am i supposed to pay tax?

[jackvdbuk]

im really confused about tax!

firstly i have just signed to a savings account and unsure wether i should of signed up for gross interest (non taxing)

and with work, do they tax me and i have to 'rebate' or something it back?

im a full time college student whos just turned 18, i really didnt want to ring hm customs for help.. LOL


right bed, HEXUS RULES!

[kidzer]

Ah tax, I don't understand it much either - here's my little snippet that might be of help.

I worked over the summer, 5 days a week, 7.5 hours a day - regular-ish office hours, and turned 18 part way through the summer, I paid tax on my earnings then, so I'd imagine you would have to also.

This assumes you are making more than ~£100p/w, as the Tax-Free Threshold is ~£5200p/a I beleive.

I got asked to stay on with this employer now I'm back at Uni, and because I dont now work enough to earn over £100p/w, I'm getting some of the tax I paid over the summer, paid back to me - because although at that time I was earning enough to pay tax, I'm not now, and the tax contributions are calculated cumulativley over the 52 week year (I reiterate, this is my own experience - and I really know nothing about Tax etc, so take what i say with a pinch or two of salt!).

As for the savings account thing, I can't say - but "non-taxed" sounds good to me!

If it's an ISA though, I don't think the intrest on it gets taxed anyway, but I can't say for sure.

[mush999]

I hate taxes. I tried to do them myself once and i failed. So every year i just pay someone to do them for me. it's ok 60 so its not so bad

[Saracen]

The 2007/08 personal allowances are £5225, kidzer, so yes, pretty close.

They aren't the only allowance people may get, and some people will have charges to offset them, so individual's circumstances may vary. But, for many people, £5225 is the basic allowance and may be all they get.

The inference of that, jackvdbuk, is that you will not owe any tax if your taxable income in the relevant tax year doesn't exceed £5225.

For most people, the Revenue assume you'll be working for the full year, so they split that annual allowance into weekly or monthly chunks, depending on how you're paid. For example, if you're weekly paid, £5225/52 = £100 a week (approx). So, the first £100 each week is not subject to income tax. After that, you start paying tax.

But, some people start paying tax part way through the year. Suppose you start 6 months into the tax year. You still have the £5225 allowance, but now only have 26 working weeks left, so it's split across 26 weeks, and the first £200/week is income-tax free. The tax "tables" used to calculate the tax due ensure the tax is taken regularly and evenly throughout the period, and you end up neither owing any nor due a refund at year-end.

Where it gets messy, though, is when a taxpayer stops earning part-way through the year. The tax tables can adjust automatically for late starting, but if you stop unexpectedly, it can't auto-adjust. In that case, you'd probably have to put in a tax claim at year-end.

Most students are in a slightly different position, in that they can do some work KNOWING that they will be doing it for a short period and that they won't go over the £5225 limit. If so, they can get a form from the Revenue declaring that and can then avoid paying tax only to have to reclaim it months later. But you have to ask for it. It isn't automatic.

Finally, jackvdbuk, many, probably most forms of savings account are paid net of tax. Essentially, tax at the standard rate is deducted before interest is credited to your account.

Theoretically, anyone whose taxes are not fully accounted for by deduction at source (PAYE) should be filling in a tax return at the year end. If you do, you enter the gross amount of interest, and the tax you should be paying on it is calculated. For some people, that'll be 40% which, of course, is higher than was deducted at source. You then deduct the tax you've already paid (by having interest paid net by the bank), and you're left owing the difference.

Alternatively, if you had tax deducted at source and don't actually earn enough (perhaps because you're a student and not earning much, or anything, during the year) then you'd enter the gross interest, the tax due (nil) and the tax already paid, leading to a negative amount due .... i.e. a refund situation.

And before anyone points it out, I know I've simplified this quite a lot and glossed over a fair bit .... like National Insurance, which works rather differently.

[JPreston]

Originally Posted by Saracen

Theoretically, anyone whose taxes are not fully accounted for by deduction at source (PAYE) should be filling in a tax return at the year end.

That's not right by a long shot. Have a look at the guidance notes that come with a return, many run-of-the-mill situations giving rise to an adjustment to someone's tax liability (even where they may have under-paid) do not require a return at all - if every student with a summer job or savings account had to fill in a tax return how much admin would that be? They like most things of this nature to be put through as an adjustment to next year's tax code but if next year's earnings aren't going to be enough to utilise this, then a refund cheque will be sent.

