When Do You Start Paying Tax?

Understanding when you should start paying tax in the UK can be confusing. And even when you’ve worked out when to start paying taxes, you may not be sure how much you should be paying. Whether you’re employed, self-employed, or juggling both, it’s crucial to grasp the fundamentals of the UK tax system to ensure compliance and effective tax planning. The last thing you want is to be caught short with a tax bill you haven’t saved for. 

With the help of experts from Kirkwood Wilson, your taxes are a whole lot easier to handle. This blog will clarify when you start paying tax, the current income tax rates, personal allowances, and the importance of paying the right amount of tax.

When Do You Start Paying Tax?

In the UK, you start paying tax when your income exceeds your Personal Allowance. The Personal Allowance is the amount of income you can earn each tax year before you have to start paying any tax. For the tax year 2023/24, the standard Personal Allowance is £12,570. This means if your total annual income is below this threshold, you won’t pay any income tax.

Income Tax Rates for 2023/24

Once your income exceeds the Personal Allowance, you will pay income tax at the following rates:

• Basic Rate: 20% on income over £12,570 and up to £50,270
• Higher Rate: 40% on income over £50,270 and up to £125,140
• Additional Rate: 45% on income over £125,140

National Insurance Contributions

In addition to income tax, you may need to pay National Insurance contributions. These are paid by both employees and self-employed individuals and are used to fund state benefits and pensions. The rates and thresholds for National Insurance contributions vary depending on your employment status and income level. These contributions are deducted from your monthly wages if you’re employed and will show on your payslip. 

Tax for Employed Individuals

If you are employed, your employer will deduct income tax and National Insurance contributions from your wages through the Pay As You Earn (PAYE) system. This system ensures that your tax is deducted at the source before you receive your pay. This means that you don’t need to worry about deducting any further money from your wages towards tax and national insurance. 

A List of Codes and What They Mean

Your tax code determines how much tax-free income you get in each pay period. It’s important to check your tax code regularly to ensure you’re not overpaying or underpaying taxes. Here is a list of codes and what they mean: 

1257L

This is the most common tax code and reflects the standard Personal Allowance of £12,570.

BR

BR stands for basic rate and means all your income from this job or pension is taxed at the basic rate of 20%.

D0

This is the higher rate of tax which means that all your income from this job or pension is taxed at the higher rate of 40%.

D1

This is an additional rate of tax and means that all your income from this job or pension is taxed at the additional rate of 45%.

Tax for Self-Employed Individuals

If you are self-employed, you must register with HMRC and file a Self Assessment tax return each year. Unlike when you’re employed, you are responsible for calculating and paying your tax and National Insurance contributions and this isn’t done for you. 

Registering for Self-Employment with HMRC

If you’re a self-employed individual looking to start paying tax, here are the steps you need to take:

1. Register as self-employed: You must register with HMRC as self-employed by 5 October following the end of the tax year in which you started working for yourself.
2. File a Self Assessment tax return: Each year, you need to complete and file a Self Assessment tax return, detailing your income and expenses. The deadline for online submissions is 31 January following the end of the tax year.
3. Pay your tax bill: You must pay any tax owed by 31 January, with a second payment on account due by 31 July if applicable.

Self-Assessment Deadlines and Penalties

It is important to be aware that missing the registration or filing deadlines can result in penalties. Therefore, it’s essential to keep accurate records of your income and expenses and file your returns on time to avoid fines. We recommend that you work on your tax months before it is due so that you have plenty of time to get all the information you need together. 

The Importance of Tax Planning

Effective tax planning can help you manage your tax liabilities and ensure you pay the correct amount of tax. This might involve making the most of allowable expenses, understanding the various tax reliefs available, and structuring your income in a tax-efficient manner. A tax return accountant can provide valuable advice and assistance in this area, ensuring you remain compliant and optimised.

Implications of Not Paying the Right Amount of Tax

You must take your tax seriously as failing to pay the right amount of tax can lead to severe consequences. These include:

• Penalties and interest: HMRC can impose penalties and charge interest on any unpaid tax.
• Investigation by HMRC: Persistent underpayment or non-payment can trigger a tax investigation, which can be stressful and time-consuming.
• Legal action: In extreme cases, deliberate tax evasion can result in legal action and even imprisonment.

Understanding when you start paying tax is essential for all UK taxpayers, whether employed or self-employed. If you’re unsure about any aspect of your tax obligations, get in touch with our tax return accountants who can provide clarity and peace of mind.