Every month, we all notice a significant portion of our income taken away in tax, but very few of us know exactly how much we're required to pay. Of course, there are some people who are self-employed and have to remain on top of such matters, but for many it's simply an issue that doesn't cross their minds.
The personal allowance has once again risen this year for people who were born after April 5th 1948, with this figure now set at £9,440. That means everybody in employment can earn up to this amount before they are subject to paying any income tax, while those who are aged between 65 and 75 can be paid £10,500 before they have to hand a slice over to HM Revenue & Customs.
However, people who earn more than £100,000 a year must play by slightly different rules, as their personal allowance is reduced by £1 for every £2 over the figure they are paid. This means somebody who earns well over the £100,000 threshold could end up with a personal allowance of zero.
You should also pay attention to which tax band you fall in. While no tax will be paid on your personal allowance, everything above this will be subject to the basic rate, which for the 2013-14 years is 20 per cent. Should you earn more than £32,010 a year, anything above this figure will be taxed at the higher rate of 40 per cent, while all earnings over £150,000 are taxed at 45 per cent.
Another consideration regarding tax should come if you have savings in the bank. The interest you earn on this is also subject to tax, with the basic rate of ten per cent applicable when you have up to £2,790 in your account. If you have more than this in savings, the interest paid out by your bank or building society will mirror the income tax barriers.
There are several items that will count as taxable income and it can pay to make a note of these, as you will potentially lose out in the long run if you fail to declare them. As well as all income from any professional activities and savings in the bank, tax must be paid on several state benefits, rental income if you are a landlord, pension payments and investment income.
With plenty to remember, it can pay to take expert advice on the subject of tax if you are at all unsure about what you should be paying or if you feel you might be handing over the wrong amount. There can be severe penalties for getting it wrong, so it's always better to be safe than sorry in this area.
A good idea to avoid paying tax on your savings is to open an ISA. This will allow you to put away up to a certain amount - currently capped at £5,760 - without paying any tax. Such an option can appeal to those who don't want to see their rainy-day pot eaten away by tax.
Published on: April 26, 2013