The Salary Calculator

Our guide to unpacking tax jargon

by Madaline Dunn

When it comes to tax, many people often feel intimidated and confused by the jargon used to explain certain terms and concepts. Of course, people must understand the ins and outs of tax jargon themselves because their personal finances can be affected by tax changes.

At The Salary Calculator, we’re here to make sure that you’re all clued up on the meanings behind complex tax jargon.

This article will go through some of the most common words and phrases used when discussing personal tax. So, don’t sweat it; you’ll know the score in no time at all.

Tax terms explained

Agent: This term refers to, usually, an accountant or advisor, who an individual appoints to take care of issues and processes related to HMRC on their behalf.

Annuity: This is a type of retirement income product that pays an individual a fixed payment stream.

Capital Gains Tax: This is a type of tax that is applied to the profits an individual earns in the sale of an asset. It is charged at a flat rate of 18%.

Defined Benefit Pension: Otherwise known as a “final salary” pension, this is the traditional pension plan that pays out a retirement income, calculated based on one’s salary and the number of years they’ve worked.

Defined Contribution Pension: Also referred to as a “money purchase” pension, this is a pension savings product that allows employers and employees to contribute and invest funds to build the pension money pot. 

Earned Income: This refers to the income that an individual receives from employment, self-employment or directorships. This includes wages, salary, tips, bonuses, and commissions.

Foreign Income: This is the income an individual receives from work or services performed outside of the UK. Income received from the Channel Islands and the Isle of Man is also classified as foreign income.

Individuals must pay income tax on foreign income if it comes from:

• Wages earned abroad
• Foreign investment
• Overseas properties
• Overseas pensions

HMRC: This is an abbreviation that stands for HM Revenue & Customs and is a non-ministerial department responsible for dealing with tax and financial obligations.

Income Tax: This refers to the tax that the government levies on an individual’s personal income. Once income exceeds the personal allowance, an individual will pay tax. The amount of tax they pay will vary depending on earnings. 

Inflation: This is an economic term that refers to the rate at which goods and services rise.

Inheritance Tax: This is the tax an individual pays when they have inherited money or property from someone who has died. The standard inheritance tax rate is 40%. However, this is only charged once an individual’s estate exceeds £325000.

IR35: This is a piece of UK tax legislation that exists to identify contractors and businesses that avoid tax by working as “disguised” employees.

Minimum Wage: The National Minimum Wage is the minimum amount of money an employer must pay an employee per hour. These rates vary depending on age and role. The current rates are:

• National living wage for employees aged 23 and over: £8.91
• Age 21-22: £8.36
• Age 18-20: £6.56
• Under 16-17: £4.62
• Apprentices: £4.30

National Insurance (NI) Contributions: Employees and self-employed workers must make National Insurance (NI) contributions if they are over 16-years-old. The amount of NI contributions you make impact your entitlement to state benefits. Individuals must complete at least 35 years of NI contributions to get the full new state pension.

There are a few different types of NI contributions, this includes:

• Class 1 contributions are made by employees who earn £183 a week, who are below the State Pension age
• Class 2 contributions are made by self-employed workers who earn £6,515 or more per year
• Class 3 contributions are voluntary contributions made by individuals to fill in contribution gaps
• Class 4 contributions are made by self-employed workers who earn £9,569 or more per year

PAYE – “Pay As You Earn”: This was introduced way back in 1944 refers to the system through which employers deduct income tax and National Insurance contributions from employees’ salary and send it to HMRC. It’s calculated based on earnings and eligibility for personal allowance.

Personal Allowance: This is the amount of money an individual can earn before they are taxed. The personal allowance amount for 2021/22 is £12,570. It will be frozen at this amount until 5 April 2026.

P45: When an individual stops working for their employer, their employer must give them a P45. This outlines the amount of tax an individual paid on their earnings in the tax year and their tax code.

A P45 is made up of 4 different sections:

• Part 1, an employer must send to HMRC
• Part 1A is given to the former employee for their records
• Part 2 and 3 are for the individuals’ new employer

P60: This is the form that a worker receives each year, outlining the amount of money earned in a year. It also states the amount of National Insurance contributions made and the amount of Pay As You Earn (PAYE) income tax. 

