Personal Allowance
Marriage Allowance: Marriage allowances are added to the personal allowances. In 2021/22 the personal allowance is £12,570 but when including marriage allowances, it will be
£13830.
Qualify for Marriage Allowances
- If you are married or in a civil partnership then you are eligible for allowances.
- If your income is not more than personal allowances.
- If your partner’s income is between £12,571 and £50,270 and pays the basic rate.
(moneyhelper 2022)
Personal Allowance: The government of the UK allows some amount on which individuals are not required to pay taxes. This allowance is known as Personal allowance. The standard personal allowances allowed for the year 2021/22 is £12,570. Up to an income of £12,570 is treated as tax-free income.
If income is more than £100,000 then personal allowances are reduced by £1 for every £2 to zero.
Rent-a-room Allowance: Rent-a-room allowance is a tax-free rental income that is allowed to owners or tenants only if the accommodation is fully furnished. For the year 2021/22, the rent-a-room allowance is £7,500.
If the income generated from the accommodation is more than £7,500, therefore, the taxpayer has two options:
- Pay taxes as per normal income basis. In this case, the income is calculated by subtracting expenses from the income received from the accommodation.
- Pay taxes on an income after claiming rent-a-room allowances. In this method, expenses are not allowed for allowances.
(GOV.UK, 2022)
Dividends: Dividend allowance is a tax-free amount that is allowed to individuals if they have any dividend income. These dividend allowances are added to personal allowances. For the year 2021/22, the dividend allowance is £2000. The basic tax rate of 7.5% is charged on dividend income if income is between £0 – £37,700 and if income is between £37,701 – £150,000 the tax rate is 32.5 and above income is the £150,000 then the tax rate is 32.1% (IT Contracting, 2022).
Choose Salary – Describe tax rates: the tax rate is applicable to total taxable income. Income from salary is also part of total taxable income. Income is below £12,570 then income is tax-free. If income is between £12,571 and £50,270 then the applicable tax rate is 20%. If income is between £50,271 and £150,000 then the tax rate is 40% and if income is above £150,001 then the tax rate is 45%.
National Insurance: National insurance is a type of contribution paid by the employer, employee, and the self-employed person for a certain benefit such as maternity allowances and State Pension. NI is directly deducted from the salary.
Contribution for NI is categorized by class.
- Class 1: If you belong to class 1, then a 13.25% rate is applicable if income is between £9,880-£50,270 and if income is more than £50,270 then the rate is 3.25%.
- Class 2: Self-employed persons are allowed to contribute in class 2. The contribution amount in class 2 is £3.05 a week for the year 2021.
- Class 3: If anyone misses their NI contribution, they can pay their contribution in class 3. The class 3 contribution for the year 2021/22 is £15.40 a week
- Class 4: If a self-employed person makes a profit of more than £9,569 for the year 2021/22 then they pay their contribution in class 4.
(Richardson, 2022)
Fuel: Fuel allowances are the amount paid to the household during the winter for the cost of heating your home. Fuel allowances are paid to those who are not able to bear the cost of room heating. The total fuel allowances for the year 2021/22 is £914 for 28 weeks.
Allowances are allowed as per the income and some other benefits. If they earn normal income such as salary or other than personal allowances of £12570 are allowed to them for the year 2021/22. It means they do not need to pay taxes on the first £12570 income.
They are also allowed for marriage income if they qualify as per the above-mentioned criteria. If they qualify then they are allowed £1260 as a marriage allowance. Therefore, the total allowance is £13830 (£12570+£1260) for the year 2021/22.
If they generate income from the rent then they are allowed to rent-a-room allowances which are £7500. If the rental income is more than £7500 in that case, they chose any one method mentioned above for tax purposes.
Marriage Allowance
If anyone received income as a dividend, they are applicable for dividend allowances which are £2000. This allowance is added to the personal allowances means the total allowance is £14570 (£12570+£2000). If the client has marriage allowances, then the total allowances are £15830 (£12570+£2000++£1260). If the client has only dividend income, then the applicable rate is 7.5% if income is between £0 – £37,700 and if income is between £37,701 – £150,000 the tax rate is 32.5 and above income is the £150,000 then the tax rate is 32.1%.
They are required to pay NI contributions as per the class categories mentioned above for the benefit of state pension and maternity allowances. If the age of clients is reached at the state pension age, then they are not required to pay NI contribution.
They also allowed for the fuel income if their income is low and not able to bear the cost of heating. In that case, the government provides them a fuel allowance for 287 weeks of £914.
Note.
i. The tax base rate is the same as applicable for all. Income is below £12,570 then income is tax-free. If income is between £12,571 and £50,270 then the applicable tax rate is 20%. If income is between £50,271 and £150,000 then the tax rate is 40% and if income is above £150,001 then the tax rate is 45%.
ii. If income is more than £100,000 then personal allowances are reduced by £1 for every £2 to zero.
The Tax Charter is a trust-building relationship between both the taxpayer and the UK tax authorities. It also demonstrates the department’s commitment to providing quality services to taxpayers. The tax Charter is a beginning towards further transparency in the department’s tax preparers and compliance with taxpayers. The UK’s tax authority is HMRC. HMRC is dedicated to enhancing the taxpayer experience, and the HMRC Charter outlines the level of service and conduct those individuals must expect while dealing with us. HMRC is in charge of collecting the tax that funds the United Kingdom’s public services. We’ll assist you in meeting your tax obligations and ensuring that you receive any advantages, tax credits, refunds, or other assistance that you are entitled to. HMRC has the power to take legal action against those who break the law or do not pay their taxes.
If they try to avoid paying their taxes, HMRC will conduct a full investigation against the taxpayer. HMRC may focus on a specific statement in the return since it appears to be incorrect, examine the tax deductions of numerous costs listed in the profit and loss numbers, or conduct a thorough examination of the taxpayer’s tax submission.
HMRC sends a notification to the taxpayer and the taxpayer must submit it within a certain time frame. The time restriction is 12 months from the day the return was submitted (Patrick Cannon 2022).
Once they settle in the UK, they may invest their surplus saving as per the risk of investment, time framing of the investment, investment goals, and tax saving. They may invest their surplus in medium-risk funds. The time frame of a medium-risk fund is 4 years to 7 years. Under the medium risk fund, 40% to 60% of the total investment is invested in shares. Preferred stock, common stocks, index funds, and pension funds are examples of medium-term investments. Before their investment, they may check their goals, tax benefit on the capital gain, and how much the portfolio is diversified. Capital gain tax is charged on the profit generated from the medium-term investment. For the year 2021/22, the capital gain tax rate is 18% as per the basic rate. If taxpayers pay a higher tax rate, then they pay a 28% tax rate on the capital gain. If they generate profit from other assets then they are required to pay 10% for the basic rate but if they pay a higher tax rate then they pay 20%.
Rent-a-Room Allowance
They can also invest their surplus money into ISA. ISA stands for Individual Saving Account and it provides a fixed interest rate with the benefit of tax on interest return or the capital gain. You can only save up to £20,000 in this during the one financial year and the limit is changed every year as per the government instruction.
They can also put money into a pension fund. The ability to contribute to a pension to lower taxes is one of the main benefits of pension savings. Tax reduction is available on all contributions to a pension, providing an immediate increase to your savings and allowing the money to grow quicker than other types of investments. When a person contributes their contribution to the individual pension program, then HM Revenue and Customs (HMRC) adds 20% to it. If you’re a 40% taxpayer, you can get an extra 20% in tax benefits, and if you’re a 50% taxpayer, you can get an extra 30%. If a business or employer pays, it is a gross payment with no HMRC surcharge (Taxinsider.co.uk 2022). If a spouse is unemployed and has no other sources of income throughout the financial year, a maximum of £3,600 gross (£2,880 net) can be provided to the spouse. If the spouse works and generates money, the 100 percent salary rule applies, with a limit of £50,000. Individuals, employers, or both can contribute, with employer payments being limitless but regulated by the 100% of wage criterion to avoid excessive financing costs.
In the current economy, six top investing funds might assist the retired couple generate a good return without carrying on excessively high risk: These are the investments:
Real estate investment trusts (REITs) are companies that invest in real estate.
- Annuities.
- Stocks that pay dividends.
- Stock with a higher priority.
- Alternative investment funds are a type of investment vehicle.
The taxation system has both good and adverse effects on the income of the individual and wealth creation. The type of taxes determines whether they diminish or exacerbate income disparity. Because of significant levels of inequality in taxes, the UK tax system imposes a heavy tax burden on the poorest as compared to the richest.
I disagree with the following aspects of taxation:
Higher marginal tax rates: If you earn more than £150,000 per year, you will be subject to a 45 percent tax rate, which applies to both individuals who earn less than £150,000 and those who earn considerably more (Ft.com 2022).
Contribution to national insurance: It is more beneficial to self-employed people since they benefit from a significant tax break due to reduced national insurance payment rates.
Capital gains tax: Determining the appropriate capital gains tax rate has become much more difficult. According to Justin Urquhart Stewart, the capital gain tax rate is complicated because there are two rates applicable based on residential property and chargeable as well as there are also higher and normal income tax rates applicable in capital gain (Ft.com 2022).
In my opinion, they should travel to the United States. Because the US has a progressive taxation system. Progressive tax systems feature tiers of tax rates. According to the progressive tax system, the higher-income persons pay a greater proportion of their income as a tax, and lower-income individuals pay the lowest tax rates. In general, flat tax schemes apply a single tax rate to all taxpayers.
Reference
Ft.com, 2022. The top 10 UK tax complexities. [online] Ft.com. Available at: <https://www.ft.com/content/c5b733ae-9fae-11e7-8cd4-932067fbf946> [Accessed 30 April 2022].
GOV.UK, 2022. HS223 Rent a Room Scheme (2021). [online] GOV.UK. Available at: <https://www.gov.uk/government/publications/rent-a-room-for-traders-hs223-self-assessment-helpsheet/hs223-rent-a-room-scheme-2021#:~:text=For%20the%20tax%20year%202020,for%20less%20than%2012%20months.> [Accessed 30 April 2022].
IT Contracting, 2022. Dividend Tax Calculator – 2021/22. [online] IT Contracting – Limited and Umbrella Contractor Guides. Available at: <https://www.itcontracting.com/calculators/dividend-tax-calculator-2021-22/#:~:text=The%20dividend%20tax%20rates%20for,See%20the%20table%20below.> [Accessed 30 April 2022].
moneyhelper, 2022. Marriage and Married Couple’s Allowance. [online] MaPS. Available at:
<https://www.moneyhelper.org.uk/en/work/employment/marriage-and-married-couples-allowance> [Accessed 30 April 2022].
Patrick Cannon, 2022. What is the Time Limit for a HMRC Investigations? | HMRC Investigations. [online] Patrick Cannon. Available at:
<https://www.patrickcannon.net/news/time-limit-for-hmrc-investigations/> [Accessed 30 April 2022].
Richardson, D., 2022. National Insurance rates. [online] Which? Money. Available at:
<https://www.which.co.uk/money/tax/national-insurance/national-insurance-rates-ajg9u9p48f2f> [Accessed 30 April 2022].
Taxinsider.co.uk, 2022. Reduce Taxable Income through Pension Contributions – Tax Insider. [online] Taxinsider.co.uk. Available at:
<https://www.taxinsider.co.uk/reduce-taxable-income-through-pension-contributions> [Accessed 30 April 2022].
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
