(ARTICLE) Everything You Need To Know About Taxes In The UK

Before you start reading.

1. This is a long article, get comfortable before reading.

2. You will not remember this nor all the other content I’ve posted if you just view it once. Take some time to revise the content .

In this article you will have a general understanding on everything you need to know about taxes.

But firstly,

Why do taxes exist?

Taxes is a contribution to society that everyone has to take part in, in order to fund the countries public services.

It would be impossible for the government to fully fund these costs by themselves

Taxpayers money is what funds

• Education

• Hospitals

• Child Benefits
• The Army
• The Police
• Firefighters
• Social services

• Transport Services
• National Sports Teams

Where Does Tax Money Go To?

In The Uk, there’s an organisation called HMRC

This stands for Her majesty’s revenue & customs.

You don’t have to know the meaning but I just thought I’d tell you just incase you are wondering.

And HMRC are the ones responsible for taxes and other legal procedures but for the sake of the article I’m just going to stick to what they do with taxes.

What power does HMRC have?

• They can get search warrants for your property

• Make an arrest
• Send bailiffs to your house
• Do a third party search with your bank to see if you’ve been receiving any external consistent income you aren’t declaring

TAX EVASION vs TAX AVOIDANCE

In the most simplest terms, one is legal and the other one illegal

Now these are something many people are simply unaware of or even if they’re aware of it, they don’t properly understand the differences between the two.

What Is Tax Evasion?

The non-payment of taxes by means of not reporting all taxable income

So Tax evasion is illegal. This is when you evade your legal responsibilities to pay tax

Tax evasion looks like this:

• Not reporting your income
• Lying about your income
• Deliberately underpaying taxes
• Lying about business expenses
• Hiding money in offshore bank accounts

I’ll be honest, many people do this and not get caught, but if you do get caught doing this, you’ll be facing serious problems

You could face a SERIOUS fine or jail time

just because there are people who do it and not get caught doesn’t mean YOU won’t get caught

It just takes one mistake for you to make before they find out what you’ve been doing..... especially if it’s with loads of money.

This is how many drug dealers and criminals get caught. They don’t pay taxes and the law catches them out on tax evasion charges.

Pay your damn taxes

TAX AVOIDANCE

Now tax avoidance is interesting

Tax avoidance is a legal way of reducing the amount of tax you really need to pay.

This is how and why rich people don’t pay as much taxes as they should be.

No, it’s not evil, it’s smart

So what are a the ways of avoiding tax ?

- ISA

Having an Individual Savings Account is a legal way to avoid paying income tax because all savings in an ISA are tax-free. So its only the savings in that account are tax free.

- Moving to a low or zero tax country

There are lots of tax haven countries which have very low costs or have no income tax at all

If you are self employed, this isn’t as easy as it sounds. Because you’ll have to be a citizen of that country and register your business there to be able to pull it off.

and you’d have to get a second passport.

So whether you’re self employed or wanting to move to a tax haven for work, this is something you need to do some proper planning on.

- Having your own business

Business owners can avoid tax by claiming expenses to reduce their tax bill or by reinvesting their profits back into the business. When you reinvest your profits back into your business, you won’t pay as much taxes as if you was to withdraw it to spend.

Business owners get tax benefits because when you own a business that means you can hire people. And when you hire people, that creates more jobs, when there’s more jobs then that’s better for the economy.

So that’s why business owners don’t pay much in taxes as most people.

So for example. Because I make money from this Patreon service, I can claim certain things as a business expense, which can reduce my tax bill and be added back to my income.

So for my iPad, I can write it off as business expense

My laptop, I can write it off as a business expense

The camera gear I use to film the videos, I can write it off as a business expense

Anything you use for your business, gets deducted from your tax bill.

Sole Trader vs Limited Company

Sole Trader

Otherwise known as a “Soleproprietorship“ (solo entrepreneur)

A sole trader is an individual running a business. It is the simplest and cheapest business structure.

If you operate your business as a sole trader, you are the only owner and you control and manage the business. You are legally responsible for all aspects of the business.

Taxes For sole Traders

• A sole trader must pay tax on business profits (minus expenses).
• A sole trader can withdraw cash from the business without tax effect.
• If a sole trader has a business bank account that is separate from their personal one, they can claim tax relief on interest and charges.

Limited company

A limited company is a type of business structure where the company has a legal identity of its own, separate from its owners (shareholders) and its managers (directors).

Even if a limited company has one person involved, who is the sole shareholder and lone director, it’s still a clear legal establishment, legally separate from that person.

The tax rules for limited companies are slightly different to other company structures.

The current rate of Tax for limited companies is 19% and you pay that on your total profits (minus allowable business expenses). Limited companies do not have to pay income tax or national insurance.

LIMITED COMPANIES DO NOT PAY INCOME TAX OR NATIONAL INSURANCE

the amount of tax a limited company pays will depend on their profit in the tax year.

For example,

If your limited company earns £120,000 in 2020/2021 and your business expenses total £20,000, your profit will be £100,000.

The amount of corporation tax your limited company must pay will therefore be £19,000.

• A limited company must pay corporation tax on all its taxable profits.

• Tax relief is given to limited companies for the business.

If your limited company has made a profit after taking away business expenses and corporation tax, it can distribute these earnings to its shareholders with something called a ‘dividend’.

You can only pay shareholders a dividend if you have sufficient profits to cover it.

The tax rates for limited companies can change on a yearly basis and it can be difficult to know exactly what your tax liabilities are.

If you have a limited company, get an accountant.

