The tax clock is loudly ticking

The end of January tax deadline is looming again and self-assessment taxpayers now only have a couple of weeks to return tax forms to HMRC – or face a £100 fine.

As well as filing a return by the end of this month, any tax due for tax year ended 5^th April 2011 needs to be paid along with the first half of this year’s potential tax bill. Failure to make payment of tax that is due by this date will result in interest being charged on the amount due.

Around nine million taxpayers submit a tax return every year and two thirds of these returns are now filed on-line. Many of us leave the filing of our return to the last minute and this caused around one million people to have to pay a fine last year.

If you are new to on-line returns then you need to register first of all and you can do this at www.hmrc.gov.uk. When you have registered you will receive an activation code through the post and this allows you to go on-line and file your return. Given the state of the postal service at the moment due to the weather time is now at a premium and if you have still to register you need to do it now!

If you still prefer the old fashioned method then HMRC need to have received your return by 31^st January.  You can take your return to a tax office up to that date if you don’t trust the postal service but in a neat little twist HMRC won’t issue you with a receipt to prove you delivered it on time if you hand deliver, leaving yourself open to the possibility of a fine.

Don’t let the taxman spoil your Christmas

If you’re a student and about to start work for the Christmas holidays – not that you won’t already have been working hard all year at whatever course you’re doing – then remember that if you organise yourself properly you may not have to pay tax on your valuable earnings over the festive period.

Each of us has a personal allowance of £7,475 this tax year (from April 6th 2011 to April 5th 2012) and this is the amount of money that we are able to earn before starting to pay tax. So if you are only working for a few weeks over the holidays then it may be possible to have your employer pay you without deducting any tax from your pay.

To enable your employer to pay you without deducting tax then you will need to complete HMRC Form P38(S). It can be found at www.hmrc.gov.uk/forms/ps8s.pdf

If you’ve already started work and you have already had some tax deducted then you can still claim it back afterwards by completing a Form P50, and again you can download this form at www.hmrc.gov.uk/pdfs/p50.pdf

If you worked over the summer and paid tax but earned less than £6475 then you can still use this form to reclaim the tax you have already paid, and perhaps use the money to help fund your Christmas spending!

Is there a unified theory for tax?

For decades now scientists have been looking for the all encompassing ‘theory of everything’. It’s a so-far vain search for a unifying theory that explains all the as yet unexplainable mysteries of our universe.

Maybe the scientists need to take a leaf out of our new Government’s soon to be introduced ‘single benefit’ – one benefit introduced by Ian Duncan Smith to replace the myriad of existing payments.

In fact maybe the scientists and the government could work together to perform the same miracles on our tax system which the Nobel Prize-winning economist Sir James Mirrlees described in a recent report as “opaque and unnecessarily complex”.

Most taxpayers, and everyone who completes a self-assessment return annually, would surely agree with that assessment.

So how would it be for you, for example, if instead of Income Tax, Capital Gains Tax and Inheritance Tax we just had ‘Tax’? Could we even add Council Tax to that list?

And should we just call National Insurance a tax as well and add it into the mix? The days when your NI contributions were ring-fenced to provide pension and social security benefits are long gone. Is it not the case not that NI payments received by the government are just added into the big ‘tax’ pot now anyway?

Recent changes to Child Benefit and Pension Contribution limits have thrown up strange anomalies in the taxation system. It seems grossly unfair, for example, that an income of £1 over the basic rate tax threshold could result in the loss of child benefit for some while others could earn almost twice as much but remain under the higher rate radar and so continue to receive the benefit. Likewise the changes to pension contribution limits could see members of final salary schemes hit with an unexpected and difficult to calculate tax charge if they receive a big increase in salary in any one particular year.   At the same time an interesting quirk of the personal allowance rules means that anyone earning between £100,000 and around £112,000 will actually pay tax at a marginal rate of 60%.

Now if your income is significantly less than that you might not care too much about the fate of these high earners. So does that open up a whole new argument – for another time perhaps – that many of them should be paying more tax to help reduce the level of the cuts that we have just been told that we have to suffer?

So not only is the tax system complicated and unwieldy in its current format but it also seems to randomly reward and penalise certain taxpayers for no real reason!

Oh, and all of this is before we look at what would happen to the tax system across the UK if the Scottish Government decided to use its tax raising powers! Would that add yet another layer of complexity and confusion?

What do you think?

The tax clock is ticking

We’re now into October and you only have a matter of weeks left if you are one of the 3.4M taxpayers who still file a paper tax return each year. October 31st is the deadline for paper returns to be received by HMRC. Note I said received by, not sent to. There is a difference!

And it is a difference that could cost you a £100 fine! That’s the automatic penalty you will be hit with if HMRC ask you to complete a Tax Return and you don’t comply.

Of course they won’t know that you won’t have complied just because they don’t receive your return by the 31st October because you still have until the end of January 2011 to file on-line.

There are lots of advantages to sending your tax return online:

• Online tax returns are processed faster than paper returns and any money you are owed is repaid to you more quickly than if you file on paper

• You get an immediate online acknowledgement as soon as your completed tax return is received

• It is safe and secure

• Your tax is worked out automatically as you complete the form so you know what you owe or are owed right away

• Any money you are owed is repaid to you more quickly than if you file on paper

• Filing online is convenient and can be done at any time of day or night

• You can monitor your Self Assessment ‘account’ online – this includes statements of your payment history and what you currently owe or are owed

• You can save your data safely and return to it later, this means you can complete your Tax Return at your own pace, just as long as you meet the deadline of 31 January

• It’s easy to store your completed return online and you can also print out a copy for your records

I know that not everyone is comfortable filling in these things online so if you prefer to complete a paper return and send it don’t forget:

• HMRC needs to have your return by 31st October or it could cost you £100

• Keep a paper copy of your return before sending it

Remember too that you don’t always complete a tax return because you owe HMRC money. It could be the case that you have paid too much tax or you have allowances or expenses that you need to claim for. In these situations completing a return will result in HMRC sending you money so it is in your interest to get it done on time!

