The tax authority in the UK is called Her Majesty’s Revenue & Customs, usually shortened to ‘HMRC’. HMRC is responsible for collecting and administering all of the different kinds of tax talked about in this section. HMRC publishes detailed guidance on how and when to register for, calculate and pay all of these taxes. This guidance is available on the gov.uk website.
For all taxes, it is very important to keep good accounting records of (amongst other things) the business’s income, expenses, profits and sales. These records will form the basis of the tax return the taxpayer will have to submit to HMRC in respect of the relevant tax. Even after the tax return has been submitted, records should be retained. This is because HMRC may raise enquiries in respect of the taxpayer’s return. HMRC can charge a penalty if records aren’t accurate, complete and readable. Further information regarding retention of records is available here and here.
Types of Tax:
Individuals pay income tax on their income, such as profits from a trade or profession, earnings from employment or self-employment, income from savings and investments, or income from rent. The tax year starts on 6 April in one year and finishes on 5 April in the following year.
Tax is paid on the amount of taxable income earned in a given tax year, after deducting any allowable expenses and taking into account any relevant reliefs. Individuals start with a standard tax-free allowance (the ‘personal allowance’) each tax year (£12,500 for the tax year 2020/21), which is the amount of otherwise taxable income that can be earned free from tax. This personal allowance is reduced if an individual’s taxable income is more than £100,000: £1 of personal allowance is lost for every £2 of taxable income above £100,000, meaning that an individual with a taxable income of £125,000 or above would have no personal allowance at all.
The rates of income tax for different bands of taxable income are as follows: