Half of Britons have NO IDEA how much tax they pay: We explain how to work out your bill

More than half of Britons don’t know how much tax they pay – and those who say they do are often way off the mark. 

Research conducted by Hargreaves Lansdown on behalf of Hargreaves Lansdown found that only 48% of individuals knew the amount of tax they had paid.

Only 39% of those aged 35-54 claimed to have any idea how much they owe tax. 

This is compared with 41 percent of 18-34-year-olds and 59 percent of 55-years.

The less people earn, the less likely they are to be aware what they’re paying in tax.

Research also showed that homeowners were less likely to know how much they had paid in taxes than renters, while higher-rate taxpayers knew more about their tax bills than those at lower rates. 

As the government tries to reduce the expenses of pandemics, tax increases are likely. To avoid overpaying for tax, you need to be aware of what tax your tax liability is.

Sarah Coles is a personal finance analyst for Hargreaves Lansdown. She stated that it’s not surprising that we don’t know how much tax we are paying because of the complexity of our tax system.

“But, it is risky to be completely ignorant about taxes because we might not have a budget for them and run the chance of overpaying.

“Even if we believe we have an idea of how much tax is being paid, it’s possible that we are not.

Take income tax. Even if you have the highest rate of income tax, that is not the same thing as knowing the total tax you will pay. Each slice of income has a different tax rate.

“Basic rate taxpayers, who have a marginal rate at 20 percent, pay an average 9.5% in income taxes across their entire income.

What are you paying – and could you pay less? 

The tax on your pay: Income tax and National Insurance

Employed workers can find out the amount they are being paid by checking their payslips. This will show you how much of your income goes to national and income taxes.

You can find out how much your self-employed earn by looking at your tax returns. However, as you always complete this in retrospect, it can be challenging to keep track – particularly if your income varies from year to year.

Coles says, “If you’re self employed, ensure you claim for all you can, which will lower your tax bill.

Salary sacrifice is an option for employees who are working. This happens when you and your employer agree on a salary reduction and the payment of equivalent benefits that include tax and national insurance.

It means that tax and national insurability are not paid on any portion of your income you give up to receive these benefits.

This is best done by paying into a retirement plan. 

However, it also applies to things like the cost of pension advice provided by your employer; workplace nurseries; cycle-to-work schemes; and ultra-low emission vehicles which emit 75g of CO2 per km or less.

Savings are subject to tax

The introduction of the savings allowance has resulted in a decrease in tax liability for savings. However, understanding your financial situation is essential.

The personal savings allowance affords basic rate taxpayers earning up to £50,270 a year, to take advantage of £1,000 of tax-free interest each year.

Higher-rate taxpayers earning up to £150,000 still benefit from a lower, £500 tax-free allowance.

However, if you’re an additional rate tax-payer earning over £150,000 a year, you don’t get an allowance.

Basic rate taxpayers, who are not eligible for savings offers at this time, will require substantial savings to be subject to income tax.

A basic rate taxpayer saving into Zopa Bank’s market leading 1.35 per cent, one-year fixed rate bond would still need to have almost £74,000 stashed away in the account before they need to pay tax on their interest, for example. 

A higher rate tax payer, meanwhile, would need to be saving almost £37,000 to breach their £500 allowance.

But with inflation at 3.2 per cent and expected to rise to 4 per cent or more, interest rates could rise in the future – and this would push more people over the threshold if savings deals follow suit.

A solution is to put your savings into a cash-free Isa. This year, savers can stash away up to £20,000 into one of these accounts. 

Coles says, ‘You could protect your savings by depositing them in a Cash Isa.

You will get a higher rate with the more competitive savings accounts. However, the gap between the market and the tax-free market is closing.

Investments: Capital gains and dividend tax

Dividends from shares that are not part of the Isa will be subject to tax.

For example, when you dispose of shares or real estate that is increasing in value, capital gains tax will be payable. 

If you make more than £2,000 in dividends outside of an Isa, or realise more than £12,300 in capital gains in a single year, you will need to pay tax. 

In April 2022 the dividend tax rate is expected to rise by 1.25 percentage points. This means that basic taxpayers will start paying 8.75 percent, and high-rate taxpayers 33.75 percent.

Maximizing your Isa allowance is the most efficient way to minimize potential capital gains and dividends tax bills.

Coles says: ‘You can shelter up to £20,000 a year in an Isa, and all income and growth is completely tax free.

‘Assets can be passed between spouses without triggering a tax bill, so between you, you can shelter £40,000 a year.

If you do not have sufficient allowance to maintain your whole portfolio in Isas (or that is the case), income-producing assets may be divided between married couples so that they can both benefit from their allowances.

“The spouse who pays the lower tax rate can hold the balance to reduce tax due.”

Coles suggests that you also consider prioritising income-producing investments in your Isa over growth investments.

This allows you to take advantage of the lower growth tax rate and access to annual capital gains allowances that will assist you in managing your gains tax.