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An Introduction to the tax system

The basics

What is tax?

Tax is a ‘financial charge’ or deduction from something you get or own. It is not a penalty or fine for doing something wrong. Normally governments collect taxes so that there is a pot of money to spend on things which benefit society as a whole. This might be law enforcement, including the police and courts, infrastructure, like roads and pathways, and administration.

The UK Government also uses tax to fund various public services, including healthcare and welfare benefits.

The UK has many taxes. Some are known as ‘direct’ taxes because they are usually obvious amounts such as income tax which you can see being taken from your pay or have to pay direct to HM Revenue & Customs (‘HMRC’). Other direct taxes include corporation tax, capital gains tax and inheritance tax.

There are also ‘indirect’ taxes. The most well-known example of an indirect tax is value added tax (‘VAT’). This is less obvious than a direct tax as it is included in the price of things that you buy.

National Insurance is not strictly a tax. It was originally a contributions-based system of insurance for support from the government in times of need such as ill-health, disability or retirement, paid by workers and employers. The link between individual contributions and benefits has gradually weakened, but the number of years for which you make National Insurance contributions still affects some welfare benefits, including your entitlement to the state pension.

Who collects tax?

HM Revenue & Customs (‘HMRC’) are the UK tax authority. They are responsible for collecting and managing most UK taxes. They also interact with other government organisations – for example, they collect most student loan repayments. These are not a tax, they are repayments towards money that students have borrowed in the past; but as they are calculated as a deduction from income, the tax system is a convenient way to collect them.

HMRC also pay some welfare benefits, like tax credits and child benefit.

Local councils are responsible for collecting council tax and rates.

Where can I find more information?

For further assistance you can contact us on 01308 488066 or via the secure email link on this website. A tax adviser will check your personal situation and guide you in the right direction.

Or you can find out more information about what HM Revenue & Customs (‘HMRC’) do and their responsibilities on the GOV.UK website.

You can find HMRC’s ‘Your Charter’ Link on the GOV.UK website. The charter sets out what HMRC expect from you, but also what you can expect from them.

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Taxation at Retirement

During your working life the tax you have to pay is generally dealt with automatically by your employer. They receive instructions from HMRC (Her Majesties Revenue and Customs) via a tax code and deduct a certain amount of tax, and National Insurance Contributions (NICs) from your pay before you receive it. The amount you receive is called ‘net pay’ and your dues to the State are satisfied without any action on your part. At the end of each tax year your employer gives you a certificate called a P60 showing how much tax and NICs they have deducted over the year.

If you are self-employed or receive any taxable income which has not had tax taken off already, such as rent, you probably have a little more contact with the tax authorities, letting them know about your income for the year by completing a self assessment tax return and then paying the tax due either directly or through the next year’s tax code.

Now, however, as you retire your financial and taxation circumstances may be about to change as extensively as your lifestyle. You, as a financial entity, will become a little more complicated. You may have several sources of income including multiple pensions, state pension/ benefits and employment probably all starting at different times in the year. Not forgetting that the taxable state pension is paid gross so your tax codes will need adjusting. You may even find yourself in self assessment for the first time in your life. Needless to say the tax system will find you more difficult to handle and you will not have the support of a payroll team – quite a change for the majority of you who have been employed. Even for some of the self employed, managing tax in retirement may have an impact if you can no longer afford to pay an accountant to do your books and sort out your tax liability. Because you usually only retire once, you have no experience of this life event.

It is important to keep track of your financial and tax situation in the year of retirement as this is the time HMRC’s systems can struggle most. Never assume that HMRC are aware of any changes. You can inform HMRC

  • in writing (keeping a copy), of incomes starting or ceasing or changes of address
  • by phone,  note the officers name along with the date and time of call. If there is a query later on you will have proof that you informed them
  • via your personal tax account. You can inform HMRC of some changes via this route and the list is increasing as it develops. You can register for your account via www.gov.uk/personal tax account

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Taxation at Bereavement

The death of a spouse or civil partner is always a difficult time. It is hard sometimes to know what to do about tax when someone dies particularly as to whether any special rules apply.

We have tried to set out some of the areas where problems can occur.

Do you need to contact HMRC?

If you have an executor or executrix - a person appointed by the will who will be dealing with the estate for you (quite often a solicitor or family friend) he or she should notify HMRC of the death.

Alternatively if you are the executor or executrix, you should either write to HMRC to let them know or telephone on 0300 200 3300 say 'bereavement' when prompted and you should be directed to the correct team.

If, however, you used the ‘Tell Us Once’ service when registering the death and opted at that time for HMRC to be notified, you should not need to contact HMRC again. If HMRC need you to complete any forms they should let you know.

If my spouse or civil partner dies - will this affect my state pension?

The additional state pension (sometimes referred to as state second pension or the state earnings-related pension scheme, S2P or SERPs) is an add-on to the basic state pension and is based on the level of National Insurance contributions made.

