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Social care tax proposed from April 2022

by Admin

The government announced yesterday plans to introduce new social care tax, intended to help reduce the costs incurred when a person goes into care. If the bill passes parliament, this will mean be an increase in National Insurance contributions of 1.25 percentage points from April 2022, to be replaced by a separate tax of the same amount from April 2023. The benefit of this additional tax, in England at least, is that care costs will be capped at £86,000 (less if you don’t have that much in savings / assets). Scotland, Wales and Northern Ireland set their own social care policies, but will receive additional revenue from the tax generated.

The plan has drawn criticism from many who see it is a tax paid by low- and middle-income employees to subsidise wealthy retirees. It also appears to be a break of a manifesto pledge not to raise income tax, National Insurance or VAT – the justification for which, put forward by the government, has been that the pandemic has changed things.

This BBC article has a clear summary of the changes in more detail, as well as a chart showing how much extra tax you’ll pay depending on how much you earn. The bill still needs to pass parliament, but when this and other changes from April 2022 are confirmed, The Salary Calculator will be updated with the latest rates so that you can see what a difference it will make to your take-home pay.

Tags: coronavirus, covid-19, HMRC, income tax, Jobs, national insurance, Pay As You Earn, social care, tax rates

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

Changes to pensions in 2021

by Madaline Dunn

The new tax year brings with it some significant changes to finances. One area affected is pensions. 

It’s important to keep in the loop about pension changes because it can mean that either your finances take a hit or you potentially see a boost!

At The Salary Calculator, we’ll make sure you’re up to date with all the latest information. In this article we’ll explore:

• What annual allowance is
• Whether any changes have been made to pension tax relief
• What changes have been made to lifetime allowance (LTA)
• Whether state pensions have been boosted
• How employer contributions work

What is Annual Allowance?

Annual allowance refers to the total amount of pension contributions an individual can make each year while receiving tax relief. This includes contributions made by the individual, employer, and any other third party.

The annual allowance is capped at £40,000. If you exceed this amount, you will be taxed at the highest rate of income tax that you pay.

The Tapered Annual Allowance (TAA) was introduced back in 2016 and applies to high earners. For the tax year 2021/2022, the limit for threshold income and adjusted income is being increased to £200,000 and £240,000, respectively.

Are there any changes to pension tax relief?

Pension tax relief is applied to any governmental top-up contributions made to your pension.

If you are eligible for pension tax relief, the amount of relief you will receive is determined by the highest rate of income tax that you pay. So:

• Those who are basic-rate taxpayers receive 20% pension tax relief
• Those who are higher-rate taxpayers receive 40% pension tax relief
• Those who are additional-rate taxpayers receive 45% pension tax relief

Those who earn under the Personal Tax Allowance (£12,570) are not eligible for pension tax relief.

No changes have been made to pension tax relief.

What are the changes to Lifetime Allowance (LTA)?

When it comes to pensions, the good news is that you can save as much as you want for your golden days. 

The amount of money you accumulate from all pension schemes in a lifetime before taxation is called your pension lifetime allowance (LTA). This was introduced back in 2006, and from 2021 through 2022, the LTA is £1,073,100.

In March, it was announced that LTA would be frozen at this limit until 2026, and it is estimated that the Treasury will generate £990m from this freeze.

Of course, LTA does not apply to everyone. An individual can work out whether or not it is relevant to them by calculating the expected value of their pension payout. To make this calculation, head over here.

If your pension pot exceeds the LTA, you will be charged 25% if it’s withdrawn as income. Alternatively, if it is withdrawn as a cash lump sum, it will be taxed at 55%.

Have state pensions been boosted?

In line with the triple lock ruling, state pensions have been boosted. On 6 April 2021, the state pension increased by 2.5%. That’s an increase of £4.40, bringing the weekly total to £179.60. Annually this works out as £9,339.20.

That said, you will only receive the full state pension amount if you have 35 years of National Insurance (NI) contributions.

Those who reached the state pension age before 2016 will receive the basic state pension, which is slightly less and boosted from £134.25 a week to £137.60.

How do employer pension contributions work?

In line with the Pensions Act 2008, an employer must offer a pension scheme to eligible employees and automatically enroll them once they have commenced employment. Employers must also make contributions to their employees’ pension scheme.

Currently, the minimum amount that an employer must contribute is 3%, and this has remained unchanged.

 

Tags: April 2021, Pensions, personal allowance, tax rates, The Salary Calculator

Pandemic-related changes to tax return schedules

by Admin

[Sponsored Post]

We appreciate that it’s difficult to stay on top of tax law at a time of such uncertainty. That’s why we’ve asked Mike Parkes from GoSimpleTax to break down the biggest support package of 2020, and how it could impact you in 2021.

Whilst the support from the government has been welcomed with open arms, by most, it is worth noting that these grants are taxable. Each grant should be reported on your tax return, as income, in the accounting period they were received. This means there may be tax and NIC due on these payments and therefore it may impact your tax liability due 31 January 2022.

The extension of the Self-Assessment filing deadline

Sole traders were also made exempt from a late filing penalty, provided that they filed online by 28th February 2021. However, this has proved somewhat confusing as self-employed individuals were still expected to pay their tax bill by 31st January.

Any individuals that failed to do so would be charged interest from 1st February on any late payments. This became even more costly if you delayed your payment on account from July 2020 (another COVID-19 response measure), as the two payments were both due on 31st January 2021 and each accrued interest.

Important change to be aware of

In a further curveball announced 19^th February HMRC confirmed that the initial 5% late payment penalty on self-assessed tax would not be charged as long as the tax is paid, or a time to pay arrangement is agreed by 1^st April 2021. The self-assessment timeline is now:

• 31 January – Normal Self-Assessment deadline (paying and filing)
• 1 February – interest accrues on any outstanding tax bills
• 28 February – last date to file any late tax returns to avoid a late filing penalty
• 1 April – last date to pay any outstanding tax or make a Time to Pay arrangement, to avoid a late payment surcharge
• 1 April – last date to set up a self-serve Time to Pay arrangement online

If you’re unable to pay your tax bill in time, the government is advising you to pay in instalments. This enables you to spread the cost of your tax bill over a few months. Bear in mind that you must owe £30,000 or less and have no other payment plans or debts with HMRC. Your tax returns must be up to date, and you also have to sign up before 1^st April 2021. It’s worth noting that you’ll have to pay interest too.

As there is currently no information concerning the rules for the fourth SEISS grant, we here at GoSimpleTax are urging all our users to submit their tax return immediately. After all, there’s a strong possibility that they could determine your eligibility, and you must do it in order to set up a payment plan.

About GoSimpleTax

GoSimpleTax software submits directly to HMRC and is the solution for self-employed, sole traders, freelancers 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.

Try 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: coronavirus, covid-19, income tax, Jobs, Self Assessment, self employed, tax rates

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