A question of tax

Q. My daughter is 17 and is doing some part-time work for 20 hours a week. She is currently earning £4.92 per hour. Does she need to pay tax and what are the rules and her choices?
Peter Murphy.

A.Each of us has a personal allowance of £7,475 this tax year (from April 6th 2011 to April 5th 2012) and this is the amount of money that we are able to earn before starting to pay tax.

So if your daughter is only working for a few weeks over the holidays then it may be possible to have her employer pay her without deducting any tax from your pay.

To enable your daughter’s employer to pay her without deducting tax then she will need to complete HMRC Form P38(S). It can be found at www.hmrc.gov.uk/forms/ps8s.pdf
If your daughter has already started work and you have already had some tax deducted then she can still claim it back afterwards by completing a Form P50, and again it can be downloaded from www.hmrc.gov.uk/pdfs/p50.pdf

If your daughter worked over the summer and paid tax but earned less than £7475 then she can still use this form to reclaim the tax she has already paid.

Working for yourself – or for the taxman?

The thirtieth of May was a very important day this year. It was the day that you started to work for yourself. Every day up to then, from the start of the tax year on 6th April, you have been working for HMRC. An increase to VAT at the start of this year added to National Insurance and Income Tax liabilities meant the income earned from every day worked until the 3oth May was going to the Revenue.
And this is three days later than last year, largely due to the increase in VAT.
It could be worse however – academics have calculated that if we wanted to pay off the whole National debt in one go it would take each of us 525 days income – with it all going to reduce the debt and none into our pockets or to provide public services!

When is avoidance not avoidance? When it’s evasion.

As we reach the last few days before your Tax Return needs to be received by HMRC it’s worth just reminding you of the difference between a couple of terms that the Revenue use and which could be important to you if you decide to try and cut some corners when telling them your money story!

The terms, as you may already have guessed, are tax avoidance and tax evasion.

Tax avoidance is about paying as little tax as you need to while making sure that Her Majesty’s Customs and Excise is aware of all of the money you earn. It is perfectly legal – although whether it’s ethical or moral is a different matter.

Tax evasion, on the other hand, is about hiding your money from the Revenue before they get their hands on any of it. It’s not clever as Ken Dodd, Lester Piggott and Steffi Graf’s dad all found out to their cost.

If you are employed then you may find that you have to spend money that you don’t get from your employer – membership of the BMA is an example if you are a doctor – and for which you may be able to claim tax relief. If you are self-employed then you will be able to offset all of your legitimate expenses against the income you earn before it is liable for tax.

As a guide to what is a ‘legitimate expense’ you might want to play a game where you imagine you are a tax inspector receiving your own return. If you laugh when you read some of the things that you have claimed then they’re probably not legitimate. Not very scientific I know but it’s a start.

You will probably want to take professional advice from a Chartered Accountant but you will also find the Revenue website at www.hmrc.gov.uk helpful.

 You have to know that there is one organisation in the UK that it is not worth messing with and that is the HMRC. While they can be very helpful if you have any enquiries (I have to say that) they can also make your life very difficult if they think you’re at it. Prison is an option as some of those mentioned above will testify so be honest and upfront in your dealings with them.

Taxing Times Ahead?

There’s nothing surer than death and taxes, and Inheritance Tax combines them both! In the first of a series of blogs on the different taxes that we have to pay during our life, and afterwards as well it seems in this case, we examine the main liabilities you are likely to be faced with when it comes to paying tax on your estate. We will look at when and how the tax is charged and how it affects the assets you are able to leave to your dependents.

Inheritance Tax (IHT)

After all the tax we pay on our income and savings while we’re alive the sting in the tail when we die is that if we’re not careful the government can come along and tax the money and other assets that we leave behind. Inheritance tax is the tax payable on your estate when you die if the value of your estate exceeds the IHT allowance, which is currently £325,000 (2010/11 tax year). This allowance is also known as the ‘nil rate band’. Inheritance tax is charged at 40% on the value of the estate above the £325,000 threshold, subject to any exemptions and reliefs that may be available.

Your estate is likely to include:

Everything owned in your name
The share of anything owned jointly
Gifts from which you keepsome benefits – for example a house still lived in and maintained although given to someone else.
Assets held in trust from which you still get some personal benefit – for example an income

It also includes the value of any gifts made within seven years of your death which are known as “potentially exempt transfers” (PETs). Some gifts may be subject to IHT if made to certain types of trust.

Inheritance tax is starting to affect an increasingly large number of people due to the rise in residential property values. It is a growing worry for many people – but there are plenty of things you can do now to make sure you pass on as much of your money as possible to your family and friends rather than the Inland Revenue.

Money paid to the revenue in IHT is increasing and this has been mainly fuelled by the rise in house prices in recent years and the pegging back of rises in IHT starting rates during the same time period. In the past seven years, the average house price has risen by 138% (Source: Nationwide house price since 1952 index, May 2006), whereas the nil rate band has increased by just 23.4%.

The inheritance tax burden not only reduces the value of any inheritance paid to your beneficiaries but the inheritance tax bill has to be paid before probate can be granted (which is when the Will is officially recognized). The IHT is due within six months of the end of the month in which death occurred. This often requires the immediate sale of assets or for benefits to have enough funds to pay the tax before the estate can be paid.

We’ll come on in part two to look at how you can minimise the impact of IHT on your family.