By Stuart d’Ivry, Managing Director of Pure Wealth Management 

 

This article provides a comprehensive overview of income tax, including its principles, rates, allowances, and key considerations for taxpayers.

What is Tax?

Income tax is a crucial aspect of the United Kingdom’s fiscal system, serving as a primary source of revenue for the government.

It impacts individuals, families, and businesses alike, influencing financial decisions and shaping economic behaviour. Understanding the fundamentals of income tax in the UK is essential for taxpayers to navigate their obligations effectively.

Principles of Income Tax

Income tax in the UK operates on the principle of progressive taxation, where individuals with higher incomes pay a proportionally higher percentage of tax.

This means that tax rates increase with income levels, reflecting the ability-to-pay principle. The UK tax system is structured into different tax bands, each with its own rate of taxation.

Taxable income includes various sources of earnings, such as salaries, wages, pensions, rental income, interest from savings, dividends, and profits from self-employment or business activities.

Certain types of income may be exempt from taxation, depending on specific allowances and reliefs provided by HM Revenue & Customs (HMRC).

Tax Bands and Rates

As of the current tax year, the UK income tax system comprises several tax bands, each subject to different rates of taxation.

The basic rate, higher rate, and additional rate are the main tax bands applicable to most taxpayers. For example, for the tax year 2023/24, the basic rate is 20% on income from £12,571 to £50,270, the higher rate is 40% on income between £50,271 and £125,139, and the additional rate is 45% on income above £125,140.

What about the Tax Traps?

The above bands and rates seem straight forward but there are several complexities hidden within the system.

For example, individuals whose earning total above £100,000 will lose their personal allowance (The amount you can earn without paying tax) at a rate of £1 for every £2 earnt over the mount.

This means that clients who earn over £125,140 have lost their full personal allowance and have paid a whopping 60% tax on this earning.

If you earn above £50,000 you begin to lose your child benefit and should you earn over £100,000 you lose access to the 30 free hours child care (In Wales).

What can we do to help the situation?

Taxpayers in the UK are entitled to various allowances and reliefs that can reduce their taxable income or offset their tax liabilities.

Tax reliefs are available for contributions to pensions, charitable donations, and certain investments.

Theoretically these payments could reduce your overall income and change your tax banding or of equal importance recoup some of the external allowances.  If you are not doing this please give Pure Wealth a call.

Conclusion

Income tax plays a vital role in the UK’s fiscal framework, supporting public services and government expenditure. Understanding the principles, rates, allowances, and reporting requirements of income tax is essential for taxpayers to fulfil their obligations effectively.

By staying informed and seeking professional advice, when necessary, individuals and businesses can manage their tax affairs efficiently.

So, who are Pure Wealth Management?

Pure Wealth are an independent financial advice practice offering holistic whole of market advice to individuals and businesses across South Wales.  We are not tied to any company or provider and will work in partnership with our clients to offer bespoke financial planning typically on an ongoing basis.

Pure Wealth is part of the wider Pure Group which consists of specialists in other areas such as residential property, property investing, commercial property and development.  This ensures that clients of the Pure Group have the peace of mind that they are receiving independent advice across all areas of their finances.

Should any of the readers require any advice or have any question in relation to pensions or any other areas of their financial planning please get in touch mention Sportin Magazine and we will ensure the first consultation is free of charge.

Info@purewealthmanagement.co.uk

02922 671957

Investments can go down as well as up. You may not get back the original capital invested.

Pensions legislation can and may change in the future. This article is for information only and should not be seen as advice or a recommendation to take action.

Tax laws and regulations may change over time, so it’s important for taxpayers to consult updated sources or professional advisors for the most current information.

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