Copyright: Copyright © Which?/IDP 1999
Citation: © Which?/IDP 1999


Capital gains tax - list
Capital gains tax

Title	Number	Year
Capital gains tax. An introduction	CGT1	1998


480 (1998)
480 (1998) - Expenses and benefits. A tax guide

This booklet explains the tax law relating to expenses payments and benefits received by directors and employees earning more than £8,500. It tells you which expenses payments and benefits are taxable and which are not. It describes, among other things, dispensations, the use of cars, and entertaining expenses.


IR110 - A guide for people with savings
A guide for people with savings (IR110)

Personal Taxpayer Series IR110

A guide for people with savings

 - how to stop paying tax on your interest

 - how to claim tax back

What is this guide about?

Banks, building societies and local authorities are required to take income tax off the interest they pay to savers. However, people whose taxable income is covered by their tax allowances can register to get their interest 'gross' (that is, without tax taken off). It is also possible to claim tax back from the Inland Revenue if the tax taken off your interest is more than you are due to pay.

This guide explains how to work out

if you can register to get your interest gross

if you can claim tax back.

It also explains the tax rules about dividends from shares, and income from unit trusts or open-ended investment companies. There is a special section on children's savings. Please read this guide carefully to make sure you are paying the right amount of tax. We want you to pay only what is due.

What you can do depends on your own circumstances. If you are in any doubt about anything in this guide, or if you need any help, please do not hesitate to get in touch with us.

Ring or call in at any Tax Enquiry Centre or Tax Office. Details are in your phone book under 'Inland Revenue'

This guide does not include information about

Personal Equity Plans (PEPs), or

Tax Exempt Special Savings Accounts (TESSAs)

but see our leaflets IR89 'Personal Equity Plans (PEPs)' and IR114 'TESSA. Tax free interest for taxpayers'.

What income does it cover?

Interest on bank, building society and local authority savings

As a general rule, banks, building societies and local authorities have to take income tax off your interest before they pay it to you. From 6 April 1996 they have taken tax off at the lower rate of 20 pence in the £. Before then they took tax off at the basic rate (25 pence in the £ in 1995-96). The interest you get is the amount left after that tax has been paid. Only higher rate taxpayers have to pay more tax on their interest.

If you should not be paying tax on your interest there are two things you might be able to do

fill in a form that tells your bank, building society or local authority  to stop taking tax off your interest. You can do this only if all your income - including your interest and any pension - is covered by your tax allowances

claim tax back from the Inland Revenue. You can do this if tax has been taken off your interest that you didn't need to pay.

Dividends from shares

If you have shares in a company, when you get your dividend cheque you also get a tax credit 'voucher'. This shows the amount of the dividend payable and the amount of the tax credit which goes with that dividend. (Your income for tax purposes is the dividend plus the tax credit.) The tax credit is not tax deducted, but it represents the fact that the company paying the dividend has paid tax on the profits used to pay the dividend. The tax credit can be set against your tax liability on the dividend. Depending on your income, you might be able to claim some or all of that tax credit from the Inland Revenue on dividends paid up to 5 April 1999.

Foreign income dividends do not carry a tax credit. Instead, the voucher will show income tax treated as paid on the dividend. You cannot claim back income tax treated as paid on a foreign income dividend.

Income from unit trusts and open-ended investment companies

Unit trusts and open-ended investment companies can pay three different sorts of income

dividends

foreign income dividends

interest.

Dividends and foreign income dividends paid by unit trusts and open-ended investment companies are treated in exactly the same way as dividends from shares.

Interest paid by unit trusts and open-ended investment companies is treated in exactly the same way as interest on bank, building society and local authority savings, but you cannot arrange for your interest to be paid without tax being taken off.

Who needs to pay tax on income from savings?

Whether you need to pay tax at all depends on how much taxable income you have.

Your income includes

your pensions

interest on your savings

dividends from shares

income from unit trusts or open-ended investment companies.

Whether you are male or female, married or single, young or old, you are entitled to a certain amount of income without paying tax

The amount of income you can have before you start to pay tax depends on your tax allowances.

The way these work is explained in the section 'How do I know what my tax allowances are?'. For the moment, all you need to know is that everyone can have a certain amount of income before they start to pay tax. The table below tells you how much taxable income you can have before you actually start to pay tax.

If your taxable income is less than the amount shown in the table you can

claim back tax taken off your income from savings

register to get your interest paid gross in future.

The first thing to do is work out whether your taxable income is less than the income figure shown in the chart.