Best thing for the OP to do would actually be call his tax office. Tax doesn't have to be taxing, and all that

[Saracen]

Originally Posted by JPreston

That's not right by a long shot. Have a look at the guidance notes that come with a return, many run-of-the-mill situations giving rise to an adjustment to someone's tax liability (even where they may have under-paid) do not require a return at all - if every student with a summer job or savings account had to fill in a tax return how much admin would that be? They like most things of this nature to be put through as an adjustment to next year's tax code but if next year's earnings aren't going to be enough to utilise this, then a refund cheque will be sent.

Best thing for the OP to do would actually be call his tax office. Tax doesn't have to be taxing, and all that

That's why I said "theoretically", and that I has simplified and glossed over a lot. Otherwise, with a question as wide open and general as the OPs, it wouldn't have been a forum post I'd have needed to write. It'd be a book.

However, take a look at the Inland Revenue guidelines. They say, among the fairly lengthy list of people that have to submit a tax return, are those that

receive other untaxed income and the tax due on it cannot be collected through a PAYE tax code

Which is more or less what I said.

But I do agree that the best bet is to call the tax office. Far from what people might think, they're generally very friendly and very helpful.

[greenalien]

If you can afford to put the money away for the future and won't need access to it, it's worthwhile putting your money into an ISA. The income from this is tax-free, whatever your earnings, so even if you are below the tax threshold at the moment, you won't be in the future - but the ISA income will always be tax-free. Downside is that you can only save £3000 per annum into an ISA - although that will increase next year - and if you withdraw any money from the account, you can't put it back again if you had previously hit the 3K limit.

[greenalien]

A further thought on this - if you save your ISA limit - £3000 per annum - every year for 40 years, and get an average 6% rate of return, then your investment will be worth £523,000 at the end of that 40 year period! The tax-free income from that would be £31380 per annum!!

Furthermore, unlike a pension that ceases when you cash in your chips, you could pass this on to your offspring.

[Saracen]

That's not quite as impressive as it sounds, though, because while the cash value in 40 years might be £523,000, what will the real value be? We don't know, because we don't know what inflation will be doing over 40 years. But what is pretty safe to say is that in 40 years, £523,000 (or £31380 pa, for that matter) will buy a LOT less than it does now.

For instance, 40 years ago (approx) £4000 would more or less buy outright a 3-bed semi-detached house in a pleasant and fairly leafy suburb in the home counties, in commuter country, 20 minutes train ride from central London. That same house now is £450,000 to £500,000. Of course, we can't assume that what was true over the last 40 years in property will be true over the next 40 years in property, and it may even be that the reverse proves to be the case .... though I doubt it.

Also, using a simple calculation in Excel, I get £492,143 from a straight £3000 at 6%, compounded annually with a further £3000 at the start of the year, so the exact figure will,I guess, depend on exactly how the institution calculates it's rates (i.e. compounded annually, daily or whatever). But if you then discount that by 3% annually, to represent current levels of inflation, £492,143 actually becomes £223318. i.e. the buying power at today's prices of £492,143. So it's still a good deal, but not as good as it might have appeared.

What is also worth considering is whether that £3000 would be better off in a stock-market based vehicle. Will, over the long term the market outperform that 6%? Very probably, yes. And possibly by quite a long way. But it is, of course, riskier and less liquid if you need money out in a hurry.

ISAs are an effective, tax-efficient and almost risk-free form of saving.

Keep an eye on one thing, though. Many "top" ISAs attract investment because of the headline rate. I have money in one at over 7%. But .... though it isn't shouted about, that rate applies for year 1 but is subject to review after that, and what is the best ISA this year may not be, and I'd go so far as to say almost certainly won't be, next year. Banks tend to rely on inertia, in that people put money into their ISA having done the research, then just leave it there. The headline rate is there to attract money in, and once it's achieved that, it's job is done. The canny investor reviews it annually.

Be prepared to move your money from ISA to ISA yearly. But if you do, do NOT take it out of one and pay it into another, because if you do, you use the current year's £3000 limit by doing so. But if you transfer it direct from ISA to ISA, without ever withdrawing it, you can still invest a further £3000 (or whatever the limit goes up to).

[greenalien]

That's not quite as impressive as it sounds, though, because while the cash value in 40 years might be £523,000, what will the real value be?

True, of course. However, the ISA limit goes up next year to £3600 and one may hope that similar schemes will be available in the future. As inflation takes hold, so savings will need to increase to keep in line.

Bottom line is that some people don't save but think it's OK to piss £60 up the wall on a night out every week. Others are wiser - and a year's worth of weekly £60 savings is your ISA allowance.

One thing you won't be able to rely on in the future is a state pension that does any more than keep you at poverty level, if that...

