Made Simple + What to Do
For foreigners moving to the UK, you need to make sure that you understand the British taxation system so that you can navigate it successfully and avoid penalties.
Things like exemptions, relief, thresholds and allowances can make the system a lot more complicated than it needs to be.
It can be simple!
If you’re new to the UK, and you plan to work there are two main taxes to know about;
- PAYE
- National Insurance
If you work directly for an employer they will deduct PAYE (Pay As You Earn) tax and national insurance.
Note: In some circumstances, you may end up running a limited company or working through an umbrella company to minimise tax, but for most people working directly for an employer this will not be the case.
1.1 How the PAYE UK Tiered Tax System Works
The UK has a tiered income tax system whereby the income tax rate you pay depends on your total income.
It is pretty simple.
The first tier, or the basic income tax rate is 20%, and this is applied to all people who earn less than £46,350 in one
fiscal year.
The second tier of the UK income tax system states that anyone with a total income ranging between £46,351 and £150,000 in one fiscal year
has to pay an income tax rate of 40%.
The third tier of the UK income tax system states that anyone with a total income which surpasses £150,000 in one fiscal year has to pay
an income tax rate of 45%.
Here is a great little video that explains PAYE (Pay As You Earn) Tax in the UK.
1.2 The UK Tax Year
The UK Tax Year is also called the Fiscal Year or the Financial Year. The UK Fiscal Year runs from April 6th to April 5th of the subsequent year.
There are certain deadlines in place for paying your income taxes and all other taxes you owe. You must complete payment on any and all taxes you own by January 31st following the end of the fiscal year (which is approximately 9 months). These deadlines are in place for both online and paper tax returns.
If you don’t pay your taxes on time, you’ll have to deal with paying penalty fees. The later you are to submit your payment, the more penalties you’ll have to cover to compensate for the delay. Aside from penalties, you’ll also have to pay a 3% interest rate on late payments.
1.3 Penalties
The penalties applied for delays in paying your income tax are as follow:
- 1 day late
In this case you’ll need to pay a £100 penalty, regardless of whether you have any taxes to pay or not. - Up to 3 months late
In this case you’ll have to pay £10 for each day after the first day of delay. This adds up to a 30-day maximum penalty of £900, which must be covered in addition to the £100 mentioned above. - Up to 6 months late
In this case you’ll have to pay the higher of £300 or 5% of the tax due (whichever is higher), in addition to the other penalties listed above. - Up to 12 months late
In this case you’ll have to pay the higher of £300 or 5% of the tax due, in addition to the other penalties listed above. If your case is more serious you might be asked – or told, rather – to pay up to 100% of the tax due.
You have the right to appeal any HMRC tax decisions, including those regarding penalties for delays. You can also have an accountant or a professional financial advisor make the appeal in your name.
2. National Insurance
In addition to PAYE tax – national insurance is also deducted by your employers. By doing so you may become entitled to receive certain benefits such as healthcare and state pensions, maternity allowances and bereavement allowances, to name only a few. Even if you never get to use these benefits, you still have to pay it.
But that’s not the immediate issue.
The main issue for foreigners is that without an NI Number, your PAYE tax automatically get taxed at a higher rate – often the highest rate currently at 45%!
This is commonly called “emergency tax”.
Therefore, it is important to get your National Insurance Number ASAP – If you are about to arrive or have just arrived in the UK. Without it you will be automatically deducted “emergency tax”.
If you are employed and you paid through the company payroll your National Insurance contribution will be taken out of your monthly earnings automatically and paid by your employer through PAYE. If you’re self-employed, on the other, hand, you’re solely responsible for paying your National Insurance contributions and for figuring out exactly how much you need to pay.
Criteria for paying National Insurance contributions:
- You are over the age of 16.
- You are employed, and you earn more than £162 each week.
- You are self-employed, and you earn more than £6,205 in one fiscal year.
You can also make voluntary National Insurance contributions in a number of situations:
- If you are living and working outside the UK but still want to be able to claim state benefits.
- If you are unemployed and do not receive any state benefits.
- If you are employed but your income isn’t high enough to require you to make National Insurance contributions.
3 What to Do
1) Get a NI Number – DIY or use a service to save time and possibly avoid the EOI interview. It is mandatory and is your first line of defence against paying emergency tax.
In order to be able to pay your National Insurance contributions, you must have an NI number (National Insurance number) which acts like an account number for your contributions.
2) Try to understand the options available to pay tax for your circumstances before speaking with a tax professional or accountant by considering the following points:
- Are you employed? If you are not employed and do not want to claim state benefits, you don’t need to pay your income tax and your National
Insurance contributions. - If you’re employed by a company, are you actually on the payroll? If you’re not on the payroll you’ll have to sort out your own arrangements for
paying taxes, which means more often than not you’ll have to file for Self Assessment. - If you are self-employed, you need to pay your own income tax and National Insurance contributions after you register with the HMRC.
3) Consider hiring a tax professional to help you get your affairs in order for taxation purposes especially if plan to work for multiple employers or work through recruitment agencies.
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