- Original Poster
- #1
Hi, I'm trying to learn about how the UK income tax and personal allowance tax thresholds work, whether you're an employee, self-employed, both an employee AND self-employed or whether you own a limited company.
You'll have to forgive my 'dumb questions' as we all have to start somewhere with our knowledge!
I live in Scotland and have looked up the personal allowance thresholds online.
Now my questions:
1) So these rates are for our income before tax?
2) Are the rates inclusive or exclusive of your tax free personal allowance? I see the personal allowance is
up to £12,570. Let's say I earn £20,000 a year from my employment, which in Scotland falls into the Basic Rate and is taxed at 20%. Is this taxed as 20% of the £20,000 OR is it taxed on £20,000 minus my personal allowance of £12,570, i.e £7,430?
So if the answer is, it's taxed as 20% of the £20,000, I'd be left with £16,000 after the 20% tax (£4000).
If the answer it's taxed on the amount minus the personal allowance, I'd be taxed on 20% of £7,430 (which is £1486), so I'd be left with £18,514 after tax.
Of course, NI and pension payments will have to be deducted to, but let's leave those for the moment.
3) If you're both employed AND self-employed (as a sole trader, not Ltd company), is the amount you're taxed on for each of these separate or combined? So I mean, let's say I make £22,000 a year from employment (before tax) and £22,000 net profit a year from self-employment (again before tax). Would I pay the basic rate of 20% for both of these £22,000 amounts separately at 20% each, or is it all combined into a grand total of £44,000 that I need to pay tax on? This would then put me in the Higher rate of tax at 42%.
What about if one has several different businesses from self-employment (again, all as a sole trader) - is the overall rate I'm taxed on the rate of all these businesses combined or is each one taxed separately?
4) Finally, if you own a limited company and pay yourself a salary as director (let's forget dividends for now). When you take the money out of the limited company and pay yourself a salary into your personal bank account, is this when the personal income tax rates kick in and they're exactly the same as for an employee or self-employed person (sole trader)? So your salary is classed as PAYE?
And final thing, is I see many owners of limited companies pay themselves the maximum personal tax allowance of £12,570 so they don't pay tax on it (and dividends for the rest). And again, if an owner of of a limited company chooses to pay themselves more than the £12,570 as a salary, what amount are they taxed on - the full salary they take out, or the salary minus the personal tax allowance? I see some limited companies subtract the £12,570 personal allowance as an expense so I am not sure.
Thanks.
You'll have to forgive my 'dumb questions' as we all have to start somewhere with our knowledge!
I live in Scotland and have looked up the personal allowance thresholds online.
Now my questions:
1) So these rates are for our income before tax?
2) Are the rates inclusive or exclusive of your tax free personal allowance? I see the personal allowance is
up to £12,570. Let's say I earn £20,000 a year from my employment, which in Scotland falls into the Basic Rate and is taxed at 20%. Is this taxed as 20% of the £20,000 OR is it taxed on £20,000 minus my personal allowance of £12,570, i.e £7,430?
So if the answer is, it's taxed as 20% of the £20,000, I'd be left with £16,000 after the 20% tax (£4000).
If the answer it's taxed on the amount minus the personal allowance, I'd be taxed on 20% of £7,430 (which is £1486), so I'd be left with £18,514 after tax.
Of course, NI and pension payments will have to be deducted to, but let's leave those for the moment.
3) If you're both employed AND self-employed (as a sole trader, not Ltd company), is the amount you're taxed on for each of these separate or combined? So I mean, let's say I make £22,000 a year from employment (before tax) and £22,000 net profit a year from self-employment (again before tax). Would I pay the basic rate of 20% for both of these £22,000 amounts separately at 20% each, or is it all combined into a grand total of £44,000 that I need to pay tax on? This would then put me in the Higher rate of tax at 42%.
What about if one has several different businesses from self-employment (again, all as a sole trader) - is the overall rate I'm taxed on the rate of all these businesses combined or is each one taxed separately?
4) Finally, if you own a limited company and pay yourself a salary as director (let's forget dividends for now). When you take the money out of the limited company and pay yourself a salary into your personal bank account, is this when the personal income tax rates kick in and they're exactly the same as for an employee or self-employed person (sole trader)? So your salary is classed as PAYE?
And final thing, is I see many owners of limited companies pay themselves the maximum personal tax allowance of £12,570 so they don't pay tax on it (and dividends for the rest). And again, if an owner of of a limited company chooses to pay themselves more than the £12,570 as a salary, what amount are they taxed on - the full salary they take out, or the salary minus the personal tax allowance? I see some limited companies subtract the £12,570 personal allowance as an expense so I am not sure.
Thanks.
