Income Tax: how does it work?

[Leo]

This is going to sound like a stupid question, but I've just moved to
the UK and I have no idea how the income tax system can work if no-one
files tax returns - and no-one seems to be doing it. Everyone I ask,
including my employer, just says, oh, you won't need to do that. How
does the government know how much tax I'm supposed to pay (I can
understand that they know how much I have already paid)? What if I've
paid too much? What if I haven't paid enough?

I've already worked out that work expenses aren't tax deductible, but
aren't there different rates or rebates if you're married (for
example) or have interest from savings, or, well, whatever?

Leo.

 

[Ronald Raygun]

This is going to sound like a stupid question, but I've just moved to
the UK and I have no idea how the income tax system can work if no-one
files tax returns - and no-one seems to be doing it. Everyone I ask,
including my employer, just says, oh, you won't need to do that. How
does the government know how much tax I'm supposed to pay (I can
understand that they know how much I have already paid)? What if I've
paid too much? What if I haven't paid enough?

You can always file one if you want to.

Your employer sends information to the tax man about how much you earn,
and deducts what he thinks will be the right amount of tax.

I've already worked out that work expenses aren't tax deductible,

Oh but they are.

but
aren't there different rates or rebates if you're married (for
example)

Not any more.

or have interest from savings, or, well, whatever?

Interest from savings normally already has tax taken off at source.
Only if you're a higher-rate taxpayer would you need to pay extra tax
on your interest.

 

[Rob graham]

Interest from savings normally already has tax taken off at source.

Only if you're a higher-rate taxpayer would you need to pay extra tax
on your interest.

Some National Savings can be a problem here.

Rob Graham

 

[Daytona]

This is going to sound like a stupid question, but I've just moved to
the UK and I have no idea how the income tax system can work if no-one
files tax returns - and no-one seems to be doing it.

Pay As You Earn (PAYE) is the system -
http://www.google.co.uk/search?hl=en&q=PAYE&meta=cr=countryUK|countryGB

Daytona

 

[GSV Three Minds in a Can]

Some National Savings can be a problem here.

And some Gilts purchased via POs in days gone by ..

 

[Rich]

"> This is going to sound like a stupid question, but I've just moved to

the UK and I have no idea how the income tax system can work if no-one
files tax returns - and no-one seems to be doing it. Everyone I ask,
including my employer, just says, oh, you won't need to do that. How
does the government know how much tax I'm supposed to pay (I can
understand that they know how much I have already paid)? What if I've
paid too much? What if I haven't paid enough?

I've already worked out that work expenses aren't tax deductible, but
aren't there different rates or rebates if you're married (for
example) or have interest from savings, or, well, whatever?

Leo.

Leo,

This page has all the tax answers you probably need:-

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/index.htm

It's an official UK Government site, and has good info.

 

[Andy Pandy]

This is going to sound like a stupid question, but I've just moved to
the UK and I have no idea how the income tax system can work if no-one
files tax returns - and no-one seems to be doing it. Everyone I ask,
including my employer, just says, oh, you won't need to do that. How
does the government know how much tax I'm supposed to pay (I can
understand that they know how much I have already paid)? What if I've
paid too much? What if I haven't paid enough?

I've already worked out that work expenses aren't tax deductible, but
aren't there different rates or rebates if you're married (for
example) or have interest from savings, or, well, whatever?

Compared to other countries the UK income tax system is a blunt instrument -
it's fairly simple and for most employees who earn under about £40,000 it's all
taken care of automatically. It's also strictly based on individual
circumstances, there is *no* allowance whatsoever for being married or having
kids.

Because it's obviously nonsense to expect people with 4 kids to be able to
afford the same tax as a single person on the same income, there is a separate
system of "tax credits" which are payable to most people with children and some
people without children on a low income. Despite the name, this has not linked
with the income tax system and although it's run by the same govt dept, HMRC, it
is a completely separate system which you need to make a separate claim for.