You may be able to inherit your late spouse or civil partner's entitlement to this type of pension. The New State Pension introduced on 6 April 2016 changed how this works but we understand that there are transitional arrangements for certain women who paid reduced-rate NI contributions, and for people who are widowed.

Are there any special income tax rules that apply?

When your husband or wife or civil partner dies the tax year is divided into two parts - up to the date of death and from the date of death.

Before the date of the death

If your spouse or civil partner normally completed a tax return or repayment claim, it will probably be necessary to complete one for the period to the date of death to include all income paid in the period before that date. If not HMRC should write to you or the executor explaining that they will reconcile your partners record and let you know if there is any tax to be refunded to, or paid from the estate. If HMRC believe the record balances you may just receive a letter. Ask HMRC for the calculation so that you can check the figures.

Any tax due or repayable is worked out in the normal way, and a full personal allowance is available for the tax year of the death to set against income arising before the date of death.

A full married couple's allowance (MCA) is available in the year of death. If your late wife or civil partner has claimed all or part of the MCA, and their income to the date of death is insufficient to use it all, the balance can be transferred back to you.

If your husband (or civil partner) dies leaving a surplus MCA - you can use this against your income arising in the tax year both before and after the date of death.

The full marriage allowance is available in the year of death. If it is the transferor who has died the transferors tax is calculated using the reduced allowance and the recipients tax code is adjusted in the year following the death. If the recipient dies both benefit from their full allowance.

After the date of death

After the date of death, the responsibility for completing tax returns or repayment claims lies with the executors or in the case of someone dying intestate, with the administrator of the estate.

On income arising after the date of death, the rates of tax are:

2018/19, 2017/18 & 2016/17 (2015/16)

  • Savings income - 20% (20%)
  • Dividends - 7.5% (10%)
  • Rents from property - 20% (20%)

Personal allowances are not available to the executors after the date of death to set against post-death income.

The surviving spouse

Your income may have changed considerably and it is important that your tax codes are reassessed. If HMRC don't contact you, contact them on 0300 200 3300 to ask for your codes to be checked. Alternatively or contact us on 01308 488066 or use the 'contact us' link on this website.

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What information should I keep?

You are legally required to keep records concerning your income and tax. It differs depending on whether you are employed of self employed. The current time limits are given at the end of this document. You may have to pay a penalty if you don't keep records or if you don't keep your records for long enough.

Types of records you may need to keep

We only list the main documents here. If unsure we suggest you keep all documents concerning your income, savings and investments and tax paid.

Income from employment

  • your P45 - if you leave your job, part 1A of this form shows your pay and tax to the date you left
  • your P60 - if you're in a job on 5 April, this shows your pay and tax details for the tax year
  • form P11D - this shows details of your expenses and benefits, such as a company car or health insurance
  • certificates for Taxed Award Schemes
  • information about redundancy or termination payments

Benefits records

  • social security benefits including state pension
  • Statutory Sick Pay
  • Statutory Maternity, Paternity or Adoption Pay
  • Jobseeker's Allowance

Pension records

  • your form P160 (part 1A), which you received when you retired and started getting a pension from your former employer
  • your form P60 giving details of your pension and the tax deducted
  • any other details of a pension (including State Pension) and the tax (if any) deducted from it
  • Your form P45 when you have taken all of your money out of your pension under the pension flexibility rules

Interest, dividends or other income from UK savings, investments or trusts

  • bank and building society statements or passbooks
  • statements of interest and other income you've received from your savings and investments
  • tax deduction certificates supplied by your bank
  • dividend vouchers received from UK companies
  • life insurance chargeable event certificates
  • details of income you receive from a trust

Income from property

Keep details of the income and rents you've received, and the expenses you've paid from letting out property.

Foreign income or gains

Keep all dividend vouchers, tax certificates and personal financial records including:

  • records of overseas earned income, for example from employment, self-employment or property letting
  • end of year information for foreign pensions
  • dividend certificates from overseas companies
  • overseas Interest payments

How long to keep your records

You must normally keep your records for another year after the online tax return deadline of 31 January. We suggest that you keep records for the same amount of time even if you pay your tax via PAYE.

For example:

The tax return deadline for an online 2017-18 return is 31 January 2019.
You need to keep your records until 31 January 2020, one year later.

Business records

Keeping up-to-date and accurate records from the start is important for your business. It makes it easier to fill in your tax return. A good record system helps you keep track of your expenses. You may have to pay a penalty if you don't keep records or if you don't keep your records for long enough.

Always keep detailed records. It will make it easier to answer any questions that HMRC has about your tax return.

How long to keep your business records

You must normally keep your business records for another five years after the online tax return deadline of 31 January.

For example:

The tax return deadline for an online 2017-18 return is 31 January 2019.
You need to keep your records until 31 January 2024, five years later;

Earlier years;

2012/13   31st January 2019.

2013/14   31st January 2020.

2014/15   31st January 2021.

2015/16   31st January 2022.

2016/17   31st January 2023.

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