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Would you know if you were paying too much tax?

Less than half of taxpayers know how much tax they currently pay

Would you know if you were paying too much tax?

Less than half of taxpayers say they’re aware of how much tax they pay – and confusion around tax rules means even they might be in the dark about their tax bills.

Women, renters and those aged between 35 and 54 are least likely to know what they pay in tax, according to research from Hargreaves Lansdown.

On the face of it, this might not seem like a problem – as long as you’re paying your tax bill. But if you don’t know what tax you pay, then you run the risk of overpaying, and being possibly surprised by a tax bill you haven’t budgeted for.

This kind of mistake is only going to get more expensive when tax threshold freezes and forthcoming National Insurance rate hikes start to bite.

Here, Which? explains the most common taxes you’ll pay – and what expenses and allowances you could be missing out on.

What taxes do you pay?

The taxes you pay will depend on your circumstances and your sources of income.

Tax on your earnings

You pay income tax on the money you earn – most commonly, this is from employment, self-employment, your pension, or letting a property.

You’ll only pay tax on the amount you earn above the personal allowance – this is £12,570 in 2021-22.

The rate of tax payable increases with your income – income tax in Scotland is split into five bands, whereas in England, Wales and Northern Ireland there are just three. Basic-rate tax is charged at 20%, rising to 40% for higher-rate tax, and 45% for additional-rate tax.

Your earnings are also subject to National Insurance contributions. Your record of contributions affects how much state pension you’re eligible for in retirement, and can also affect your entitlement to certain benefits.

There are four classes of National Insurance payments. Those in employment who earn more than the minimum threshold pay Class 1 National Insurance (12%), which is automatically taken from their pay with income tax via PAYE.

Self-employed workers may pay Class 2 of £3.05 per week, and Class 4 National Insurance of 9% and 2%, depending on your profits.

Class 3 National Insurance is for voluntary payments, most commonly paid by those with gaps in the history of their contributions.

From April 2022, CLass 1 and 4 National Insurance rates will increase by 1.25 percentage points.

It has been the case that those who continue to work after they’ve reached state pension age no longer pay National Insurance; however, this will no longer be the case after April 2023.

Tax on other types of income

If you’ve made a profit after selling a valuable possession or asset, you may have to pay capital gains tax if you’ve made more than the capital gains tax allowance of £12,300.

The rate you’ll pay depends on your income tax band, and what you’ve sold. Most assets are charged at 10% for basic-rate taxpayers, or 20% if you pay the higher rate of tax. Gains made from the sale of residential property are 18% for basic-rate taxpayers, and 28% for higher-rate taxpayers.

If you’ve earned money from shares and received a dividend income, you may have to pay dividend tax. The first £2,000 you make is tax-free. Above that, what you’ll pay also depends on your income tax band. Basic-rate taxpayers are charged 7.5% dividend tax, rising to 32.5% for higher-rate taxpayers and 38.1% for additional rate taxpayers.

From April 2022, dividend tax rates are rising by 1.25%, increasing them to 8.75%, 33.75% and 39.35%.


Expenses and allowances you might be missing

You may be eligible to get tax relief on things you have to buy as part of your job, as well as tax allowances geared up for people in certain circumstances. These aren’t automatically applied, so you should make sure you’re clued up to make sure you’re not paying too much tax.

Working from home

If you’ve had to work from home due to the coronavirus pandemic, you may be able to claim a tax rebate on what you’ve had to pay as a result.

Employed workers can claim for things solely used for work purposes, such as extra gas and electricity costs, and business calls added to your phone bill. It’s possible to claim through PAYE on the government’s microsite for a flat rate of £6-a-week without having to provide evidence of your increased outgoings. Basic-rate taxpayers will receive an extra £60 a year; higher-rate taxpayers will receive £125 a year.

If you’re self-employed, you’ll need to claim through your self-assessment tax return and work out the proportion of costs for things like lighting, heating, cleaning, insurance, general maintenance, and water rates that are spent on business purposes. Expenses will be deducted from your profits, reducing the amount of tax you’ll pay.

Work uniform expenses

If you have to wear a uniform as part of your job, you may be able to claim tax relief for the costs of cleaning, repairing, or replacing it – but you can’t claim for the initial cost of buying it.

HMRC has set out a list of occupations that can deduct a flat-rate allowance of uniform expenses; it’s possible to claim more than this if you can provide proof of what you’ve spent.

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Marriage allowance

Couples may be able to reduce their household tax bill if one partner earns less than the personal allowance (£12,570), and the other is a basic-rate taxpayer.

The marriage allowance works by effectively transferring 10% of the lower-earning spouse’s personal allowance to their partner, boosting the higher earner’s personal allowance by an extra £1,260. This means the higher earner will pay less tax on their income, and the couple can collectively save £252 on tax.

It’s also possible to backdate the allowance for up to four years; if you’re eligible, you’ll receive a cheque from HMRC to reimburse you for the extra tax you’ve paid.

Self-employed expenses

If you’re self-employed, there’s quite a long list of potential expenses you can claim – but it can be tricky. If you use business premises, you can claim for costs of things like lighting, heating, cleaning, business rates and general maintenance. However, you can’t claim for the initial cost of the building, or building alterations.

You can also claim for travel and accommodation on business trips, and the running costs of a car used for work – but you can’t claim for the cost of buying the vehicle, or what you spend travelling just between home and your workplace.

If you have employees, you can claim on their wages, redundancy payments, insurance and pension benefits, training and employee childcare provision. You can’t claim for your own costs, however – including wages, pension costs or life insurance.

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File early to get it right

If you file a paper tax return, the 31 October deadline is fast approaching. This is the date HMRC must have received your tax return by – so you’ll need to post it several days earlier, especially as 31 October is on a Sunday this year.

HMRC no longer automatically sends out paper tax return forms to be filled out, apart from to those who it knows can’t file online. If you want to file a paper return, you’ll either have to download the pages you need from the HMRC website, or request them to be sent to you by calling HMRC on 0300 200 3310.

If you think you might miss the paper tax return deadline, it’s best to file online instead – the online deadline is 31 January 2022. Don’t try to do both – if you file a paper tax return that’s received late, and also file online on time, HMRC will still classify your return as being late.

Submit your tax return with Which?

If you prefer to submit your tax return online, the Which? tax calculator can help you tot up your tax bill and also suggests expenses and allowances you might have forgotten.

You can declare income from a wide range of sources, and the easy-to-use tool can also be used to submit your tax return directly to HMRC.

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