[htid]

The problem I have here is that I just started a job last month, which lasts until the end of March. I'll earn just over the threshold so will pay tax on some of my earnings but not all. I'm paying tax now as I earn over £100 a week, so I will be getting a refund at the end of the tax year. The problem is by then I'll most likely be out of the country until September and will need the money. They can send me a cheque to the place I'll be living in Germany, but over there cheques aren't used and as I've found out before, I can't put an English cheque in a bank account over there, so I hope they can refund me in some other way - BACS or something.

[JPreston]

Originally Posted by Saracen

That's why I said "theoretically", and that I has simplified and glossed over a lot. Otherwise, with a question as wide open and general as the OPs, it wouldn't have been a forum post I'd have needed to write. It'd be a book.

While I don't doubt that you could write a book on the subject, far from over-simplifying anything you actually over-complicated the OP's question hence my contribution. For example, the quote from HMRC in your reply is not relevant here because the OP is not receiving any untaxed income (his interest is being paid net), even if he were the tax due could in all likelihood be recovered through next year's tax code (because he is employed, albeit part-time) and in fact he is likely to be due a tax refund. His tax office will be able to issue him with either a tax review form (a P810, IIRC) or a tax refund claim (Rxx, I forget) as appropriate, and is the only place he can get these. So he should just call his tax office....unless he is working cash in hand in which case he would not even have a tax office to call, and it wouldn't take a chartered accountant to tell him whether he was compliant or not.




ISAs are indeed a very good way to invest - any UK resident paying into a savings account who is not already maxing out at least a mini cash ISA needs to rethink what they are doing. I never understand the ISA limits, but it's possible to pay up to £7000 each year into a ISA(s) (maxi, or 3x minis, or something). However, they are not particularly well suited towards providing pension income because of the reasons already given - low returns compared to shares etc - but even given equal investments into either a personal pension or a maxi shares ISA the pension has a huuuuuge advantage:

Payments into personal pensions are made out of gross income, i.e untaxed. Where an employee can arrange for his employer to pay directly into his personal plan I'm told there is no NI liability either, so the contribution can be ~14% greater at the same cost to the employer....so a higher rate taxpayer either gets £46 in his pocket or £100 into his pension, which will then compound until he retires. Pension income is ultimately taxed, but you are likely to have a lower marginal rate in retirement than you have while you are in work, and have seen a bigger investment grow over the years due to no tax up front. And in theory, you can buy a bigger annuity when your capital is a pension pot (because pensioners die quite soon) than you could get by effectively treating it as interest earning in perpetuity. Yes pensions cannot be passed on to children but ISAs aren't a particularly good way to leave money either, due to inheritance tax.

But of course paying into a pension is effectively burying your money for up to 40 years, with no chance of access, so isn't all roses. Most people would probably do best to pay into a combination of all of their home, ISAs, and company or personal pensions to one degree or another.

[schmunk]

Originally Posted by htid

The problem I have here is that I just started a job last month, which lasts until the end of March. I'll earn just over the threshold so will pay tax on some of my earnings but not all. I'm paying tax now as I earn over £100 a week, so I will be getting a refund at the end of the tax year. The problem is by then I'll most likely be out of the country until September and will need the money. They can send me a cheque to the place I'll be living in Germany, but over there cheques aren't used and as I've found out before, I can't put an English cheque in a bank account over there, so I hope they can refund me in some other way - BACS or something.

HM Revenue & Customs: Claim a tax repayment

Note they can pay the money order direct to your bank (effectively, but not quite, BACSing it...)

[htid]

Cheers schmunk As long as they can get me my money and I can put it in a German account, I don't mind how it happens.

[Saracen]

Originally Posted by JPreston

While I don't doubt that you could write a book on the subject, far from over-simplifying anything you actually over-complicated the OP's question hence my contribution. For example, the quote from HMRC in your reply is not relevant here because the OP is not receiving any untaxed income (his interest is being paid net), even if he were the tax due could in all likelihood be recovered through next year's tax code (because he is employed, albeit part-time) and in fact he is likely to be due a tax refund. His tax office will be able to issue him with either a tax review form (a P810, IIRC) or a tax refund claim (Rxx, I forget) as appropriate, and is the only place he can get these. So he should just call his tax office....unless he is working cash in hand in which case he would not even have a tax office to call, and it wouldn't take a chartered accountant to tell him whether he was compliant or not.

I don't accept either your analysis or your judgement on simplification. The OP was ASKING about the situation on interest paid gross, which would then be untaxed income.

But you're entitled to your opinion. I stand by what I said, and I don't intend to argue with you about it.

[yamangman]

And I thought accounting was boring!