Paying taxes is crucial for every community, and collecting taxes is vital for every government, from local councils to state or federal authorities. There’s even a proverb that nothing is certain except death and taxes, attributed to Benjamin Franklin.
Hence, every adult person should know what types of income are taxable and what kinds of earnings aren’t subject to taxation. This article covers the most important taxable and non-taxable types of income in the UK.
Taxable vs Non-Taxable – Key Differences
In terms of legal matters, the main difference between these two income types is the manner in which the earnings have been obtained.
If you had to carry out any particular work activities where you’ve applied the skills and knowledge you possess, this income is due to be taxed.
On the other hand, if you haven’t performed any particular action that includes skills and knowledge, but you’ve rather gained assets by luck, this income is not taxable. For instance, winning a prize contest or hitting a bull’s eye at a betting parlour won’t be taxed.
Still, there are nuances in this context, as well. For instance, if you’ve made an earning investing in cryptocurrencies, or gambling on crypto casino sites, you still might want to report such winnings to the HM Revenue & Customs (HMRC). With the emergence of many new UK casino sites, more and more people have been generating income for which they didn’t have to practically work.
The UK Parliament and Government are yet to adopt the gambling and betting regulations to address such developments. For the time being, non-crypto winnings aren’t taxed, and the crypto ones follow suit, but it would be wise to report the latter in the case of winnings.
The Taxables
In accordance with the above, every bit (and byte) of income you earn by doing a certain job must be reported to the HMRC, i.e., the relevant tax authorities in the UK. Be it your monthly salary, the remuneration you receive for side gigs, or project-based earnings that occur periodically, you must pay taxes on each of these activities.
What’s more, every person working for themselves also has to pay taxes on each invoice they issue and the money they receive for their work. They also have to fill out their Self-Assessment tax return when the tax year ends (April 5), so that the tax authorities double-check whether the taxes paid during the business year match the volume of performed work. The self-employed have the opportunity to use the tax reliefs prescribed by the UK legislation. If we know that the UK tax and labor regulations contain more than 1,000 potential tax deductions, every person already running their own business or entrepreneur-to-be should get more familiar with those rules.
In other news, landlords and homeowners who rent out their properties also need to pay taxes on the income they generate this way. This doesn’t apply if the landlord lives in the same household.
Finally, the revenue you generate from a trust and interest on savings above the savings allowance are also subject to taxation.
The Non-Taxables
Even though the authorities of various levels are equally fond of taxes because they’re their operational fuel, they also have a gentle side. Not every penny that comes into one’s hands has to be taxed because it would be counterproductive in some cases.
For starters, self-employed persons are exempt from paying taxes on the first £1,000 they earn per month. This also applies to the full-time employed people, who have a side job. Once they surpass £1,000 per month, they’re obliged to include their earnings in their tax return.
Also, the first £1,000 a landlord receives from their property rent is non-taxable. However, if you’ve rented out your property for the total monthly amount of, say, £2,500, the first £1,000 is not taxable, but you will have to pay a tax on the remaining £2,500.
The income received via tax-exempt accounts, such as National Savings Certificates and Individual Savings Accounts (ISAs), is also not to be taxed in the UK. Still, if there’s any interest on the saved amount, then the interest amount will be taxed.
As mentioned above, games of luck are also non-taxable, which includes – in addition to the offline and online gambling/betting prizes – the National Lottery wins, premium bonds, and bingo rewards.
Finally, dividend-based earnings are excluded from taxation up to a certain point. If the amount of money you’ve earned from company dividends doesn’t exceed your annual personal allowance – the sum of annual earnings for which you don’t pay taxes (£12,570 per year as of 2024) – this income isn’t taxed. But if you’ve made £20,570 in one year, of which £8,000 comes from dividends, and £12,570 is the annual allowance, you’ll have to pay taxes on this £8,000.
The tax regulations in the UK are neither the harshest nor the mildest in the world. Based on the number of self-employed people and companies doing well in the UK, the tax policy seems reasonable. Still, every working person, both employers and employees, should keep following the relevant tax regulations to understand their rights and obligations, ensuring they pay all their dues on time.
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