The UK tax year runs from 6 April to 5 April the following year.
You pay two types of tax in the UK:
- Pay as You Earn (PAYE)
- National Insurance (NI)
Pay As You Earn (PAYE)
This follows a simple principle: The more money you earn in the UK, the more tax you pay.
The first £10,600 of your income in a financial year is completely tax-free. The next £21,185 is taxed at 20%, while income falling between £43,000 and £150,000 is taxed at 40%. Any portion of your income that exceeds £150,000 a year will be taxed at 45%.
National Insurance contributions
Along with PAYE, you are also required to pay up to 12% of your gross salary income as an NI contribution. The first £8,064 you make in a financial year is not taxed for NI purposes.
If you earn between £8,064 and £42,384 per year, you are taxed at 12%. Anything over this is taxed at an additional 2%.
These contributions are represented at the bottom of your payslip and are divided into:
- National Health Service: This goes towards funding government doctors and hospitals in the UK, enabling you to use the public health system for free.
- UK pension scheme: This is a retirement fund set up for you in the UK.
During your time in the UK, you may work for more than one employer. On your last day of employment at your current company, you will receive a P45. This document indicates the total the amount of tax paid whilst you were working for that employer. If you hold various jobs throughout the financial year then you would have multiple P45s.
Every year, your employer at 5 April must give you a P60. This document sums up the total tax paid on your behalf during the financial year and is used when claiming a tax refund.
If you choose to work through tax structures in the UK, there will be other taxes that apply. If carefully managed, you are able to maximise your income through these structures.
Salaried employee or PAYE
As an employee, your recruitment agency or employer is responsible for deducting the PAYE, Income Tax and National Insurance at source, with little to no involvement or costs on your side. Agencies and employers with whom you have a long term employment contract will often require that these taxes are deducted in this way.
To register as self-employed, you simply need to contact HM Revenue and Customs (HMRC) within three months of starting work. Registering as self-employed is the simplest way for a contractor to start their own business.
Agencies and clients pay into your account and you pay yourself. You are usually taxed at one of the higher tax rates and will be responsible for paying your taxes yourself.
The level of ongoing administration is relatively low, which should translate into lower accounting fees.
When you set up a limited company, your agency or client pays into the company’s business bank account. You then use these funds to pay yourself with a combination of salary, expenses and dividends; the best combination can be discussed with our contractor accounting experts. Find out more about contracting through a limited company.
Payroll or umbrella service companies
Do note: As of 6 April 2016, new legislation makes payroll or umbrella companies a much less attractive option than they once were. Temporary workers, including those under umbrella companies or through agencies, will no longer receive tax relief on travel and subsistence costs.
Payroll or umbrella companies act as third party employers for contractors. As a result, these structures usually have more benefits than a self-employed set-up.
An umbrella company is responsible for all back-office administration, such as invoicing and payroll. With these setups, clients can afford to pay premium or “company” rates to contractors. You will have little to no extra administration than if you were a PAYE employee of your agency or client.
Get your money back with 1st Contact Tax Refunds
If you’ve worked and paid tax in the UK, at any point in the past five years, you could be due a tax refund. Millions of pounds of overpaid tax still go unclaimed every year. Don’t put it off! Our tax refund service can ensure you claim your share.
Our sister company, 1st Contact Tax Refunds is the largest registered tax refunds agent in the UK. They specialise in the management and administration of tax refunds on behalf of our clients.
With over 15 years’ experience working with UK tax rebates, they’ve managed and processed over 100,000 successful tax claims for our clients.
Each tax rebate is highly unique, that’s why we operate on a no refund, no fee basis.
As an accredited member of the Association of Tax Agents, they can offer you 100% guaranteed protection on your tax refund claim.
How to claim your tax refund
1. Fill out the form
Take a few minutes to complete our online Tax Refund Claim Form. If you're due a refund, we’ll send you our Tax Refund Claim Pack.
Sign all pages of the Claim Pack marked with an "X". Don’t forget to fill in your employment history details.
Post or email your completed Claim Pack back to us. Remember to include: P45s from each employment and P60s from each financial year (or a statement of earnings)
Your dedicated caseworker will take care of all the details and provide you with regular updates about your claim.
We can assist you in obtaining any of the above documents, like lost P45s and P60s.
Get help with your personal and contractor accounting tax needs.
Contact the accounting team for more information on firstname.lastname@example.org