Self Assessment: This is the system used by HMRC to calculate and collect income tax and National Insurance (NI) contributions. Self-employed and freelance workers must submit a self-assessment form for each tax year.

Starter checklist (formerly the P46 form): This is the form that replaces the P45 form in cases where their former employer did not give an individual one.

Take-home Pay: Take-home pay, otherwise known as net pay, is the amount of money an individual receives per month after tax and any other deductions have been made.

Tax Code: In the UK, everyone paid via the PAYE scheme is allotted a tax code from HMRC, which indicates how much tax must be deducted. The most common tax code appears as a set of numbers followed by a suffix. 

Tax Credits: This is a type of government benefit payout given to individuals who receive lower incomes. This benefit comes in two forms, working tax credits and child tax credits.

Tax Rebate: This is a refund of tax given to an individual when they have overpaid tax.

Tax Year: This is the time period covered by a tax return. It begins on 6 April and ends the following 5 April.

Unique Taxpayer Reference: This is a 10-digit number issued to every taxpayer in the UK.

Tags: Employed and Self Employed, HMRC, income tax, national insurance, Pay As You Earn, personal allowance, tax rates

First 5 Steps to Self Employment

by Admin

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For many people, becoming their own boss is the dream. They get to work in an industry they love, choosing their own clients and – better yet – their own hours. The only problem is that becoming self-employed isn’t that straightforward. At least, not on the surface.

After all, having to evaluate your income and manage your own tax affairs can be daunting. That’s why we’ve asked Mike Parkes from GoSimpleTax to help set your mind at ease, by providing his first five steps to self-employment.

1. Register as self-employed

First things first, you need to let HMRC know that you’ll be paying your own Income Tax and National Insurance contributions (NICs) moving forward. You’ll need to do this as soon as possible – no later than the 5th October after the end of the tax year in which you first became self-employed. So, if you become self-employed between 6th April 2021 and 5th April 2022, you have until 5th October 2022. It’s a relatively simple process though. All you need to do is register on the GOV.UK website, or fill in an on-screen form to then post to HMRC.

2. Get to grips with your tax bill

Next, it’s time to understand what tax you’ll be responsible for paying. First is your Income Tax, which is determined by your taxable income (that is, your earnings minus any allowable expenses and deductions). HMRC takes this information from your Self Assessment tax return and calculates your tax bill accordingly.

The amount of National Insurance you pay also depends on your taxable profit (income less expenses). Instead of the Class 1 NICs that employed people make, you’ll pay Class 2 (unless you earn less than £6,515 a year) and 4 (if you earn profits over £9,569 a year). See the effects of self-employed income tax and NICs at Employed and Self Employed.

3. Choose the correct insurance cover

This largely depends on which industry you’re in, but there are some general policies that all sole traders should consider. For example, if you employ another person, even if it is just part-time support to help complete projects, you are legally obliged to take out employers’ liability insurance. There is a significant fine for sole traders caught failing to have this.

You should also consider taking out public liability insurance. This protects your business should a client, customer or member of the public decide to take legal action. In the event that they suffer an injury at your premises, or you suffer an injury at their premises, it would also provide cover for damage to property.

Finally, you should consider insuring yourself for professional indemnity. This is where you protect yourself from a client lawsuit levelled at you on account of them being unhappy with the work you have done or the support you’ve provided.

We would always advise that you seek specialist advice from a suitably qualified insurance broker to discuss your requirements.

4. Identify any relevant tax relief in your line of work

Now you’re square with HMRC, and you’ve covered yourself legally, it’s time to enjoy the benefits of self-employment. All sole traders are eligible to claim relevant expenses to reduce their profits – and the lower the profits, the lower your tax bill will be.

After you’ve incurred the expenses, and inputted the total amount on the relevant tax return, just be sure to store the receipts somewhere secure should HMRC request them. Software like GoSimpleTax makes this easy, by allowing you to take a picture of receipts and save them together with invoices and bank statements in the cloud.

