Category: Income Tax

How to check your tax code

Your tax code determines how much tax is deducted from your pay. While 1257L is the most common, different letters and numbers can affect how much you owe. From marriage allowance to emergency codes, here’s how to decode what HMRC assigns you.

Your tax code is basically a set of letters and numbers that show whether you are entitled to the annual tax-free personal allowance (the amount you can earn without paying tax). These codes are updated each year and help your employer figure out how much tax to take off your pay.

For the current and next tax years, the standard personal allowance is £12,570, and if you are entitled to this, your tax code will likely be 1257L. This is the most common code and applies to people with one job, no untaxed income, and no taxable benefits like a company car.

But tax codes are not always that straightforward. There are all sorts of other letters and numbers that might pop up. For example, if you are claiming the marriage allowance, your code might have an "M" in it. If you are paying tax at the Scottish rates, your code will start with an "S." And if your personal allowance gets reduced for some reason, like unpaid tax or income adjustments, your code will change accordingly.

Then there are the emergency tax codes—W1 or M1—which are used when someone starts a new job and does not have a P45 yet. These codes mean your tax will be calculated based on just that specific pay period, rather than your full income.

If you spot a 'K' at the start of your tax code, it means deductions (for things like company benefits, state pension, or previous tax owed) are greater than your personal allowance. Your tax deduction won’t be more than half of your pay or pension.

Reforms to taxation of non-doms from April 2025

From 6 April 2025, the remittance basis of taxation will be scrapped in favour of a residence-based system. A new 4-year Foreign Income and Gains regime offers tax relief for new arrivals, while transitional measures aim to ease the shift. Here’s what’s changing.

Effective from 6 April 2025, the remittance basis of taxation for non-UK domiciled individuals will be replaced by a simplified, residence-based tax regime.

Additionally, the government will introduce a 4-year Foreign Income and Gains (FIG) regime. Under this regime, individuals newly arriving in the UK who choose to participate will receive full relief (100%) on foreign income and gains during their first four years of UK tax residence, provided they have not been UK tax resident in any of the preceding 10 consecutive years.

As a transitional measure for Capital Gains Tax (CGT) purposes, individuals who have previously used the remittance basis will have the option to rebase personally held foreign assets to their value as of 5 April 2017, provided certain conditions are met.

Furthermore, Overseas Workday Relief will be extended to cover a 4-year period, in line with the new 4-year FIG regime. This change will eliminate the need for individuals using this relief to keep their employment income offshore. From 6 April 2025, the maximum amount of Overseas Workday Relief that can be claimed annually will be the lesser of £300,000 or 30% of the individual's net employment income.

A new Temporary Repatriation Facility (TRF) will also be introduced from April 2025 for a 3-year period. This facility will allow individuals who have previously been taxed on the remittance basis to designate and remit foreign income and gains that arose prior to the reform, at a reduced rate. This includes foreign income and gains held within trust structures that have not been attributed. The TRF will offer a rate of 12% for the first 2 years, and 15% in the final year of its operation.

Self-employed must report profits on tax year basis

Big changes are here for the self-employed! From 2024-25, profits must align with the tax year, replacing the old "current year basis." Overlap relief is ending, and transition profits will be spread over five years. Here’s how the new system affects your tax bill.

The reform to the self-employed tax basis period has introduced significant changes in how trading income is allocated to tax years. Previously, the tax basis period operated on a "current year basis," but the reform has now shifted to a "tax year basis." As a result, all sole traders and partnership businesses are required to report their profits based on the tax year, commencing with the self-assessment return that was due by 31 January 2025. This return covered the tax year 2023-24.

Under the previous system, overlapping basis periods could occur, which resulted in certain profits being taxed twice. To counter this, businesses could claim ‘overlap relief,’ typically at the time of business cessation. The introduction of the "tax year basis" eliminates the possibility of overlapping basis periods, thereby preventing the generation of further overlap relief.

It is important to note that businesses which already prepare annual accounts to a date between 31 March and 5 April are not affected by these changes. These businesses continue to file their tax returns as they did under the old system, without any alteration.

The full implementation of the new rules takes effect in the current 2024-25 tax year, which ends on 5 April 2025. The 2023-24 tax year is considered a "transition year." During this transitional period, the basis periods for all businesses will be aligned with the tax year, and any outstanding overlap relief can be utilised against profits for that period.

In cases where profits exceed the period covered by the overlap relief—specifically profits that span more than 12 months—these are referred to as "transition profit." This transition profit will, by default, be spread across five tax years, from 2023-24 to 2027-28, to help ensure a smooth adjustment to the new rules.

How donations to charity can provide tax relief

Gift Aid transforms charitable donations by allowing charities and CASCs to claim 25p extra for every £1 given—at no additional cost to you. Higher and additional rate taxpayers can also claim valuable tax relief, making giving even more rewarding.

