Income tax

How tax is collected

By Ian Robinson

Article 6 of 7

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How tax is collected

Find out how tax is collected, and whether or not you need to fill in a tax return.

Tax is collected on behalf of the government by Her Majesty's Revenue & Customs (HMRC). It's most commonly collected at source under the pay-as-you-earn (PAYE) scheme, although some people have to pay by filling out a self-assessment tax return.    

PAYE tax

If you work for an employer or receive an employer's pension or personal pension, tax is usually collected under the PAYE scheme.

This means the tax you owe is automatically deducted from your pay by your employer and sent to HMRC. National Insurance is also collected this way.

Self-assessment tax return

You'll need to fill in a tax return if:

  • you're self-employed, a business partner, director, trustee or if you represent someone who has died
  • you receive rental income (but, possibly not if it's below £2,500 a year and you're on PAYE)
  • you have taxable foreign income
  • you receive other untaxed income and the tax due on it can't be collected through PAYE.

When you may need to fill out a tax return

You might also have to fill out a tax return if you're an employee or over 65 and:

  • your annual income is more than £100,000 or you receive untaxed income of at least £2,500 a year
  • you have annual investment income of at least £10,000 or you claim £2,500 or more a year in expenses
  • you're entitled to some age-related personal or married couple's allowance, but not the full amount (unless your affairs are straightforward).

Declaring untaxed income

If you receive some income without tax deducted but you're liable for tax, you have to declare the income to HMRC – your tax office will tell you how to do this. You pay the extra tax either through a tax return or via an adjustment to your tax code if you're a PAYE taxpayer.

You must tell your tax office about new untaxed income by 5 October following the end of the tax year in which you received the income. So if you received untaxed income during the 2015-16 tax year, you'll have to tell your tax office about this by 5 October 2016.

Deadlines and penalties

There are specific deadlines for filing your tax return, paying your taxes and, in some circumstances, informing HMRC of new income. 

If you file your return or pay you taxes late (or fail to meet any other deadlines), you may have to pay a penalty. Interest is also charged where tax is paid late.

Revised penalty regime

HMRC has a penalty regime which could mean that you may have to pay a penalty if there is an error in your return which is either deliberate, or has resulted from you not taking reasonable care when preparing the return or supporting information. 

For more detailsm see tax appeals, disputes and complaints.

Tax already deducted

In 2015-16, most savings income, such as interest from bank and building societies, had tax deducted at the basic rate of 20% before you receive it. You only have to pay any further tax on this if you're a higher-rate taxpayer. In 2016-17 deduction at source will stop and a new savings allowance will apply- whereby the first £1,000 of interest is tax free (the first £500 if you are a 40% taxpayer). 

Non-taxpayers

If you were a non-taxpayer in 2015-16, you can claim back the basic-rate tax that has been deducted. In 2016-17, this will no longer be necessary.

Dividend income

From 6 April 2016, the first £5,000 you receive in dividends from investments is tax free. Above this, basic rate taxpayers will pay 7.5% tax on dividends, higher-rate taxpayers 32.5%, and additional-rate taxpayers 38.1%.  

In 2015, dividend income carried a 10% tax credit, so, basic-rate taxpayers effectively paid no tax, higher-rate taxpayers paid tax at and effective rate of 25% and additional rate taxpayers paid tax at just over 36%.

Non-savings income is normally allocated against your tax bands before savings, dividends and capital gains, so to find out at what rate interest on your savings is taxed, you must add this to your other taxable income. 

Avoiding tax

Tax avoidance, where you arrange your finances to pay as little tax as possible, is a legal course of action.

Tax evasion, where you conceal income or gains or fraudulently claim allowances or other deductions, is a criminal offence. You can be fined or even imprisoned.