 estate then everything above £325,000 (i.e. £275,000) will likely be taxed at 40% on your death, resulting in a £110,000 bill.
There are legitimate ways to reduce your IHT bill and leave more to your loved ones. To mention just a few which you might want to discuss with your financial adviser:
● You can raise your IHT-free threshold by a further £150,000 if you leave your family home to direct descendants (known as the Additional Nil Rate Band).
● Married couples and civil partners can combine their Nil Rate Band and Additional Nil Rate Bands; in some cases, allowing some couples to leave estates worth up to £950,000, IHT-free, to beneficiaries in 2019-20.
● You can make up to £3,000 worth of gifts each year from your estate, without facing IHT.
● Pensions are exempt from IHT (although they might be added to beneficiaries’ income tax bills).