Amounts of taxable income you can have before you start to pay tax

1998-99
People under 65
a single person	£4,195 (about £81 a week)
a married man (1)	£5,620 (about £108 a week)
a single parent (2)	£5,620 (about £108 a week)
a married woman (1)	£4,195 (about £81 a week)
a widow or widower (3)	£4,195 (about £81 a week)
People aged 65-74
a single person	£5,410 (about £104 a week)
a married man (1)	£7,889 (about £151 a week)
a married woman (1)	£5,410 (about £104 a week)
a widow or widower (3)	£5,410 (about £104 a week)
People aged 75 and over
a single person	£5,600 (about £107 a week)
a married man (1)	£8,109 (about £155 a week)
a married woman (1)	£5,600 (about £107 a week)
a widow or widower (3)	£5,600 (about £107 a week)
1 Married couples can decide whether the husband or wife gets the married couple's allowance or they can split it equally between them. In the examples given above the whole of the married couple's allowance has been taken into account in the figure for the married man's income. If you want to know more about the married couple's allowance ask for our leaflet IR80 'Income tax and married couples'.

2 Single, divorced or separated parents who have children living with them may benefit from an additional personal allowance. In the example above, additional personal allowance has been taken into account in the figure for the single parent's income. More information is given in our leaflet IR90 'Tax allowances and reliefs'.

3 In the tax year of her husband's death, a widow is entitled to a widow's bereavement allowance.  A widow is also entitled to this allowance in the tax year following her husband's death if she has not remarried before the start of that tax year.  (The tax year runs from 6 April in one year to 5 April in the next.)  Widows bereaved since 6 April 1998 should add £1,425 (about £27 a week) to the figure shown above for their age.

Remember, tax allowances can change from year to year. A Tax Enquiry Centre or Tax Office will be glad to tell you what the allowances were for any other year. There is more about tax allowances in the section 'How do I know what my tax allowances are?'.

What income is taxable?

Not all the income your receive is taxable.

The main things you need to include in working out your taxable income are

gross interest from a bank, building society or local authority (except interest in a TESSA or a PEP)

interest from National Savings investments (except National Savings Certificates and the first £70 of interest from ordinary accounts with the National Savings Bank)

dividends from shares (except dividends in a PEP). Remember to add on any tax credits to the dividends or, if the dividend is a foreign income dividend, income tax treated as paid

income from unit trusts and open-ended investment companies (except income in a PEP).  Remember to add on any tax credits to dividends, any income tax treated as paid to foreign income dividends, and any income tax taken off interest

old age pension

widow's pension

most other state pensions - but not war pensions

pension from employer*

earnings from a job or self-employment*

unemployment benefit

statutory sick pay - usually paid by your employer but sometimes paid by the Department of Social Security

maternity pay

widow's benefits

invalid care allowance and invalidity addition paid with a retirement pension

incapacity benefit - all benefit paid in respect of new claims from 13 April 1995 (except benefit paid during first 28 weeks of incapacity)

widowed mother's allowance and widow's allowance

income support (if paid when you are unemployed or on strike)

student's earnings - but not student's grants and loans

rent from letting property or rooms (but if you let rooms in your home the rental income may not be taxable. For more information see our leaflet IR87 'Letting and your home')

income from trust funds

income from outside the United Kingdom

your share of any joint income.

* Don't forget to add on any tax taken off. Your employer (or former employer) should send you a form P60 every year which shows your earnings (or pension) and any tax taken off.

If you are in any doubt, please ask any Tax Enquiry Centre or Tax Office.

How do I work out my taxable income?

You need to know what things to include.

The first step is to work out your total 'gross' interest. You do this by adding together all the interest you get. If tax has been taken off you must add it back. For example, if you get £80 interest from a savings account and £20 tax has already been taken off, the 'gross' interest on the account is £80 + £20 = £100.

If no tax has been taken off your interest then what you receive is gross interest.

To work out your total gross interest, add up all the interest credited to your account(s) in the tax year (ie from 6 April to the following 5 April).

The second step is to add your total gross interest to all your other income (including any pensions), adding on any tax that has been taken off it to get the 'gross' income for the year. For dividends, you take the amount you receive and add on the tax credit or, in the case of foreign income dividends, you add on the income tax which is treated as paid. This gives you the amount of your total taxable income. Filling in the table below will help you.

If your total taxable income is less than the amount shown in the table on page 6 you should not be paying any tax.

