Money matters

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You may have to pay tax on some of the income you receive. But everyone is allowed to have a certain amount of income without having to pay tax. Here's a brief look at tax rates, the main types of income that are taxable and not taxable and tax allowances.

Tax rates & Taxable Income

There isn't one flat rate of tax, income is taxed at different rates:

Taxable income in 2006-2007 Rate of tax

The first £2,150 10% (starting rate)
£2.150 to £33,300 22% (basic rate)
Over £33,300 40% (higher rate)

Most types of income will be added together to calculate how much tax you must pay. But some forms of income are not taxable and not taken into account when calculating whether you have to pay tax.

Income which is not taxable includes:

• Disability Allowance
• Attendance Allowance
• Incapacity Benefit for the first 28 weeks of incapacity
• Working Tax Credit
• Pension Credit
• Winter Fuel Payments
• Council Tax and Housing Benefit
• War Disablement and War Widow's Pension.

Any allowances you are entitled to will also be taken into consideration when calculating your taxable income.

Allowances for 2006 - 2007

Tax allowances represent the amount of income you can receive without paying tax. Everyone is entitled to a personal allowance, but some people are entitled to other allowances as well. You cannot, however, be 'paid' any unused allowance.

The main allowances are listed below. The higher allowances for people 65 and over may be reduced if someone's gross (before any deductions) income is more than £20,100:

Personal Allowance
Under 65 £5,035
Aged 65 - 74 £7,280
Aged 75+ £7,420
Married Couples Allowance
One or both aged 71-74 £6,065
(if aged 65 before 6/04/00) One or both aged 75+ £6,135
Blind Person's Allowance
£1,660

Civil partners are now also able to qualify for the Married Couple's Allowance. But for everyone this allowance is restricted to 10% tax relief - which means that if you receive an allowance of £6,065 it will reduce your tax bill by £606.50 (10% of £6,065) regardless of whether you pay tax at 10%, 22% or 40%.

Tax on pensions and earnings

The state pension is taxable but you probably won't have to pay tax because it will normally be less than your allowances. But if you also have earnings or an occupational pension th value of you State Pension will be taken into account when your tax is deducted through the Pay As You Earn (PAYE) system.

Tax on savings and investment income

Income from savings and investments may be paid gross - without the deduction of tax - or it may be paid with the tax already deducted. In some cases it may be tax free.

When income is paid gross - as with National Savings accounts - you will be due to pay tax unless your total income is too low to make you a taxpayer. If you receive income from savings with the tax already deducted you may be able to claim back some or all of this tax if you haven't used all your allowances.

Income from savings is generally taxed at 10%, 20% or 40%. If you are a basic rate (22%) taxpayer your savings income is taxed at 20%.

But higher rate taxpayers have to pay 40% on any interest that is due to be taxed at this rate. So, if you are a higher rate taxpayer and have had savings income paid with 20% tax deducted you will owe another 20% on top.

Tax on bank and building society interest

If you are a non taxpayer you can receive bank and building society interest without any tax deducted. Otherwise you will receive the interest after the deduction of 20% tax.

It you think your total gross income will be less than your allowances you can register to have the interest paid without any tax deducted. Ask for form R85 at your bank, building society or tax office. Or look for it in the Revenue and Customs Office guide IR110. 'A Guide for People with Savings'..

If you haven't previously registered to do this, but think you may have overpaid tax, you can apply for a refund. If you are due to pay tax on some but not all of your interest you cannot register to have the interest paid gross, but can also apply for a refund.

Claiming a rebate on income paid with tax deducted

In some cases people who have received savings income with 20% deducted will be due a refund, while some will owe extra tax. It all depends on your total gross (without deductions) income - so to find out whether you have paid the right amount of tax you'll need to add it up.

Any income paid with tax already deducted will be net income - so you must gross it up to give you the equivalent amount in gross income. If you received £800 income after the deduction of 20% tax during the year, then this would be the equivalent of £1,000 gross income. To work out your gross income divide the income you receive by 4 and then multiply the answer by 5.

If you have received dividends from shares or distributions from a unit trust the unit the rules are different. You will receive a 'tax credit' of 10%.

Overpaid tax can be claimed back for the current year and up to 6 previous years. But non-taxpayers with dividend income can no longer claim back tax credit for dividends paid after April 1999.

The Revenue and Customs Office guide IR110. 'A Guide for People with Savings' will provide more information on this subject.

The tax advantages of Gift Aid

The gross amount of any regular payments you make to charities under the 'Gift Aid' scheme reduces the level of your income when calculating your entitlement to the age-related personal allowance. It's important that you tell the Revenue and Customs Office about these payments to make sure you get all the allowance you're entitled to.

Transferring savings to reduce your overall tax bill

If one person in a marriage or a civil partnership does not have enough income to use up their personal allowance, the savings of the other partner can be transferred to them to reduce their overall tax bill. Transferring savings may also be a good idea if one partner is at risk of losing the additional age-related allowances because they have an income of £20,100 or more.

If assets are transferred as an outright gift, any income from these savings will be taxed as the income of the person who received them. Income from joint assets will normally be split 50/50. But if you own the asset unequally it may be possible to be taxed on your actual share by making a joint declaration.

There can be disadvantages to transferring assets too. If , for example, a husband has given all his savings to his wife and she enters a care home those savings could affect the amount of of financial help she gets towards the fees .

Self Assessment

If you pay tax through PAYE and your tax affairs are straightforward you will not normally be sent a tax return. But you will probably be sent one if you are self employed, a higher rate taxpayer or receive untaxed income. The tax return - which is usually issued in April - looks back at your income for the past tax year.

You will be sent the basic form and perhaps one or more supplementary pages which cover particular types of income such as employment, self employment or income from land or property. You will also receive a guide to completing the form and a tax calculation guide.

You can complete the forms and let the Revenue and Customs Office calculate the tax due. To do this you need to return the forms by September 30th. However, if you want to calculate it yourself you have until January 31st of the following calendar year.

In April 2004 a new short tax return - just 4 pages - was introduced for people with simple tax affairs. Many older people receiving the State Retirement Pension, an occupational pension or retirement annuity will be able to use this instead of the longer version.

If you need any further general information on self assessment call the Self Assessment Helpline on 0845 9000 444. Or pick up a copy of the Revenue and Customs Office leaflet SA/BK8 'Self assessment - your guide'.

Information obtained from Age Concern Factsheet 15s 'Income Tax' May 2006.www.ageconcern.org.uk