Employment income is taxed through PAYE as others have said and savings income
is taxed by the bank at the basic rate. So most people don't need to do tax
returns.

Some work expenses are tax deductible, but most of these would usually be paid
by the employer direct to you as expenses without being taxed, assuming the
employer has a "dispensation" which basically means his expenses get audited by
HMRC to prove he's not paying taxable payments through expenses. If there is
anything tax deductible which your employer isn't paying for, they will usually
tell you about it. Travel to your normal place of work is *not* tax deductible.

 

[Leo]

Thanks for the link, I'm working through it. As you say, should have
all I need.

What it seems to be saying is that, regarding income, I need to file a
return only if my non-salary income takes me into a different tax band
(ie above £36,000 or, below £2320). Otherwise I don't bother.

But re: expenses, I've been told that the the criteria is "wholly,
exclusively and necessarily" (or something like that), which means
that nothing I spend qualifies because it's not "necessarily". For
example, I go to a conference. I apply for funding to go (I'm an
academic) but don't get it. I go anyway, because if I don't go to
conferences I might as well kiss my career good-bye. It's wholly and
exclusively part of my job, but since I wouldn't lose my job if I
didn't go, it's not necessary and so not an expense. Same with
computer software (I can always use an pencil and paper - but I can't
claim for pencil and paper, because I should really just memorise the
data), books and journal subscriptions (no-one's forcing me to read
them, and if I really want to read them I can go to a library),
membership of professional bodies (not necessary for the job itself),
etc.

Just some of the things that are tax-deductible in Australia, my last
residence, but appear not to be here.

Is this correct, or have I been misinformed?

 

[PeterSaxton]

Thanks for the link, I'm working through it. As you say, should have
all I need.

What it seems to be saying is that, regarding income, I need to file a
return only if my non-salary income takes me into a different tax band
(ie above £36,000 or, below £2320). Otherwise I don't bother.

You need to file a tax return if you are requested to file one. You
also have to tell HMRC of any new sources of income.

But re: expenses, I've been told that the the criteria is "wholly,
exclusively and necessarily" (or something like that), which means
that nothing I spend qualifies because it's not "necessarily". For
example, I go to a conference. I apply for funding to go (I'm an
academic) but don't get it. I go anyway, because if I don't go to
conferences I might as well kiss my career good-bye. It's wholly and
exclusively part of my job, but since I wouldn't lose my job if I
didn't go, it's not necessary and so not an expense. Same with
computer software (I can always use an pencil and paper - but I can't
claim for pencil and paper, because I should really just memorise the
data), books and journal subscriptions (no-one's forcing me to read
them, and if I really want to read them I can go to a library),
membership of professional bodies (not necessary for the job itself),
etc.

Just some of the things that are tax-deductible in Australia, my last
residence, but appear not to be here.

Is this correct, or have I been misinformed?

You are right about the expenses.

If these tools and expenses are necessary why doesn't your employer
provide them?

 

[Ronald Raygun]

What it seems to be saying is that, regarding income, I need to file a
return only if my non-salary income takes me into a different tax band
(ie above £36,000 or, below £2320). Otherwise I don't bother.

Yes, or if you have other income which has not had tax deducted at
source, for example if you write anything and the publisher pays
you a fee.

But re: expenses, I've been told that the the criteria is "wholly,
exclusively and necessarily" (or something like that),

That's correct for employment income. If you were self-employed,
the "necessarily" part would be omitted. Bummer.

which means
that nothing I spend qualifies because it's not "necessarily".

It's not a simple as that. I suspect you are imposing a stricter
interpretation on "necessary" than is, er, necessary.

For
example, I go to a conference. I apply for funding to go (I'm an
academic) but don't get it. I go anyway, because if I don't go to
conferences I might as well kiss my career good-bye. It's wholly and
exclusively part of my job, but since I wouldn't lose my job if I
didn't go, it's not necessary and so not an expense.

This is a difficult one. It's not even certain that going to a
conference is part of your job at all, so in this case even the
"wholly and exclusively" tests are likely not satisfied, and so
there isn't even any point in wondering about the "necessarily" test.

