A complete guide to understanding the UK tax system

The UK’s tax system is extremely complicated if you’re new to the country, or if you have just started paying tax in the UK. It’s a good idea to seek advice and assistance from an experienced UK accountant who can help you navigate the tax system, find out which taxes apply to you and help you save money. Here’s what you should know.

The basics of the UK tax system

HM Revenue and Customs (HMRC) is responsible for collecting and administering taxes in the UK. The UK tax year runs from 6 April to 5 April the following year. You pay two types of tax in the UK: Pay as You Earn (PAYE) and National Insurance (NI).

How UK Pay As You Earn works

This follows a simple principle: The more money you earn in the UK, the more tax you pay.

For the 2021/2022 tax year, the first £12,570 of your income in a financial year is completely tax-free – this is known as your Personal Allowance.
The next £12,571 to £50,270 is taxed at 20%
Income falling between £50,271 and £150,000 is taxed at 40%
Any portion of your income that exceeds £150,000 a year will be taxed at 45%

National Insurance contributions

National Insurance is mandatory and payable by anyone who is over 16 years of age and either earning a salary above £184 a week or self-employed and making a profit of £6,515 or more a year. You and your employer will make NI contributions. NI contributions allow you to qualify for certain benefits and the State Pension.

Classes determine how much you pay – which class applies to you depends on your employment status and how much you earn. The table below outlines the different classes.

National Insurance class	Who is required to pay
Class 1	Employees earning more than £184 a week and are under State Pension age. This is automatically deducted by your employer.
Class 1A or 1B	Employers pay these directly on their employees’ expenses or benefits.
Class 2	If you’re self-employed and earning profits of £6,515 or more a year. If you’re earning less than this, you can choose to pay voluntary contributions to fill or avoid gaps in your National Insurance record.
Class 3	Voluntary contributions. This can be paid to fill or avoid gaps in your National Insurance record.
Class 4	You’re self-employed and earning profits of £9,569 or more a year.

Employees pay Class 1 National Insurance contributions. For the 2021/2022 tax year, you’ll pay the following UK tax rates:

How much you pay	Class 1 National Insurance rate
£184 to £967 a week (£797 to £4,189 a month)	12%
Over £967 a week (£4,189 a month)	2%

During your time in the UK, you may work for more than one employer. On your last day of employment at your current company, you will receive a P45. This document indicates the total amount of tax paid whilst you were working for that employer. If you hold various jobs throughout the financial year, then you would have multiple P45s.

Every year on 5 April, your current employer must give you a P60. This document shows your total gross income and total tax paid on your behalf during the tax year. You will require this document if you believe you are entitled to a tax refund. If you choose to work through tax structures in the UK, there will be other taxes that apply. If carefully managed, you are able to maximise your income through these structures.

How to pay your National Insurance as an employee

If you’re employed, your NI is deducted by your employer before you receive your salary. Contractors who work through an umbrella company will also have their contributions deducted before their salary is paid.

How to pay your National Insurance If you’re self-employed

You must submit a Self Assessment tax return if you are self-employed or earn additional income; this includes income from savings, investments or property. Your tax return can be submitted online, but you will need to register first if you have not submitted one before. Many self-employed workers and individuals who need to complete a Self Assessment tax return find it easier and less stressful to have an accountant file their tax returns and manage their tax affairs to ensure they stay compliant and submit their returns correctly and on time.

Remember it is up to you to make sure you pay this tax so find out ahead of time if you do need to complete a Self Assessment tax return.

UK tax deadlines for 2021

You must submit your returns or pay any money you owe by the deadline, or you’ll have to fork out a penalty fee.

UK tax refunds

If you changed jobs, stopped working or were on the wrong tax code you may be entitled to a tax rebate. You can check if you’re due a refund by using a UK tax calculator. You can submit your claim for a refund to HMRC yourself or with the help of a specialist accountant who can advise you on all your accounting needs.

Type of UK tax	Deadline	Penalty
Income Tax return (Self Assessment)	31 January following the end of the tax year for electronic returns. 31 October following the end of the tax year for paper returns.	Missed deadline: £100 Three months: £10 a day Six months: 5% of tax due or £300 if greater 12 months: 5% of tax due or £300 if greater
Income Tax payments	31 January balancing payment for the previous tax year and the first payment on account of the current year. 31 July second payment on account for the current tax year.	30 days: 5% of tax due Six months: 5% of tax outstanding at that date 12 months: 5% of tax outstanding at that date
VAT (if registered) quarterly return and payment	One month and seven days after quarter-end	Surcharges can apply if you don’t file (or don’t pay in full) by the deadline more than once in a 12-month period. Level of the surcharge depends on turnover and number of failures, ranging from 2% to 15% of the VAT outstanding.
PAYE (if an employer) RTI return	On or before payment made to an employee	Can be up to three days late without penalty. Special rules apply in numerous situations. Final submission: Varies depending on the number of employees.
PAYE payment	19th of each month (if making manual/electronic payment) unless arranged for a quarterly or annual scheme. Class 1A NICs: 19th of July following the end of the tax year.	Late monthly and quarterly payments: 1% to 4% of late amount depending on how many more times a payment is made late. No penalty if only one payment is late in any tax year, unless more than six months late. Additional 5% if more than six months late. A further 5% if still not paid after 12 months. Annual payments (e.g. Class 1A NICs and PAYE Settlement Agreements): Up to three penalties of 5% of the amount that is late, depending on the length of time that the amount is not paid in full.
Tax credits renewal	31 July	If the deadline is missed, tax credits payments will stop. You will have to repay any amounts received since 6 April.

Get help with your personal and contractor accounting tax needs. Contact our accountants at accounting@sableinternational.com or on +44 (0) 20 7759 7553.

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