However, if your total taxable income is slightly more than the amount shown in the table on page 6, see the question 'What do I do if my taxable income is slightly more than my personal allowance?' on page 23.

How do I get my interest in future without tax taken off?

If you have worked out that your taxable income is less than the amount you can have before you start to pay tax, you should arrange for your bank, building society or local authority to pay your interest without tax taken off. However, you cannot arrange for your interest from a unit trust or open-ended investment company to be paid without tax taken off.

Ask them for a Registration form R85 or use the green form R85 opposite. Once you have filled the form in, hand it in at your bank, building society or local authority. This is known as 'registering'. You will then start to get your interest 'gross' - that is, without tax taken off. It is important that you complete the form in full. Until you do this, interest cannot be paid gross.

You can register more than one account with the same bank, building society or local authority, on a single Registration form, providing the account numbers are shown clearly in the box provided. If you open a new account, and you are still entitled to gross interest, you must complete a separate form R85 for the new account.

If the account is held in more than one name (including accounts in the name of husband and wife) you will be able to register only if

each person registers, or

the bank, building society or local authority will allow both net and gross account holders on the same account.

Before you can register any account you must expect the 'gross' interest from all your accounts, plus any other taxable income you get, including pensions, to be fully covered by your tax allowances.

If you are in doubt, please ask any Tax Enquiry Centre or Tax Office for help or call the special Inland Revenue Registration Helpline on 0645 800645. Your call will be charged at local rates.

What if my circumstances change after I've registered?

If for any reason your circumstances change, you may have to start paying tax. Remember that both your income and your tax allowances can change from year to year, so you may find that your taxable income is no longer fully covered by your tax allowances.

If this happens after you have registered to get your interest 'gross' (that is, without tax taken off), you must tell your bank, building society or local authority, in writing, to cancel your registration. They will then take tax off your interest before you get it. You must also tell your Tax Office if you think that you should have paid tax after all, and you have been getting interest 'gross'.

You can remain registered to get your interest 'gross', only so long as your taxable income is fully covered by your tax allowances.

If your savings increase or you start to receive income from a new source - for example, if you start getting a pension or you take up a job or start up in business - you may no longer be entitled to have your interest paid gross. it is very important to check that your taxable income is covered by your tax allowances from one year to the next. There is more information about your tax allowances in the section 'How do I know what my tax allowances are?.

The following chart will help you to up-date the figures you first worked out for your total taxable income on page 10.

If you are in doubt about what to do, please ask any Tax Enquiry Centre or Tax Office for help, or call the special Inland Revenue Registration Helpline on 0645 800645. Your call will be charged at local rates.

What if my taxable income is not fully covered by my tax allowances?

If you find that your taxable income is not fully covered by your tax allowances, you may still be able to claim back some of the tax that has been taken off your interest. This can happen if the tax taken off your interest is more than the tax you have to pay for the whole year on all your income.

The same thing could apply to dividends paid up to April 1999, so you might be able to claim some of the tax credits, even if you can't claim them all.

Tax is taken off interest at the lower rate of 20 pence in the £ and, for the first £4,300 of your income not covered by your tax allowances, you pay tax only at the lower rate (20 pence in the £). (These are the rates for 1998-99. They may be different in other years).

We give some examples later on of people who can claim tax back in these circumstances.

How do I claim tax back?

If you know which Tax Office deals with your affairs, and you haven't received a Repayment Claim form, complete a form R40(SP)(M) which you can get from any Tax Enquiry Centre or Tax Office, together with guidance notes on how to complete it, and send it to your Tax Office. If you already receive a Repayment Claim form each year, your Tax Office will continue to send you a form automatically. All you have to do when you receive the form is fill it in and send it back.

If you don't know where your Tax Office is, look at the lists at the end of this guide. It shows which areas are dealt with by the Inland Revenue Offices that specialise in repayment claims. Complete the form R40(SP)(M) and send it to the Office that handles claims for your area. For example, if you live in Norfolk send the form to Leicester 7.

You will need the certificates or bank statements showing the amount of tax taken off your interest to help you complete the Repayment Claim form.

Some banks and building societies automatically issue certificates showing the amount of tax taken off your interest. If yours does not automatically issue certificates, you can get them by writing to the branch where your account is held. You should keep all these certificates in a safe place as you will need them to make a claim. Companies which pay you dividends automatically send you a certificate (sometimes called a tax credit voucher) showing the dividend and any tax credit. Again, you should keep all these certificates.