5. Record income and expenses for your first tax return

A large number of sole traders log their income and expenditure towards the end of the tax year, causing unnecessary stress and a much longer tax return submission process. However, with real-time record-keeping, you can input this information throughout the year. This enables you to forecast your tax bill and better manage your cash flow. Again, with Self Assessment software, this takes no time at all.

In order to be successful as a sole trader, you need to be maximising your take-home pay and steering clear of HMRC penalties. By following the above steps, you achieve both. So, are you ready to finally become your own boss?

About GoSimpleTax

Income, Expenses and tax submission all in one. GoSimpleTax will provide you with tips that could save you money on allowances and expenses you might have missed.

The software submits directly to HMRC and is the solution for the self-employed, sole traders and anyone with income outside of PAYE to file their self-assessment giving hints and tips on savings along the way. GoSimpleTax does all the calculations for you so there is no need for an accountant. Available on desktop or mobile application.

Try for free – Add up to five income and expense transactions per month and see your tax liability in real time – at no cost to you. Pay only when you are ready to submit or use other key features such as receipt uploading and HMRC direct submission.

Tags: Employed and Self Employed, income tax, national insurance, Self Assessment, self employed, self employment

The IR35 changes: Who will be impacted by the reforms?

by Madaline Dunn

The off-payroll working (IR35) rules for the private sector have changed. These delayed reforms came into effect from 6 April 2021 and could significantly impact some contractors.

That said, according to research from EY TaxChat, very few contractors know what the changes actually mean for them. Of the 500 self-employed workers surveyed, only 14% claimed to be up-to-date.

At The Salary Calculator, we’ll have you clued up in no time at all. This article will explain:

• How the IR35 rules have changed
• Why the changes have been introduced, and
• What determines IR35 status

How have the IR35 rules changed?

The IR35 rules exist to ensure that contractors and those who hire them pay the correct amount of tax. It targets those who provide their services via an intermediary, such as a Personal Services Company (PSC).

The rules on who is classified as employed have not changed. However, the burden of responsibility for who determines this status has changed. 

It is now the responsibility of medium-sized and large businesses to determine the employment status of a contractor. 

These businesses must outline the reasons behind the contractor’s employment status in a Status Determination Statement. A contractor has the power to dispute this.

The changes do not apply to small businesses. To be classified as a small business, a business must have:

• A maximum annual turnover of £10.2 million 
• A balance sheet total of £5.1 million or less, and
• 50 employees or less

IR35 does not apply to sole traders. 

Why have the IR35 changes been introduced?

According to the HMRC, those who are “genuinely” self-employed should not be concerned by the changes. The new rules were introduced to ensure that more businesses are compliant with the law. 

Specifically, the reforms seek to crack down on companies who hire contractors through “disguised employment” for tax purposes, which, according to HMRC, is rife. Data shows that only around 10% of Personal Service Company (PSC) owners have assessed their status as employed.

What determines IR35 status?

IR35 status is largely determined by the level of supervision, direction and control a contractor has. 

So, if a contractor has the power to determine their working hours, with little or no oversight and only provides work outlined within the contract, they are likely to fall outside of IR35.

Other factors include whether or not the contractor provides their own equipment, if they are paid on a project-by-project basis, their level of exclusivity and mutuality of obligation (MOO).

It can be a bit of a minefield figuring out where you stand when it comes to IR35. But, don’t worry, there are resources out there to help.

HMRC has a tool called CEST which can help you work out whether or not IR35 applies. That said, it’s important to note that CEST should only be used as a guideline and does not provide a definitive answer on your IR35 status.

For more information about where you stand, head over to Employed and Self Employed to learn about the tax implications of different employment statuses.

 

Tags: April 2021, HMRC, income tax, IR35, national insurance, self employed

Updated for April 2021

by Admin

The Salary Calculator has been updated with the tax rates which take effect from 6th April 2021. Some of these rates are still subject to confirmation by the relevant governments, but the calculator will be updated if any of them change.

The biggest change is the introduction of “Plan 4” student loan repayments, for Scottish students. If your undergraduate loan is administered in Scotland and due for repayment you will start repaying under Plan 4 from April 2021, even if you have been previously repaying under Plan 1. Those already repaying their loans will switch from Plan 1 to Plan 4 repayments in April. This change does not affect students in England, Wales or Northern Ireland, and nor does it affect repayment of postgraduate loans.

