It is important that people understand how the tax system works

It’s well known that the UK system is complex, and even experts have difficulty understanding aspects of it. But for most people, at least, personal taxes ought to be relatively simple. Where would I go for guidance if I didn’t know the first thing about income tax?

The obvious answer may be the website of HM Revenue & Customs (HMRC), or rather the HMRC part of GOV.UK. (Oh, please note my disclaimer about external websites!) My aim here is not to provide specific tax advice but to share a thought about the tax system and how well or how little it is explained and understood. And how that understanding might be improved.

If you are relying on GOV.UK for guidance you need to take particular care because, as many tax professionals will tell you, GOV.UK does not provide the same level of detail as HMRC provided on its old website. The government has tried to make the information more accessible, and while the guidance may be shorter and easier to read it may not cover your particular circumstances. And it may be out of date, because tax is changing all the time. There are many other sources of guidance and I’ll mention some of them in future posts.

Start here at GOV.UK and you would go to money and tax, and follow several links to “income tax” to arrive at an overview. (Or you might start on the HMRC pages and go to income tax for a  different starting point).

Item 5 on the overview page allows you to “check you’re paying the right amount” of income tax. And you can estimate how much income tax you should have paid in any tax year. There is a long list of people who can’t use this particular tax checker – and as HMRC says, other checkers are available.

Let’s assume you are eligible to use this checker, and that you were an employee in the tax year ending 5 April 2016 and you received salary of £30,000. You had no other taxable income or allowable deductions in that year.

The checker tells you that you should have paid income tax of £3,880. This is £30,000 less the personal allowance of £10,600, leaving £19,400 taxable at 20%. These figures are clearly shown in the calculation, but the calculation does not include national insurance contributions (NICs). In this example the NICs would be:

  • Employee NICs (£30,000-£8,060) x 12% = £2,633
  • Employer NICs (£30,000-£8,112) x 13.8% = £3,021

So on the face of it, for an employee with straightforward circumstances setting out to use the HMRC guidance to understand his/her tax bill, the income tax part is reasonably clear but the NICs aspect is not so clear (and it may even be missed altogether).

The employer’s NIC bill is met by the employer, of course, while the employee’s NIC may go largely unnoticed on the monthly payslip. But the amounts are significant, and this is one reason for the growth in self-employment (real or bogus) in recent years.