Another reason why you should keep your certificates (or other records) in a safe place is that we may ask to see them to check the accuracy and completeness of your claim. All claims are checked, but we will only ask to see certificates (or other records) in a certain proportion of claims. If this is the case, please send us the original certificates, not photocopies. Typically, you should keep the certificates (or other records) for about two years from the end of the tax year for which your claim is made, as you may be liable to a penalty if you do not do so. If you have lost your certificates or statements, ask your bank or building society for duplicates (though they might charge for these).

Even if we carry out a more detailed check, there is no presumption that anything is wrong with your claim.  Indeed, we will normally repay the amount claimed before writing to you to check the information on which the claim is based.

We will do all we can to send repayments out as quickly as possible, but we may not be able to avoid some delay, especially during April to September when most people send us their claims.

Children's savings

Children, like adults, are allowed to have a certain amount of income before they need to start paying tax. They are entitled to the same basic allowance as other single people. This means that they can get back the tax on their savings income if their total taxable income is less than £4,195.

Children under 16 in Scotland or under 18 in England, Wales and Northern Ireland cannot apply personally to get their tax back. It's up to a parent, guardian or trustee to do it for them.

When it comes to registering with a bank or building society to have the interest on a child's account paid without tax taken off, children under 16 cannot register themselves. A parent or guardian must complete the form R85 with the child's details and sign it on his or her behalf. If the child's account is in the name of someone else (for example, a grandparent) the form must still be signed by the child's parent or guardian.

If the child's total income, including interest, is expected to be less than the personal allowance, interest can be paid gross (that is, without tax taken off) until 5 April following the child's 16th birthday.

Be careful. There are special rules if the savings or shares have been given by a parent. If gifts from a parent produce more than £100 gross income a year, the whole of the income from the gifts is taxed as that parent's income. A child cannot get back any of the tax on that income. Nor can the account(s) be registered to have interest paid without tax taken off.

The £100 rule applies separately to the gifts each parent makes to each child.

Example

Mary Banks, aged 14, has £7,200 in her building society account. Her father had given her £2,400, her mother £1,200 and her uncle £3,600. The interest on the gift from her father comes to more than £100, so Mary's parents cannot register her account to get interest without tax taken off.

The interest Mary gets and the amount of tax that can be claimed back are as follows.

Father's gift
Her father's gift of £2,400 produced net interest (that is, after tax was taken off) of	£88
The amount the building society took of for tax was	£22
The gross interest is	£110
As the gross interest is over £100, none of the £18 can be claimed back. The interest is treated as income of Mary's father

Mother's gift
Her mother's gift of £1,200 produced net interest (that is, after tax was taken off) of	£44
The amount the building society took of for tax was	£11
The gross interest is	£55
As the gross interest is under £100, Mary's parents can claim back for her the £9 that was taken off.

Uncle's gift
Mary's uncle's gift of £3,600 produced net interest (that is, after tax was taken off) of	£132
The amount the building society took of for tax was	£33
The gross interest is	£165
As people other than parents are not affected by the £100 gift rule, Mary's parents can claim back for her the £26 tax that was taken off the interest from her uncle's gift.

The total Mary's parents can claim back for her is therefore £44 (£11 + £33).

If a child under 16 has other savings income, the £100 limit on gifts from the same parent applies to the total gross savings income on gifts from that parent. This applies even if the money is spread across more than one bank or building society account or other savings.

Unit trust savings

Many unit trusts allow children to hold units in a designated account.  This simply means that the units are held in the name of the parent or other guardian but designated with the child's initials.  The units and any income still belong to the child.  The £100 rule for savings income applies.

What happens when a child becomes 16?

A registration made for a child's account will allow interest to be paid without tax taken off only until 5 April following the child's 16th birthday.

If a child does not expect to have to pay income tax after that date - because his or her income will still be less than the personal allowance - he or she can register personally for interest to continue to be paid without tax taken off. This is known as 're-registering' and it can be done at any time in the tax year in which the child will reach 16. (A tax year runs from 6 April in one year to 5 April in the next.)

If the account is not held in the child's name (for example, if it is in the name of a parent or grandparent), it must be transferred into the child's own name in time for the first interest payment in the tax year following the child's 16th birthday.

The £100 rule continues to apply to young people until they reach 18 or marry. They cannot register an account to get interest without tax taken off if it includes gifts from a parent which, alone or when added to other gifts from the same parent, will produce more than £100 income a year.

How do I know what my tax allowances are?