Setting up a limited company is easy

Just type in on google “set up a limited company”

The official UK TAX RATES as of 2021

(THIS EXCLUDES LIMITED COMPANIES)

If you’re someone who earns £12,500 or less, you will not be taxed on this. This is known as a personal allowance

Read that again 👆

If you’re some who’s making between £12,501 to £50,000 then you will get taxed at 20%.

This is also known as the basic rate And this is the amount most people pay towards their taxes.

If you’re someone who’s making over £50,001 to £150,000 then you will get taxed at 40% . This is what’s known as the higher rate of tax

If my business (not Patreon) wasn’t setup as a limited company then this is the tax bracket I’d be in. This should show you that governments are in favour of business owners.

And when you start making over £150,000 you will get taxed at a 45% rate.

And this is why many people who make a lot of money do whatever they can to pay as little as they can when it comes to taxes.

Don’t let this scare you from making more money, because a lot of people use that as an excuse to not make more money simply because they don’t want to pay more taxes as they increase their income.

How To Pay Taxes

If you are someone who is working under employment then your taxes will be automatically deducted from your paycheque. So you don’t have to worry about sorting anything out

There’s not really many ways you can lower the amount you pay in taxes when you’re underemployment.

Apart from contributing to any retirement plans your company is offering.

If you are Self employed or have external sources of income

If you are running your own business or have an external source of income and you’re earning over £12,501 a year then you’ll have to declare this on something called a self assessment form.

And then HMRC will calculate what you owe based on what you report.

please be honest on this form, don’t lie or put less than what you’ve actually earned on their trying to be sneaky, because that would go under tax Evasion and if they find out that you lied on your self assessment form, it could into some serious problems.

If you’re someone running your own business and you’re not sure how to properly file your taxes, then I would recommend you get an accountant to properly help you with this.

If you run your own business and you start making really good money, please don’t just go and blow it away, put at least 35% of that income away so that youll be able to comfortably pay any taxes which may come your way.

I’ve seen soo many people start making good money from their business and they didn’t put any money aside for taxes, then 2-3 years later they get a call from the government asking them for tax money and they’re absolutely screwed because they have no money to pay it.

Take from that what you will.

Self assessment

Self-assessment is used by HMRC to calculate tax on your income.

Normally, your tax is deducted automatically from your wages, pensions or savings - known as PAYE.

However, if you receive any other income, you need to report this to HMRC by sending a self-assessment tax return once a year.

This can either by filed online or you can send a paper tax return.

It’s easier to do it online

If you’re self-employed, you’ll need to submit a self-assessment tax return every year, to pay income tax and National Insurance on your profits.

How do self-employment tax payments work?

Year 1

In your first year of self employment, you're taxed on profits made from the date you started as self-employed to the end of the tax year

Year 2

In the second year, you're taxed on profits for 12 months to your 'accounting date'

Year 3 onwards

Your bill will be based on profits made during your accounting year

Accounting year = Tax year

What is the 'tax year'? (For people who’re self employed)

6 April-5 April

Each tax year runs from 6 April to 5 April - so the 2020-21tax year covers any profits you've made during your accounting year, which will have ended between 6 April 2020 and 5 April 2021

When are tax payments due?

31 January - Any tax due for the 2020-21 tax year must have been paid by January 31

If you are employed your taxes will be automatically taken out every month.

you may also need to send a self assessment form if you have any other untaxed income, such as:

• Money from rental properties
• Commission

• Foreign income
• Income from savings, investments and dividends

Once again, this is one of those ones where some people choose to not declare.

But if you choose to not declare this and they end up finding out, just know, you could be in very serious trouble

HOW TAX BRACKETS WORK FOR CAPITAL GAINS

Capital Gains Tax (also known as CGT) applies to anyone who sells an asset – such as a business, a property or stocks shares and makes a profit from it.

Capital Gains Tax - is a tax on the profit when you sell something that’s increased in value.

Example; If you bought a house for £100,000 and then that home has increased in value by 50,000

Now that home is worth £150,000 when you sell it.

After you sell it, you made a profit of £50,000.

You will only be taxed on the profit, which was £50,000. Rather than being taxed at £150,000

Once again, this doesn’t just apply for homes, this is for anything you buy that increases in value that you then sell at a profit.

Capital gains Tax on inheriting a property

You don’t pay Stamp Duty, Income Tax or Capital Gains Tax on a property you inherit when you inherit it.

HMRC will contact you if you need to pay.

Stamp duty is the land tax you pay when you buy a property or land over a certain price in England and Northern Ireland.

However if you are a first time home buyer you’ll get a discount which is also known as a relief and that means you’ll pay less or no tax , if once again you’re a first time home buyer and the home is under £500,000

However when you rent out a property you inherited, then you will have to pay on the rental income.

Also, if you don’t choose to sell the home you inherited, you don’t pay tax when you sell the home.

You do pay it if you make a profit when you sell a property that isn’t your main home.

If inheriting a property means you own 2 or more homes, you’ll have to choose one of them as your main home.

You have to tell HMRC which property is your main home within 2 years of inheriting the property.

If you don’t tell HMRC and you sell one of the properties, they’ll decide which property was your main home.

And they’ll most likely pick the one which is most expensive to make more money from you.

Capital gains Tax on stocks, crypto currency and shares.

You only play taxes on the profits you make.

Final Thoughts

that’s basic overview on what you need to be aware of when it comes to taxes and I hope it was informative for you.

Feel free to rewatch and read the content I’m posting on here because you won’t remember everything if you only watch or read it one time and just move on, and that’s why I don’t post everyday on here.

Till next time :)