Lesser known factors affecting your tax liability
None of us like unexpected expenses but it can be all the more unwelcome when they come along in a tax bill. Below are some items you may not expect that will affect the amount of tax due shown on your self assessment tax return.
High Income Benefit Charge
This will apply to parents of children under 18 receiving child benefit, where one partner earns over £50000 from all sources in a year. It also applies if a child living with you is not your child. For those that meet the criteria, a charge will arise.
You can choose not to receive child benefit or pay the charge with your self assessment. It is advisable for new parents to fill out the child benefit form in any case as it will assist in getting national insurance credits and will ensure the child receives a national insurance number as soon as they reach 16.
For details of how much the charge is likely to be in your situation please get in touch.
Student loan repayments
Student loan repayments are taken through payroll run by an employer and you will see the deductions made on your payslip and P60. However, for those with more than one source of income like self employment alongside employment, an additional amount will be payable to Student Loans on the non-employment income. The rate is 9% over £19380 per year for plan 1 and £26568 per year for plan 2.
Loss of personal allowance
The personal allowance for 2020/21 is currently £12500, this is the amount of income you can earn without paying tax.
Once personal income in a tax year goes over £100000, the standard personal allowance begins to be withdrawn. For every £2 over £100000, the personal allowance will reduce by £1. This means that once income reaches £125000, the personal allowance is withdrawn altogether.
Class 2 and Class 4 National insurance
For the newly self employed it may come as a shock that as well as tax, they are assessed for two lots of national insurance.
Class 2 national insurance is a weekly flat rate paid by all self employed individuals with profits over £6475 per year. For 2020/21 tax year the rate is £3.05 per week and it is paid through the self assessment system.
In addition to class 2, self employed individuals with over £9500 of profits in a year are required to pay class 4 national insurance. It is paid through the self assessment system and is levied at two rates:
On profits between £9075 and £50000, the rate is 9%
On profits over £50000, the rate is 2%