It's important also to distinguish between your actual job on the
one hand, and your career on the other. Your career will span
several jobs, and any expense incurred mainly for the purpose of
furthering your career prospects is really of more benefit to you
long-term than it is to your current short-term duties.

If what you expect to learn at the conference is directly relevant
to the research you are doing now, or if you are even contributing
even is a small way to the conference, the expense may well qualify.
But if your attendance is more for "networking" to benefit your
future employability, it probably will not.

Same with
computer software (I can always use an pencil and paper - but I can't
claim for pencil and paper, because I should really just memorise the
data), books and journal subscriptions (no-one's forcing me to read
them, and if I really want to read them I can go to a library),
membership of professional bodies (not necessary for the job itself),
etc.

This is where you're going too far. Membership of professional bodies
generally *is* an allowable expense, including journal subscriptions.
Most people don't claim for pencil and paper because it's too trivial
(but I dare say most academics don't actually buy their own pecils and
paper, but have them supplied free of charge by their employers).
Likewise computers are generally supplied for your use, and you're not
expected to pay for them.

If there is a particular item of computer software which is necessary to
help you carry out your duties more effectively or efficiently, I reckon
it would generally pass the "necessarily" test. But what would count as
evidence that it is indeed "necessary to help you ..."? It may well be
the fact that the cost is reimbursed by your employer. If you buy it
yourself, it may not be as necessary as all that. If it makes you more
efficient, you will have more time to do something else. What will you
do with that time? Go surfing? Then the expense would really have been
incurred for your private benefit.

 

[Martin]

Yes, or if you have other income which has not had tax deducted at
source, for example if you write anything and the publisher pays
you a fee.


That's correct for employment income.

Not quite... see
http://www.hmrc.gov.uk/manuals/eimanual/EIM31811.htm

Also, note that (a) once the travel qualifies for relief, then associated
subsistence generally does, too; and (b) it is not "necessary" to use the
cheapest method of transport.

I think you can reasonably take a different approach here. If your employer
had reimbursed you, would you then be taxable on that reimbursement? From
the academics I know, the answer is clearly "no". Hence, I cannot see why
you cannot claim tax relief on the costs you incur in attending conferences.

If HMRC contested the claim, I would argue that CPD is an integral and
essential part of your job (which academic isn't expected to be "up to date"
on stuff?). I would also point out that you are being paid to attend - i.e.
you are not taking the days out of your annual holiday entitlment.

I strongly recommend you go here...

http://www.hmrc.gov.uk/manuals/eimanual/EIM70199.htm

.... then click on EIM70695 and all the sub-sections which apply to whichever
areas of academia are relevant to you.

That said, I'm very surprised the academic body which employs you doesn't
reimburse you direct - but then it's a competitive world and they doubtless
have limited funds. I think you should be fighting for your share, however.
Mind you, you sound to be "new" and perhaps the hierarchy have stitched up
the budget and you won't see the benefits for a couple of years or so.

See EIM70790 from the above link.

This is where you're going too far. Membership of professional bodies
generally *is* an allowable expense

and some trade unions, too - e.g. school teachers & (IIRC) AUT etc...!

In summary, I think you're in a stronger position on most of the issues you
raise than you might think... (albeit, you just get tax relief on the costs,
not reimbursement in full).

Certainly worth asking colleagues what they claim.

HTH

 

[Simon]

I think you can reasonably take a different approach here. If your
employer
had reimbursed you, would you then be taxable on that reimbursement? From
the academics I know, the answer is clearly "no". Hence, I cannot see why
you cannot claim tax relief on the costs you incur in attending
conferences.

If HMRC contested the claim, I would argue that CPD is an integral and
essential part of your job (which academic isn't expected to be "up to
date"
on stuff?). I would also point out that you are being paid to attend -
i.e.
you are not taking the days out of your annual holiday entitlment.

