Spare a thought for your accountant - it's self-assessment time again🤔.

Published: Mon, 04/19/21

As you collate your paperwork for your accountant to prepare your self-assessment tax return you probably care little about the process they will engage in or whether the tax rates applied to your income are correct.

"Just tell me how to pay and when. It can't be that hard. Income tax is 20%, isn't it - or 40% over a certain amount?"

Well no, actually. Would it surprise you to hear that he new tax year saw the introduction of an additional tax band to the UK system of personal taxation, bringing the total number to nine tax bands in England, Wales and Northern Ireland and twelve in Scotland?

When I had an office in Liverpool I'd occasionally 'present' the business news on the BBC Radio Merseyside breakfast show; I was doing so on one occasion when the news of the day was that self-assessment for income tax was to be introduced rather than HMRC calculating the amount of tax that was owed.

"Well Noel", questioned the host "The government is simplifying the tax system - that must be bad news for accountants"?

I remember replying "Quite the opposite, we love it when the government simplify things".

This is exacerbated by the perennial tendency of governments to find ever more complicated approaches to extract additional money from taxpayers without touching the headline rates of tax – for example through the ‘withdrawal’ of the personal tax allowance on income over £100,000.

And although the advertised personal tax allowance of £12,570 a year suggests that individuals only start to pay tax above that point, in practice ‘taxation’ in its wider sense can start from as little as £0, which is when some of those claiming universal credit start to have their benefits withdrawn at a rate of 63p in the pound.

Tax in its more formal sense starts at £9,568 when employee national insurance of 12% starts to be levied. Although ‘constitutionally’ different in how the money collected is used and its role in entitlement to the state pension, in substance it operates as an income tax in all but name.

Income tax itself starts to be levied on earnings above £12,570 at a basic rate of 20%, adding to national insurance to give a marginal tax rate of 32% for those not on universal credit and 74.8% for those who are.

For those in England, Wales and Northern Ireland this tax band goes from £12,570 up to £50,000 but in Scotland, there are intermediate tax bands, with a lower rate of income tax of 19% between £12,570 and £14,667, 20% between £14,667 and £25,926, 21% between £25,926 and £43,662, and 41% above £43,662 when the higher rate of Scottish income tax kicks in.

The new tax band this year arises because the government failed to increase the £50,000 threshold at which child benefit is withdrawn from the higher-earning parent to align with the increase in the higher rate tax threshold to £50,270. This means the insertion of a new tax band between £50,000 and £50,270 as the government starts to withdraw entitlement to ‘universal’ child benefit of £21.15 a week for the eldest child and £14.00 a week for remaining children by collecting an additional tax of 11% for the eldest child and 7.3% for the second and each of any subsequent children.

Above £50,270, the higher rate of income tax of 40% starts to be levied in England, Wales and Northern Ireland, but the marginal rate of national insurance reduces to 2% meaning that this is a 10% increase from 32% to 42% in the combined marginal rate – at least assuming you don’t have children!

This rate also applies to those with children from £60,000 up until £100,000 when the marginal rate jumps to 62% (63% in Scotland) as the personal income tax allowance is gradually withdrawn. The marginal rate reverts to 42% (43%) from £125,140 before increasing to 47% (48%) for those on the 45% top rate of income tax above £150,000.

We can expect even more complexity in future now the Welsh government has obtained devolved powers to adjust its income tax rates and thresholds like Scotland.

So as you pop your paperwork in the post or email, spare a thought for your accountant.

Noel Guilford