If you would like to see the effects of this change, and any others from April 2021, try out The 2021 Salary Calculator by choosing the “2021/22” tax year from the drop-down box.

Tags: April 2021, budget, income tax, national insurance, Pay As You Earn, student loan company, student loans, tax rates, The Salary Calculator

What Do I Need To Complete My Tax Return?

by Admin

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If you have earnings outside of PAYE, chances are you’ll need to file a tax return. This is an annual submission, due on the 31st January, that lets HMRC know your taxable income and how much tax you need to pay. If you fail to submit it or forget to pay your tax bill, you could face a fine.

So to ensure that doesn’t happen, we’ve asked Mike Parkes from GoSimpleTax to explain the tax return process and keep you on the right side of the taxman.

Get registered with HMRC

If you’ve been a sole trader or received income from other sources (like property) before, you may have already filed a tax return. If not, you’ll need to register for Self Assessment with HMRC.

Once complete, you’ll receive a Unique Taxpayer Reference (UTR) number that identifies you and enables you to submit a tax return. When your UTR arrives, you’re able to set up your Government Gateway account. It’s here that you’ll file your return (either manually or through software).

Bear in mind that it could take up to 20 days to receive your UTR, so be sure not to leave it too late.

Have all your documents to hand

Now you’re registered, the next step is to prepare the information you need to complete your tax return. This includes:

• Your UTR
• Your National Insurance number
• Employment income and benefits received during the year (forms P60 and P11D)
• Any income you’ve received as part of a self-employed business
• A total of any rent you’ve received
• Certificates detailing interest you’ve received from your bank
• Any income you’ve received from overseas
• Any income you’ve received as part of a partnership (one partner should also file a tax return for the partnership as a whole)
• Information about any dividends received
• All taxable benefits you’ve received from the state
• All capital gains you’ve made by disposing of assets
• Information about any Gift Aid payments you’ve made
• Details of any pension contributions (you may be able to claim some of this money back)
• Details of any tax payments you’ve already made this year

All of the above information only needs to refer to the tax year that you’re filing for. In other words, if you’re filing before 31st January 2021, the period will cover 6th April 2019 to the 5th April 2020.

Don’t forget your expenses

While it’s important to keep track of your income, it’s equally important to keep track of your expenses. Any expenditure you’ve incurred during the year may be allowable and used to lower your tax bill. Whether you’re self-employed or a landlord, HMRC have prepared lists of regular expenses you’d expect to see.

You won’t need to send any evidence with your tax return. However, it’s important that you keep your records safe for up to six years in case HMRC investigates your tax return.

Pay your tax bill

Once you’ve filed, HMRC will calculate your total tax liability. Obviously, if you file early, you’ll be aware of your liability well ahead of the payment due date, allowing you to manage your cash flow better.

There’s no legal requirement to file early though – both the tax return and any money you owe are due on 31st January following the end of the tax year.

This tax year, however, HMRC are allowing some Self Assessment users affected by COVID-19 to spread their tax bill over a period of 12 months. Users that file early will be able to determine how much they can pay right away, and then how much they’ll need to pay each subsequent month, using the government’s Time to Pay service.

You can check your eligibility and set up your payment plan by logging in to the Government Gateway. Alternatively, you can call the Self Assessment Payment Helpline on 0300 200 3822 and talk through your options.

That’s it! You’ve officially completed your tax return. Now to prepare for the next one…

About GoSimpleTax

GoSimpleTax software submits directly to HMRC and is the solution for self-employed sole traders and anyone with income outside of PAYE to log all their income and expenses. The software will provide you with hints and tips that could save you money on allowances and expenses you may have missed.

Trial the software today for free – add up to five income and expense transactions per month and see your tax liability in real time at no cost to you. Pay only when you are ready to submit or use other key features such as receipt uploading.

Tags: Employed and Self Employed, HMRC, income tax, national insurance, Self Assessment, self employed, tax rates