Higher and additional rate taxpayers can claim tax relief on the difference between the basic rate of tax and their highest rate. This can be done through their self-assessment tax return or by requesting HMRC to adjust their tax code.

Example: 

If a taxpayer donates £1,000 to charity, the total value of the donation to the charity is £1,250. The taxpayer can claim additional tax relief based on their tax rate:

• £250 if they pay tax at 40% (£1,250 × 20%)
• £312.50 if they pay tax at 45% (£1,250 × 25%)

It is important to ensure that the taxpayer has paid enough tax in the relevant year. Donations will qualify for tax relief as long as the total claimed does not exceed four times the amount of tax paid in that year. If more tax relief is claimed than entitled, the taxpayer must notify the charity and repay the excess to HMRC.

Additionally, taxpayers can make donations directly from their wages through a payroll giving scheme if their employer operates one approved by HMRC. This allows donations to be made tax-free from salary or pension payments.

Penalties for late filing of tax returns

HMRC reports over 63,000 taxpayers filed their returns over the New Year, but 5.4 million still need to act before the looming 31 January 2025 deadline. File now to avoid penalties, pay your 2023-24 tax, and set up payment plans if needed to stay compliant.

The deadline for submitting your 2023-24 self-assessment tax return online is fast approaching—31 January 2025. This date is not just for filing your return; you also need to pay any tax due by this time. This includes settling any remaining tax from the 2023-24 tax year, plus the first payment on account for the 2024-25 tax year. It’s crucial to remember this deadline to avoid penalties.

If you miss the deadline, be aware of the penalties that can arise. The first penalty is an automatic £100 charge, which you will incur even if you do not owe any tax or if you have paid on time. If your return is still late after 3 months, you will face daily penalties of £10 per day, which can add up to a maximum of £900. After 6 months, another penalty kicks in, which is either 5% of the tax you owe or £300, whichever is greater. Then, if you are still late after 12 months, you will face another penalty of 5% of the tax due or £300, whichever is greater.

On top of these filing penalties, there are also penalties for late payment. If you do not pay your tax bill on time, HMRC charges 5% of the unpaid tax at 30 days, 6 months, and again at 12 months. Interest will also be charged on any outstanding amount.

If you are struggling to pay your tax, there is an option to set up a payment plan online, where you can spread the cost of what’s due by 31 January 2025 over up to 12 months. This option is available for debts up to £30,000, but you will need to set up the plan no later than 60 days after the due date. It is a good idea to set it up sooner rather than later because if your tax is still outstanding on 1 April 2025 and you have not made arrangements, you will face an additional 5% late payment penalty.

If you owe more than £30,000 or need longer than 12 months to pay, you can still apply for a time to pay arrangement, but you will not be able to do this through the online service. Make sure to file your return and pay on time to avoid these costly penalties.

Last month to file 2023-24 tax return

The 31 January 2025 deadline for self-assessment tax returns is fast approaching. Avoid penalties and last-minute stress by filing your return and paying any tax due promptly. Don’t forget, first-time filers need to register for HMRC’s online service without delay.

You should also be aware that payment of any tax due should also be made by this date. This includes the remaining self-assessment balance for the 2023-24 tax year, as well as the first payment on account for the 2024-25 tax year.

A recent press release by HMRC has highlighted the fact that 4,409 taxpayers took the time to file their tax return online on Christmas Day with a further 11,932 taxpayers completing their tax returns on Boxing Day. In total, 40,072 self-assessment returns were filed between 24 and 26 December. The total number of submissions for the period was significantly more than in the previous year.

If you are filing online for the first time you should ensure that you register to use HMRC’s self-assessment online service as soon as possible. Once registered an activation code will be sent by mail. This process can take up to 10 working days.

If you miss the filing deadline then you will be charged a £100 fixed penalty (unless you have a reasonable excuse) which applies even if there is no tax to pay, or if the tax due is paid on time. There are further penalties for late tax returns still outstanding 3 months, 6 months and 12 months after the deadline. There are also additional penalties for late payment amounting to 5% of the tax unpaid at 30 days, 6 months and 12 months.

What expenses can be claimed against rental income

Are you a landlord? Maximise your rental income by knowing which expenses you can claim to reduce your tax bill. From maintenance costs to Replacement of Domestic Item Relief, understanding allowable deductions is key to smart property management.

If you are a landlord, it is important to be aware of the expenses that can and cannot be claimed from rental income. As a general rule, allowable expenses must be wholly and exclusively for the purpose of renting out the property. In some cases, a proportion of expenses can be claimed if part of the expense relates to the property business.

