These days, 99% of registered businesses are responsible for paying taxes on their income. Almost 60% of self-employed and sole traders are also required to pay tax, with the rest falling under the tax bracket due to a lower annual wage or income. Taxable income is the generalized term given to any individual or entity that owes tax to the HMRC based on what they have made in the previous year. In this article, we’ll explore the concept of taxable income, how it works, and who it applies to.
What does taxable income mean?
Taxable income is the amount of money that is more than an individual’s personal allowance and is, therefore, taxable. For example, if a person earns just £10,000 a year, then they are below the threshold and will not owe any tax – although they may still be required by the HMRC to contribute towards their National Insurance (NI). If, on the other hand, they receive an annual wage of £20,000, then the threshold will have been surpassed (as the UK’s current personal allowance limit is £12,570), and so they will be required to pay tax on everything over the threshold.
What is non-taxable income?
Non-taxable income refers to any expense that isn’t deemed taxable. For example, if a person is working from home and has an office, then they may be able to reduce their tax by claiming a reduction due to the electricity and general energy used to run their home office. The same can be said for an external office. Things like a dedicated company car can be considered as an expense, but as far as nontaxable income is concerned, it will specifically relate to any amount of money that is received but isn’t considered legally taxable by the HMRC. Entities such as LLPs are also considered to be non-taxable as each partner will be responsible for declaring their own income and assets, which in turn can be taxed.
Why is taxable income important?
It is essential for several reasons. First, it is legally owed to the State, and the HMRC will pursue anyone they believe owes them tax. In most cases, a fine will be depending on the amount owed. This can increase if the fine remains unpaid. Taxable income is also essential for the future of the individual paying their tax annually, as it will contribute to their pension and allow them to accrue a set amount that can be added to over time. Additionally, if National Insurance contributions are made, further benefits can be enjoyed, as this amount will also go towards a pension repayment fund when the time comes.
Taxable income examples
There are many examples of taxable income, but the main ones include:
- Annual wages
- Rental income
- Self-employment income
- Profits from stocks, shares, and dividend pay-outs
- Sale of immovable products such as houses or cars
There are other types, but these are the main ones that will be taxed by the HMRC as long as the personal allowance threshold has been overcome. In instances where this allowance hasn’t been surpassed, these assets cannot be taxed, but as mentioned above, it is not uncommon for National Insurance contributions to be made, either via personal choice or requirement.
How to calculate taxable income
Knowing the total sum of each earnings category is a good idea for calculating taxable income. This includes profits and expenses, which are offset against the amount earned and then used to reduce the taxable income total. Many businesses and self-employed people prefer to hire an accountant or bookkeeper as the tasks involved with calculating costs can be technical.
To do so, all receipts, transfers, and payments must be evaluated and added together. Then, any and all expenses must be worked out. The total expense cost should then be reduced from the total earnings (profit) to provide the final taxable sum. Other factors can come into play, such as charitable donations, income from overseas properties, etc.
Do non-residents pay income tax in the UK?
You can establish your company in the UK without coming to the UK. At the same time, you don’t need any special allowances (visa, residence, or work permits) to establish a company too. So if you are a non-resident company owner in the UK, you can choose to file in the UK or your home country. A double taxation agreement must be in place between the UK and your country of origin to file income tax in your home country. Most non-residents file their income tax in their home country because of the high taxation and currency differences.
Ways to reduce taxable income
Many options are available to those who wish to reduce their taxable income. Some of the most common include investing in more business expenses, claiming allowances and benefits, taking advantage of specific factors that can reduce tax, spreading costs out, opening a dedicated LLP to allow each partner to function independently, or even opening an off-shore account which benefits from a lower tax percentage or a higher personal allowance.
Many people prefer to register their self-employed businesses within the United Kingdom because the personal allowance is one of the highest in the world. Additionally, when signing up with the HMRC, many measures can be taken advantage of when paying tax online, as the forms can be filled with ease, and many business owners don’t even realize that they can receive reductions on tax if they fall into specific categories.
For example, if they carry on their business abroad, they may be exempt from paying a particular class of National Insurance, allowing them to save potentially thousands over time. Hiring a tax advisor can be hugely advantageous as they will be specialized in helping their clientele to reduce the amount that they owe to the HMRC, all within a legal setting that shouldn’t get them into any trouble, as one of the ways that the HMRC receives so much from registered entities is because they don’t always explain how money can be saved and who can be eligible. As a result, many people pay much more than they have to, and by hiring a professional advisor, or a team, this concern can be reduced so extensively that many find themselves paying a hugely reduced amount of tax each and every year.
Manage your company’s financial processes with Workhy
When calculating costs and expenses, it’s always a good idea to turn to the assistance of a reliable firm such as Workhy, because our team can handle all of the technicalities on behalf of clients and with minimal fuss. From submitting forms and documentation right through to helping set up a business in the UK, Workhy has assisted countless people and entities in becoming established whilst also being able to help them with their taxes, annual returns, calculating costs, profits and expenses, and other valuable solutions. For detailed information, you can visit our website.