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Understanding Income Tax

SOLVEDby QuickBooks55Updated December 22, 2022

What is Income Tax?

Income Tax is the tax that you have to pay the government based on your yearly earnings. Income tax applies to most types of income, including the salary from your job, pensions, profits if you own a business or are self-employed, and even rent received if you're a landlord.

Here's an introduction to Income Tax on the HMRC website.

How do you pay Income Tax?

There are two ways you can pay Income Tax. These are:

  1. PAYE (pay as you earn) - income tax is deducted from your salary before you receive it.
  2. Self Assessment tax return - if you are self-employed or have any other income sources, you must send a tax return each year to declare and pay income tax on your earnings to HMRC.

For more information on Income Tax, visit HMRC.

How is Income Tax estimated?

What you owe in Income Tax is calculated based on how much you earn, minus your allowable expenses. Income Tax is made up of different tax bands, which means as your income increases, so does the amount of Income Tax you pay.

How much Income Tax you pay will depends on how much you earned above your personal allowance, and how much of your income falls within each tax band. The table below shows the rates of Income Tax depending on how much you earn.

See the current tax rates and Personal Allowances set by HMRC.

Most people have a personal allowance (£12,570 in 2022/23), which allows them to earn up to a certain amount tax-free. However, you may be entitled to a different allowance under certain circumstances.

The Estimated Income Tax feature can be found in the Taxes menu. We're going to continue expanding on this feature to cater for different business requirements. However, as of now, the feature works best for sole traders who don't have any disallowable expenses.

What if my income is over £100,000?

QuickBooks will calculate your estimated income tax based on HMRC's guide, whereby your personal allowance decreases by £1 for every £2 that your adjusted net income is above £100,000. If you earn £125,140 or more, you pay Income Tax on everything and there's no tax-free allowance.

For more information on income over £100,000, visit HMRC's website.

QuickBooks will also calculate your estimated Income Tax if you're based in Scotland. Visit HMRC's website to learn more.

How can I estimate my Income Tax in QuickBooks?

  1. Connect your bank account and import your transactions.
  2. Categorise and add your business income and expense transactions to your books.

QuickBooks will estimate your Income Tax based on the categories you've assigned to your transactions.

What isn't included in the Estimated Income Tax calculation?

There are a few items that won't be considered when reviewing your Estimated Income Tax. We are working hard on improving this feature for our customers and any feedback you have is valuable to help improve our product. These items are:

Mileage deductions

When you enter mileage in QuickBooks, you will notice that this doesn't automatically create an expense. Mileage deductions will need to be entered as an expense in your QuickBooks account for it to be posted to the Estimated Income Tax boxes.

Net VAT and CIS payments

Net VAT and CIS payments aren't recorded as expenses in QuickBooks. To account for these, you'll need to export your Income Tax Estimate report and add the net payments for the year outside QuickBooks. One way to do this is to:

  1. Export your Estimated Income Tax from the Income Tax page.
  2. Run a report for your VAT/CIS payments made to HMRC.
  3. Add the total amount of these payments to the exported copy of your Estimated Income Tax.
  4. Make adjustments to the calculated Estimated Income Tax with the additions of the payments made.

Tax allowance for vehicles and equipment

QuickBooks doesn't have the ability to create fixed assets and deduct tax allowances against those assets and allowances. Speak with your accountant to discuss how to account for these.

Other items that aren't included in the Estimated Income Tax calculation:

  • Prepayments/payments made on account
  • Current year and past year tax reliefs
  • CIS deductions taken off by contractors
  • Other taxes taken off trading income (for example, Capital Gains Tax, foreign income tax, tax paid on income from trusts)

Who needs to file a Self Assessment tax return?

You need to send a Self Assessment tax return if you are:

  • Self-employed as a 'sole trader' and earned more than £1,000 (before taking off anything you can claim tax relief on)
  • A partner in a business partnership

You may also need to send a tax return if you earned any other untaxed income such as:

  • Grants or support payments
  • Money from renting out a property
  • Tips and commission
  • Income from savings, investments and dividends
  • Foreign income

To find out if you need to send a tax return, use HMRC's online checker.

Can I send a Self Assessment tax return in QuickBooks?

It's currently not possible to file your Self Assessment through QuickBooks. However, you can use the income and expenses information on the Income Tax page in QuickBooks to help generate an estimate of your Income Tax.

Need to send a Self Assessment tax return but not sure where to start? Use this checklist to get started.

If you use QuickBooks Self-Employed, follow this checklist.

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