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Understanding Income Tax | QuickBooks Online

SOLVED•by QuickBooks•70•Updated December 04, 2023

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.

For a comprehensive overview of Income Tax, refer to the HMRC guide.


How do I 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 guidance on paying your income tax bill, read this.


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.

Most people have a personal allowance which allows them to earn up to a certain amount tax-free. However, you may be entitled to a different allowance under certain circumstances.

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

The Estimated Income Tax feature is in the Taxes menu. We're working on improving it for different business needs. Right now, it's best for sole traders without disallowable expenses.


What if my income is over £100,000?

QuickBooks calculates your estimated income tax based on HMRC's guide. 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 without any 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 bank transactions.
  2. Categorise and match the downloaded bank transactions, and add new ones if necessary.
  3. Add your business income and expenses 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 are currently not taken into consideration when reviewing your Estimated Income Tax. Select the following items that are currently excluded to show more information.

When you enter mileage in QuickBooks, you might notice that it doesn't automatically create an expense for you. To make sure your mileage deductions are included in the Estimated Income Tax boxes, you'll need to manually enter them as an expense in your QuickBooks account.

Net VAT and CIS payments aren't automatically recorded as expenses in QuickBooks. To properly account for these payments, you'll need to export your Income Tax Estimate report and add the net payments for the year outside QuickBooks. Here's how to do it:

  1. Go to Taxes, and then select Income Tax.
  2. Export your Estimated Income Tax report from the Income Tax page.
  3. Run a report for your VAT/CIS payments made to HMRC.
  4. Add the total amount of these payments to the exported copy of your Estimated Income Tax.
  5. Make adjustments to the calculated Estimated Income Tax by incorporating the additional payments made.

QuickBooks doesn't have the feature to create fixed assets and deduct tax allowances for them. It's best to consult with your accountant to determine the best way to account for these assets and allowances.

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

  • 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

If you're unsure whether you need to submit a tax return, you can use HMRC's online checker.


Can I send a Self Assessment tax return in QuickBooks?

Currently, it's not possible to file your Self Assessment directly through QuickBooks. However, you can use the income and expense information on the Income Tax page in QuickBooks to generate an estimate of your Income Tax.

If you're unsure where to start with Self Assessment, don't worry. You can follow this checklist which will walk you through each step of the way.

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

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