Tax terms
Tax is something we will all have to worry about sooner or later, and it can be a really tricky business! The glossary below will help you to understand some of the basic tax terms…
The financial year runs from 6 April to the following 5 April.
When you start working you will get a tax code made up of one letter and several numbers. For example, 117L or K497. Your employer uses your tax code to calculate the amount of tax to deduct (take away) from your pay.
If HM Revenue and Customs (HMRC) doesn’t send your tax code in time, your employer may use an emergency tax code until they get the right one. This means you may pay more tax than you’re supposed to but you will get this back.
How to claim back if you’ve paid too much tax – write to your tax office explaining that you’ve paid too much tax and include documents like your payslips, P60 and P45. The tax office will work out how much they owe you and will send you a refund.
PAYE Forms:
If you’ve got a job, your employer must give you certain documents - forms P45 and P60 - about the tax you pay on your wages.
When you stop working for an employer you will receive a record of your pay and the tax that's been deducted from it so far in the tax year.
It shows:
Your tax code, tax reference number and tax office
Your N.I (National Insurance Number)
When you were last paid
Your earnings in the tax year from all your jobs
How much tax was deducted from your earnings.
You should keep part 1A of the form for your records but give parts 2 and 3 to your new employer. It’s really important to keep this safe. Maybe you could get a file/folder to start filing important documents.
Your P60 is the summary of your pay and the tax that's been deducted from it in the tax year. Your employer should give you a P60 to keep as a record at the end of every tax year.
You might need it:
To complete a tax return, if this applies to you
To claim back money if you’ve overpaid on your tax (tax rebate)
To apply for tax credits
as proof of your income if you apply for a loan or a mortgage.
-So it's important to keep all your P60s and P45 safely. The HMRC suggests that you keep these for at least two years after the tax year which they refer to.
An official form on which a company or individual enters details of income and expenses, used to calculate how much tax, if any, you should be paying.
Tax credits are payments from the government to help with everyday costs. If you're responsible for at least one child or young person who normally lives with you, you may be eligible for Child Tax Credit. If you work, but earn low wages, you may be eligible for Working Tax Credit. A tax credit is money that you receive regularly – not a tax. Find out more about tax credits.
Wages are simply the amount of pay over a certain amount of time. Most jobs work around hourly wage rates. The current minimum wages in the UK are:
£3.40 per hour aged 16-17
£4.60 per hour aged 18-21
£5.52 per hour aged 22 years and older.
National Insurance:
National Insurance (NI) contributions are taken from your wages if you earn over a certain amount. They go towards your Pension and help pay for other benefits if you're employed. Find out more about National Insurance.
Your payments through the National Insurance scheme will be paid back to you in a pension once you have retired or reached the age at which you are entitled to draw the savings.
Your National Insurance number is on a document sent to you just before you turn 16. It has two letters followed by six numbers then one more letter. It is important to keep this safe.The government tracks the amount of contributions you make using this number. You'll need this when you start a job or start claiming benefits.
This is simply the amount an employee can earn each year before having to pay income tax on their wages. Find out more about personal allowances.
Income tax is a tax on income. Not all income is taxable, depending on your personal allowance. It is very important that you are paying Income tax at the right rate and that your employer has the right tax code for you. If you don’t you could be put on an Emergency Tax Code and end up paying more than you need to. If you are unsure contact your local Tax Office. They should get your code changed and send you a tax rebate if you have paid too much. Find out more about income tax.
This is a tax refund owed to you, should tax have been deducted where it shouldn’t. However, rather than waiting for a rebate, it is much better to start off with the right tax code by giving your new employer your P45 when starting a new job.
Payslip:
If you are employed you will receive a payslip each week or month, depending on how your workplace pays you. This will give you details of your hourly rate, the money you’ve earned, how much income tax has been deducted (if you are liable to pay it) and will show your tax code.
Other basic forms of tax outside of employment are explained below
Council Tax:
Council tax helps to pay for local services like rubbish collection. The good news is you don’t have to pay council tax if you are a full-time student and you share a house with other students. If you are on a training scheme, such as an apprenticeship, you can also get a council tax discount. However, if you rent or own your own place, you’ll probably have some council tax to pay, and the amount payable will depend on the value of your house and what council tax band it falls into. The council can tell you the rates for your area.
Value Added Tax (VAT):
It is impossible to avoid this tax term. VAT is charged on most everday things you buy, from expensive products to smaller items like food, drink and cigarettes. You may not even realise that you’re paying tax because it’s usually included in the amount you see on the price tag. Sometimes if you take a look at your receipt it may be shown separately. This tax works out at around 17.5 per cent of the products actual price.
Vehicle Tax:
Everyone who owns a car or motorbike will have to pay vehicle tax each year. How much you pay depends on the sort of car you have, whether it’s diesel or petrol and how environmentally friendly it is.
Holiday Tax:
You will also pay tax if you’re jetting off on holiday. The government of the country you are travelling to will charge an Air Passenger Duty. This will be added to the cost of your ticket. The cost will depend on which country you’re travelling to.
Check out the HM Revenue and Customs website for more information about tax.