How to work out how much tax you pay

More than half of Britons don’t know how much tax they pay – and those who say they do are often way off the mark. 

Only 48 per cent of people said they knew how much tax they paid, according to research conducted on behalf of the investment platform Hargreaves Lansdown.

Those aged between 35 and 54 were the most clueless, with only 39 per cent claiming to know how much tax they paid. 

This was compared to 41 per cent of 18-34 year olds, and 59 per cent of 55 year olds.

The less people earn, the less likely they are to be aware what they’re paying in tax.

The less people earn, the less likely they are to be aware what they’re paying in tax.

The less people earn, the less likely they are to be aware what they’re paying in tax.

The research also found that renters were less likely than homeowners to know what they paid in tax, and higher-rate taxpayers were more likely to know what their tax bill was than lower-rate ones. 

With tax hikes expected as the government attempts to claw back the costs of the pandemic, it is important to understand what tax you are liable for in order to avoid paying over the odds.

Sarah Coles, personal finance analyst at Hargreaves Lansdown said: ‘It’s hardly surprising we don’t know exactly how much tax we’re paying, because the tax system is so needlessly complex.

‘However, being completely in the dark about tax is dangerous, because we may not budget effectively for tax bills, and we run the risk of paying more than our fair share.

‘Even when we think we know how much tax we’re paying, there’s a good chance we’re actually in the dark.

How many people know the amount of their tax bill?  
Category Percentage
Women 42%
Men  53% 
Middle aged (35-54)  39% 
Younger (18-34) 41% 
Older (55+)  59% 
Renters  36% 
Homeowners  54% 
Non-income taxpayers  44% 
Basic rate taxpayers  51% 
Higher rate taxpayers  63% 
Additional rate taxpayers  74% 
Data from a study of 2,000 people by Opinium   

‘Take income tax: even if you know the top rate of tax you pay, it isn’t the same as knowing how much tax you pay overall, because you face a different rate on each slice of your income.

‘Basic rate taxpayers have a marginal rate of 20 per cent, for example, but pay an average of 9.5 per cent in income tax across all their income.’

What are you paying – and could you pay less? 

Tax on pay: Income tax and national insurance

If you’re employed, the best way to find out what you’re paying is to check your payslips to find out how much goes towards income tax and national insurance.

If you’re self-employed, your tax return will tell you how much you pay. However, as you always complete this in retrospect, it can be challenging to keep track – particularly if your income varies from year to year.

Coles says: ‘If you’re self-employed, make sure you claim for everything you’re entitled to, which will bring your tax bill down, including all allowable expenses, pension contributions and charity donations.

‘If you’re employed, you can lower your salary through salary sacrifice. This is where you and your employer agree to cut your salary, and pay the equivalent into benefits which have tax and national insurance breaks.

‘It means you save tax and national insurance on the portion of your salary that you sacrificed in return for these benefits.’

The best example of doing this is paying into a pension. 

However, it also applies to things like the cost of pension advice provided by your employer; workplace nurseries; cycle-to-work schemes; and ultra-low emission vehicles which emit 75g of CO2 per km or less.

Tax on savings

Since the introduction of the savings allowance, far fewer people pay tax on savings. Nonetheless, it is worth understanding your position.

The personal savings allowance affords basic rate taxpayers earning up to £50,270 a year, to take advantage of £1,000 of tax-free interest each year.

Higher-rate taxpayers earning up to £150,000 still benefit from a lower, £500 tax-free allowance.

However, if you’re an additional rate tax-payer earning over £150,000 a year, you don’t get an allowance.

With savings deals paying so little at the moment, basic rate taxpayers will need considerable savings built up to become subject to tax.

A basic rate taxpayer saving into Zopa Bank’s market leading 1.35 per cent, one-year fixed rate bond would still need to have almost £74,000 stashed away in the account before they need to pay tax on their interest, for example. 

A higher rate tax payer, meanwhile, would need to be saving almost £37,000 to breach their £500 allowance.

But with inflation at 3.2 per cent and expected to rise to 4 per cent or more, interest rates could rise in the future – and this would push more people over the threshold if savings deals follow suit.

One solution to this is to save money into a cash Isa, which is tax-free. This year, savers can stash away up to £20,000 into one of these accounts. 

Coles says: ‘You can protect your savings by putting them in a cash Isa.

‘You will tend to get a slightly lower rate than on the most competitive savings accounts, but in the easy access market the gap is closing, so you can get 0.6 per cent on your tax-free savings.’

Tax on investments: Dividend and capital gains tax

Dividend tax is chargeable on dividends you receive from investing in shares outside of an Isa.

Capital gains tax, meanwhile, is payable when you sell something that has increased in value, for example shares or a property. 

If you make more than £2,000 in dividends outside of an Isa, or realise more than £12,300 in capital gains in a single year, you will need to pay tax. 

From April 2022, the dividend tax rate will rise by 1.25 per cent, meaning basic rate taxpayers will begin paying 8.75 per cent and higher-rate taxpayers will pay 33.75 per cent.

The most effective way to minimise any potential capital gains tax or dividends tax bill is to make full use of your Isa allowance.

Coles says: ‘You can shelter up to £20,000 a year in an Isa, and all income and growth is completely tax free.

‘Assets can be passed between spouses without triggering a tax bill, so between you, you can shelter £40,000 a year.

‘If you don’t have enough available allowance to hold your entire portfolio in Isas, income-producing assets can be shared between a married couple, so that both take advantage of their allowances.

‘The balance can be held by the spouse paying the lower rate of tax, to reduce the tax payable.’

Another option, according to Coles, is to prioritise income-producing investments within your Isa, ahead of growth investments.

This means you can take advantage of the lower rate of tax on growth, and the availability of annual capital gains tax allowances to help you manage the tax bill on gains.

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