Sorry Martin but you are not correct on this. An expense ha to be incurred
Wholly, Exclusively and necessarily in the performance of the duties of the
employment. Attendance at the conference may be of assistance in keeping the
worker up to date but it is not "in the performance of the duties of the
employment".

This means that, to be deductible, the expense must be incurred in actually
carrying out the duties of the office. It is not sufficient that an expense
is simply relevant to, or incurred in connection with, the duties of the
office. In particular, no expense will be allowable which merely puts the
office holder in a position to perform the duties of that office.

The expenditure must be such that any holder of the office would be
necessarily obliged to incur it. The fact that an office holder is
encouraged, expected or required to incur a particular expense is not
conclusive evidence that it is 'necessarily' incurred. Also, the expense
must stem from the requirements of the job itself, not from the personal
circumstances of the office holder. Strictly, the 'necessity test' will be
satisfied if (and only if) each and every person holding the office would
have to incur the expenditure.

I strongly recommend you go here...

http://www.hmrc.gov.uk/manuals/eimanual/EIM70199.htm

... then click on EIM70695 and all the sub-sections which apply to
whichever areas of academia are relevant to you.

That said, I'm very surprised the academic body which employs you doesn't
reimburse you direct - but then it's a competitive world and they
doubtless
have limited funds. I think you should be fighting for your share,
however.
Mind you, you sound to be "new" and perhaps the hierarchy have stitched up
the budget and you won't see the benefits for a couple of years or so.


and some trade unions, too - e.g. school teachers & (IIRC) AUT etc...!

Thats because the membership of certain associations are permitted to be
paid by the employer as they are on List 3.

You can find this at http://www.hmrc.gov.uk/list3/list3.pdf

This generally allows annual subscriptions to trade associations but not
trade unions.

 

[Simon]

Sorry Martin but you are not correct on this. An expense ha to be incurred
Wholly, Exclusively and necessarily in the performance of the duties of
the employment. Attendance at the conference may be of assistance in
keeping the worker up to date but it is not "in the performance of the
duties of the employment".

This means that, to be deductible, the expense must be incurred in
actually carrying out the duties of the office. It is not sufficient that
an expense is simply relevant to, or incurred in connection with, the
duties of the office. In particular, no expense will be allowable which
merely puts the office holder in a position to perform the duties of that
office.

The expenditure must be such that any holder of the office would be
necessarily obliged to incur it. The fact that an office holder is
encouraged, expected or required to incur a particular expense is not
conclusive evidence that it is 'necessarily' incurred. Also, the expense
must stem from the requirements of the job itself, not from the personal
circumstances of the office holder. Strictly, the 'necessity test' will be
satisfied if (and only if) each and every person holding the office would
have to incur the expenditure.



Thats because the membership of certain associations are permitted to be
paid by the employer as they are on List 3.

You can find this at http://www.hmrc.gov.uk/list3/list3.pdf

This generally allows annual subscriptions to trade associations but not
trade unions.

This is the other part of the guidance that I was looking for:-

EIM31990 - Travel expenses: general: overseas conferences, seminars and
study tours: example
A consultant neurologist attends the annual conference of the World Council
of Neurology. The conference takes place in Geneva and takes 4 days. The
conference consists of a series of meetings, lectures and seminars on
medical matters. The neurologist's employer encourages her to attend and the
conference is directly relevant to her work.

No deduction can be permitted for the cost of attending the conference.
Attendance at the conference is not necessary expenditure, see EIM31950.
Attendance at the conference is not one of the duties of her employment, see
EIM31650.

 

[Ian Jackson]

This is the other part of the guidance that I was looking for:-

EIM31990 - Travel expenses: general: overseas conferences, seminars and
study tours: example
A consultant neurologist attends the annual conference of the World
Council of Neurology. The conference takes place in Geneva and takes 4
days. The conference consists of a series of meetings, lectures and
seminars on medical matters. The neurologist's employer encourages her
to attend and the conference is directly relevant to her work.

