Tax basics

Income tax

Income tax is payable on wages if you're employed, profits from your business if you're self-employed, your pension and some benefits like Jobseeker's Allowance, Carer's Allowance and Incapacity Benefit.

If you're an employee, your employer will deduct tax and National Insurance contributions (NICs) from your wages via PAYE (Pay As You Earn). If you're self-employed you'll be responsible for paying your own tax and NICs.

Everyone under 65 can earn £8,105 a year before they start to pay tax. Basic rate tax at 20% is then payable on earnings up to £34,370 a year, higher rate tax on earnings up £150,000 and 50% tax on earnings over £150,000.

Capital Gains tax

Capital gains tax (CGT) is a tax on capital 'gains'. If you sell certain assets – such as a second home or shares - which have risen in value since you bought them, you may have to pay tax on the profit.

CGT is worked out for each tax year and is charged on the total of your taxable gains, after taking into account certain costs and reliefs that can reduce or defer gains and allowable losses you have made on assets to which normally CGT applies.

CGT only kicks in after £10,600 of gains each year. After that basic rate taxpayers pay CGT at 18%, and higher rate taxpayers 28%.

Inheritance tax

Inheritance tax (IHT) is a tax on money or possessions you leave behind when you die, and on some gifts you make during your lifetime.

However, a certain amount can be passed on tax-free. This is called the 'tax-free allowance' or 'nil rate band'.

Everyone in the 2012-2013 tax year has a tax-free inheritance tax allowance of £325,000. The allowance will remain the same until at least 2015.

Tax on savings and investments

In most cases you’ll have to pay tax on any interest or income you receive from savings and investments. The exceptions to this are if the income you receive falls within your personal allowance or the type of account means that interest or income is tax-free (an Isa, for example).

Interest from savings accounts with a bank or building society is normally paid after tax of 20% has been deduced by the providers. Basic rate taxpayers will have no more tax to pay but higher rate taxpayers will have a further 20% to pay which they do via their self-assessment tax return.

Most children are non-taxpayers, so parents or guardians of children who have saving accounts should complete form R85 to save them paying tax.

Self-assessment

Most employed people will have tax deduced at source (i.e. by their employer) and won’t need to fill in a tax return. However, some people need to complete a self-assessment tax return and send it to the tax office either in the post or online.

People who need to complete self-assessment include the self-employed, business owners, anyone with an income of £100,000 or more, those who have pre-tax investment income of more than £10,000, and anyone who is acting as the trustee or representative of someone who has died.

If you are required to complete a tax return and fail to do so on time you’ll be liable for a penalty and may also have to pay interest on any tax you owe.

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