Common types of deductible revenue expenditure include:

• General maintenance and repairs to the property (but not improvements).
• Water rates, council tax, gas, and electricity.
• Insurance costs.
• Letting agent and management fees.
• Qualifying legal and accountancy fees.
• Direct costs such as phone calls, stationery, and advertising for new tenants.
• Vehicle running costs (only the proportion used for the rental business), including mileage rate deductions for business-related motoring costs.

Additionally, the Replacement of Domestic Item Relief allows landlords to claim tax relief when replacing furniture, furnishings, appliances, and kitchenware in a rented property, provided certain conditions are met.

Landlords should also keep a record of any capital expenditure incurred on investment properties. These expenses cannot be claimed as revenue expenditure against rental income but can usually be offset against Capital Gains Tax when selling a property.

Is your trade in goods or services a business

Selling goods or services? It’s vital to know if HMRC considers this a business. From regular sales to earning commissions, their rules on ‘trading’ impact your tax obligations. Here’s a simple guide to help you stay compliant and avoid pitfalls.

If you are selling goods or services, you need to determine whether this constitutes a business. According to HMRC’s guidance, you are required to establish a business if you 'trade' in goods or services.

While not an exhaustive list, HMRC suggests you are likely to be considered as trading if you:

• sell regularly to make a profit
• make items to sell for profit
• sell items on a regular basis, either online, at car boot sales or through classified adverts
• earn commission from selling goods for other people
• are paid for a service you provide

If you only occasionally sell items then you are probably not trading. However, there is no statutory definition of ‘trade.’ The only statutory clarification is that ‘trade’ encompasses a ‘venture in the nature of trade.’ Consequently, the courts have defined what constitutes a ‘trade’ through their rulings, which serve as guidance when disputes arise.

In complex cases, HMRC may use 'badges of trade' tests to assess whether an activity is a legitimate business or just a money-making by-product of a hobby. While not definitive, these tests will help HMRC make this determination. In most cases, it will be clear if your trade in goods or services is a business.

Cash-basis default position for self-employed

The cash basis is now the default for self-employed income reporting. Learn about the key updates, opt-out options, and how this simplified method can ease your self-assessment obligations with HMRC.

The cash basis is used by sole traders and other unincorporated businesses to determine their income and expenses for self-assessment. This simplified method can ease record-keeping and income reporting to HMRC, whilst still providing a suitable measure of profits for many businesses.

Since 6 April 2024, the cash basis has become the default method for calculating income and expenses for self-employed individuals and partnerships when filing their Income Tax self-assessment return.

Businesses that prefer traditional accruals accounting or who are ineligible for the cash basis, must opt out of the cash basis when submitting their self-assessment return. The first return requiring this decision will be the 2024-25 return, due by 31 January 2026.

There have also been a number of other changes to the cash basis that took effect for the current 2024-25 tax year. This includes the following:

• The removal of the turnover thresholds for businesses to use the cash basis.
• The removal of the restrictions on using relief for losses made in the cash basis, aligning the rules with accruals.
• Interest restrictions have been removed so both cash basis and accruals accounting are subject to the same tax rules.
• People with more than one business will be able to choose whether they use the cash basis or accruals accounting for each business they have, rather than having to pick one method for all their businesses.

The cash basis is not available to limited companies and limited liability partnerships.

Making Tax Digital for Income Tax volunteers

From April 2026, Making Tax Digital for Income Tax (MTD for ITSA) will transform tax compliance for businesses, self-employed individuals, and landlords, mandating digital record-keeping and online submissions. Get prepared!

The mandatory signup for Making Tax Digital (MTD) for Income Tax is set to commence from April 2026. MTD for ITSA will fundamentally change the way relevant businesses, the self-employed and landlords interact with HMRC. The regime will require businesses and individuals to register, file, pay and update their information using an online tax account.

The rules will initially apply to businesses, self-employed individuals and landlords with an income of over £50,000 annually. MTD for Income Tax will then be extended to those with an income between £30,000 and £50,000 from 6 April 2027. A new system of penalties for the late filing and late payment of tax for ITSA will also apply.

It was announced as part of the recent Autumn Budget measures that MTD for Income Tax will be extended to sole traders and landlords with income over £20,000 by the end of the current Parliament. The precise timing of this change has yet to be confirmed.

HMRC states that, MTD for Income Tax is a new way of reporting income and expenses if you’re a sole trader or landlord. You’ll need to:

• use software that works with Making Tax Digital for Income Tax;
• keep digital records of your business income and expenses;
• send us quarterly updates; and
• submit a tax return and pay tax due by 31 January the following year.

If you have volunteered to test the MTD for Income Tax service then the new late submission penalties and late payment penalties will apply. If you are looking to volunteer now then you will be required to confirm that you agree that the new penalties will apply to you as part of the sign-up process.

The new penalties apply as following during the testing phase.