No deduction can be permitted for the cost of attending the conference.
Attendance at the conference is not necessary expenditure, see
EIM31950. Attendance at the conference is not one of the duties of her
employment, see EIM31650.

But is this not what is tax-deductible by the employer, ie it does not
affect the employee directly? For attendance at conferences, seminars,
training courses and other related jollies, the employer usually
reimburses the employee all reasonable related expenses. What the taxman
allows as tax deductible when the employer puts in his business tax
returns is a different matter.

 

[Leo]

It's sounding like the answer is "no" to most of the above. Membership
seems to be ok, but a couple of people I've asked say it's more
trouble than it's worth.

Interesting the difference in philosophies in the two systems. In
Australia you can claim pretty much anything work related, even if
(I'm tempted to say especially if) it's linked to career rather than
job. So, for example, if I'm a plumber and I go to night school to
learn Japanese so I can get a better-paid job with a Japanese company,
then (assuming I can justify that this is not just so I can
competently order sushi on my next holiday) I can claim not only the
cost of the courses, but the travel costs from work to school (but not
to or from home), Japanese books I purchase, and so on.

So, back when I was a (part-time) student I could claim the bus fare
from work to the university to attend classes as well as books,
membership of societies, conferences, etc.

The Australian system seems to be geared towards encouraging people to
move on (and up) and thus ultimately contribute to economic growth. I
guess the British economy is strong enough without people trying to
improve themselves

L.

 

[Ronald Raygun]

This is the other part of the guidance that I was looking for:-

EIM31990 - Travel expenses: general: overseas conferences, seminars and
study tours: example
A consultant neurologist attends the annual conference of the World
Council of Neurology. The conference takes place in Geneva and takes 4
days. The conference consists of a series of meetings, lectures and
seminars on medical matters. The neurologist's employer encourages her to
attend and the conference is directly relevant to her work.

No deduction can be permitted for the cost of attending the conference.
Attendance at the conference is not necessary expenditure, see EIM31950.
Attendance at the conference is not one of the duties of her employment,
see EIM31650.

Does this apply only if the employee chooses -off her own bat- to attend
the conference? Surely in principle it could *become* part of her duties
if the employer went further than to encourage her to attend, but in fact
instructs her to attend, right?

To phrase it in terms the OP used, he gave the example of having applied
unsuccessfully for funding to attend, and then opting to attend anyway
by self-funding. Suppose the funding application had been successful.
You would not then expect to tax this funding, would you? This is because
that funding would be given specifically for, and conditional upon,
actually attending it.

 

[Ronald Raygun]

Interesting the difference in philosophies in the two systems. In
Australia you can claim pretty much anything work related, even if
(I'm tempted to say especially if) it's linked to career rather than
job. So, for example, if I'm a plumber and I go to night school to
learn Japanese so I can get a better-paid job with a Japanese company,
then (assuming I can justify that this is not just so I can
competently order sushi on my next holiday) I can claim not only the
cost of the courses, but the travel costs from work to school (but not
to or from home), Japanese books I purchase, and so on.

Here you would certainly not be able to claim the cost of Japanese
classes and books against your existing job, because knowledge of
Japanese is not a requirement of your existing job. If anything,
you might expect to be able to set the costs against income actually
arising from the new employment (but only if you in fact get that job
- speculative expenditure is not allowed), but under UK rules sadly
even that is not allowed, because the new skills could be of use not
only for your first Japanese plumbing job, but also for any other
subsequent Japanese job. If you moved to Japan, knowledge of the
language would also become useful to you socially, and so the
exclusivity test would fail.

If, in order to qualify for being allowed to practice plumbing in
Japan, you went on a crash course in Japanese plumbing regulations,
this would still not be allowable because you could not identify
*which* Japanese plumbing employment the cost would have been
necessary for. On the other hand, if you were going to work as a
self-employed plumber in Japan, the "necessary" test does not need
to be met, and you might therefore conceivably be able to set the
costs against income from that self-employment.

