Last year we went to the Upton Blues Festival, which is a free event held in the beautiful town of Upton upon Severn, Worcestershire. Of course, we couldn’t go this year, but maybe next year? It is a friendly weekend full of good music and food. On the Saturday, we walked around the marina and were amazed by the stunning boats and ships moored there. Admiring the luxury yachts, it was not too much of a stretch to guess that the people who owned them were probably paying higher rate tax! Having said that, it is not as difficult to go over the tax threshold as you may think.
In reality, you could easily go over the threshold if you have other types of income – you are taxed at 40% on any income over £37,500. If you’re only employed and don’t have any other types of income then don’t worry, this will not be an issue for you as you will be taxed directly from your pay packet.
However, if you have other sources of income or are self-employed, then you need to make sure you take account of how much money you have coming in as it has an impact on your tax rate.
Hi, I’m Anna Goodwin – Author of five books, Director, Mentor and Trainer for Anna Goodwin Accountancy.
Basically, I take the stress out of finances – both business and personal. From running my own business and helping others to run theirs, I know it’s important to be aware of the total level of income you are earning and plan accordingly.
Pot Of Income
This picture from my book Anna’s Simple Accounting Guide – Stress Free Tax Returns shows all the different types of income that count towards your total.
As you can see, all of your income is added together and this is what your personal allowance is deducted from and what your tax is calculated on.
Types Of Extra Income
- Airbnb rental income
- If you let out a furnished room of your main residence (or indeed the whole house), then if the gross rents received are £7,500 or less, this is all tax free.
- A change from April 2019 – you must be living in the property for at least some of the time that the accommodation is let out.
- Rental income, (see my Rental Income blog here)
- Partnership income
- Self-employed income
- Network marketing such as Arbonne or Forever Living products
- Private tuition
- Being paid for work for someone else: friend, family or business contact
As a basic rate taxpayer you can earn £1,000 of savings interest per year tax free. For higher rate taxpayers, this decreases to £500.
If you receive any dividends on shares that you own, then be aware that there is a tax free dividend allowance of £2,000.
Basic rate taxpayers pay tax at 7.5% on dividends.
Higher rate taxpayers pay tax at 32.5% on dividends.
Whichever self-employed income you receive you will need to include your income less costs on your tax return. Remember the Self Employment Income Support Scheme income will need to be added for this year if you have claimed it as it will count towards your taxable income. Also any rates grant you received.
Of course, it’s not your income which is taxed as costs can be offset against this. Here are examples of allowable costs:
- Motor Expenses
- Travel and Subsistence
- Telephone and Broadband
- Printing, postage and stationery
- Bank charges
- Home costs
- Legal Fees
Remember the marriage allowance, if applicable, if one of you doesn’t earn enough to use up all of his/her allowance then 10% of their personal allowance can be transferred over to the other spouse.
In future, as you sit and enjoy watching the yachts bobbing around in a harbour, or pour over photos of celebrities enjoying their summer break in luxury resorts, why not take a moment to consider your income streams. You’ll be more aware of your own financial situation and you may find that you are in a different tax bracket. Think about whether you need to take any advice now, so you are as tax efficient as possible.
Next week, I will concentrate on understanding the power of numbers.
Do you want to stay in control of your finances? Why not join my online group? I also offer 121 mentoring and Accountancy services. If you would like more information, get in touch or visit my website.