However, this is unlikely to be of practical interest, since if you
were working as a plumber in Japan, you would presumably be taxed
according to Japanese, not British, rules.

 

[Martin]

Sorry Martin but you are not correct on this. An expense ha to be incurred
Wholly, Exclusively and necessarily in the performance of the duties of
the employment.

For travel & subsistence, N but *not* W & E - see the link I posted
previously.

Attendance at the conference may be of assistance in keeping the worker up
to date but it is not "in the performance of the duties of the
employment".

Why do you say that?

This means that, to be deductible, the expense must be incurred in
actually carrying out the duties of the office. It is not sufficient that
an expense is simply relevant to, or incurred in connection with, the
duties of the office. In particular, no expense will be allowable which
merely puts the office holder in a position to perform the duties of that
office.

The expenditure must be such that any holder of the office would be
necessarily obliged to incur it. The fact that an office holder is
encouraged, expected or required to incur a particular expense is not
conclusive evidence that it is 'necessarily' incurred. Also, the expense
must stem from the requirements of the job itself, not from the personal
circumstances of the office holder. Strictly, the 'necessity test' will be
satisfied if (and only if) each and every person holding the office would
have to incur the expenditure.

I disagree with you. You've quoted the standard HMRC stuff, but you must
then look at the requirements of the job.

Leo is an academic - and the job descriptions for Uni lecturers (which Leo
may or may not be) all make the clear point that keeping abreast of latest
thinking / developments (aka research, in some quarters) is central. That
is a part of the job [most] academics are paid for, and effectively a "duty
of the employment".

Also please note the points I made earlier (but you snipped) about other key
arguments - especially whether any reimbursement to Leo would be taxable on
him. Such reimbursements, IME, are not taxed. If you've got a contra
example, I'd be interested to hear about it.

By your interpretation, a salesman would not get relief for reimbursement
for the cost of travelling to a customer, since the travel merely puts him
in the position of being able to sell. He could have done that on the
phone.

Also consider that the conference (at which the academic is indeed working)
is held at a temporary workplace. Hence travel is deductible.

 

[AnthonyL]

It's sounding like the answer is "no" to most of the above. Membership
seems to be ok, but a couple of people I've asked say it's more
trouble than it's worth.

Interesting the difference in philosophies in the two systems. In
Australia you can claim pretty much anything work related, even if
(I'm tempted to say especially if) it's linked to career rather than
job. So, for example, if I'm a plumber and I go to night school to
learn Japanese so I can get a better-paid job with a Japanese company,
then (assuming I can justify that this is not just so I can
competently order sushi on my next holiday) I can claim not only the
cost of the courses, but the travel costs from work to school (but not
to or from home), Japanese books I purchase, and so on.

So, back when I was a (part-time) student I could claim the bus fare
from work to the university to attend classes as well as books,
membership of societies, conferences, etc.

The Australian system seems to be geared towards encouraging people to
move on (and up) and thus ultimately contribute to economic growth. I
guess the British economy is strong enough without people trying to
improve themselves

ISTR that an Australian minister (of Finance?) once stated that it is
the duty of an Australian tax payer only to pay the minimum that is
due.

The underlying message was to claim everything that was claimable
which I recall doing when I was there.

Here I've got in 'trouble' for using the wrong NI rate on benefits on
telephone calls even though the difference in amounts over the year
was not even £10.

Welcome to the land of jobsworths!

 

[PeterSaxton]

ISTR that an Australian minister (of Finance?) once stated that it is
the duty of an Australian tax payer only to pay the minimum that is
due.  

The underlying message was to claim everything that was claimable
which I recall doing when I was there.

Here I've got in 'trouble' for using the wrong NI rate on benefits on
telephone calls even though the difference in amounts over the year
was not even £10.

Welcome to the land of jobsworths!

Don't you think you've confused duty with something else? I don't
think the underlying message was as you state. He was pointing out the
limits of duty.

Minimum? There's one amount due that is both the minimum and the
maximum.