The table on page 6 gives you a guide to the amount of income you can have before you start to pay tax. If you need to know more about tax allowances, the main allowances are described below. You can get a full list in our leaflet IR90 'Tax allowances and reliefs'.

The figures shown are for the tax year 1998-99, that is, from 6 April 1998 to 5 April 1999. If you would like to know the figures for any other tax year, please ask any Tax Enquiry Centre or Tax Office.

There are two types of allowance. Your personal allowance is the amount of income you can receive without having to pay any tax.

Personal allowance 1998-99
Under 65	£4,195 (about £81 a week)
65-74	£5,410 (about £104 a week)
75 and over	£5,600 (about £107 a week)
If your taxable income us less than your personal allowance you should not be paying any tax.

The married couple's allowance and certain other allowances (the additional personal allowance, the widow's bereavement allowance, tax relief for maintenance payments) work differently. They reduce your tax bill by a certain amount.

married couple's allowance 1998-99
Under 65	£1,900
65-74	£3,305
75 and over	£3,345

The allowance reduces the amount of tax you have to pay if you are a taxpayer. In 1998-99 it reduces the tax bill by 15% of the allowance, so the allowance is worth £285 (£1,900 x 15%) for someone under 65. Any unused part of the married couple's allowance can be transferred between partners. See our leaflet IR80 'Income tax and married couples' for details.

For people aged 65 or over, the married couple's allowance works in the same way.

The higher age related allowances are reduced gradually to the level of the standard allowances if the husband's income is above a certain limit.

In 1998-99 this limit is £16,200.

Your questions answered

Here are the questions we are most often asked (some of the answers have already been partly covered). If you want to talk to someone about them, or you have any other queries, please contact any Tax Enquiry Centre or Tax Office. The address and telephone number of your nearest one is in your local phone book under 'Inland Revenue'.

For which years can I claim back tax on my bank or building society interest?

From 6 April 1996 Self Assessment was introduced.

For tax years before Self Assessment was introduced, you have up to six years to claim tax back. For example, if you have paid more tax than you need to for the tax year 1992-93, you have until 5 April 1999 to claim tax back.

Under Self Assessment you have only 5 years and 10 months to claim tax back. For example, if you have paid more tax than you need to for the tax year 1996/97, you have until 31 January 2003 to claim tax back.

What about dividends?

On dividends paid up to 5 April 1999, you can claim some or all of the tax credit you receive with your dividends from shares if the amount of the tax credit is more than the tax you have to pay for the year.

You can claim for the same years as bank and building society interest (see answer to previous question).

Who can claim tax back for someone else?

You can claim tax back on behalf of someone else if

you are the parent, guardian, or trustee of an account holder who is a minor (that is, under 18 in England, Wales and Northern Ireland, and under 16 in Scotland)

you have power of attorney for the account holder

you are a receiver or person appointed by any court in the United Kingdom to handle the affairs of an account holder who is incapable of managing  his or her own affairs

you are the next of kin of an account holder who is incapable of managing his or her own affairs*

you have been appointed by the Department of Social Security to claim or receive benefits on behalf of an account holder who is incapable of managing his or her own affairs*.

In some circumstances you can claim tax back if

you are the relative of an account holder who would have difficulty making a claim, for example, an elderly person in poor health.

In any of these cases, do not complete the Repayment Claim form R40(SP)(M) but contact one of the Inland Revenue Offices that specialise in repayment claims, or your nearest Tax Enquiry Centre or Tax Office. If you don't know which Inland Revenue Office (IRO) to contact, look at the list at the end of this guide to see which IRO deals with your area to get its address or telephone number. If you know which IRO or Tax Office deals with the account holder's affairs, then contact that one. Whichever office you contact, they will need to know

the name, address and date of birth of the person on whose behalf you are claiming

the reason why he or she cannot claim personally

your name and address.

* There is a limit to how much tax you can claim back if you are the account holder's next of kin or a DSS appointee. The Tax Office you contact will let you know what the limit is.

What do I do if my taxable income is slightly more than my personal allowance?

If your total taxable income is just above the tax threshold/personal allowance you will not be able to register your account(s) to receive interest without tax being taken off. In these circumstances your bank or building society will deduct tax from any interest payments it makes. As a result, if you have paid more tax than you are due to pay you can claim back some of it by completing the Repayment Claim form R40(SP)(M).

When can I make a claim to get tax back?

That depends on the amount you are claiming, and whether you also register for gross interest - see the question 'When I register '.

If you are claiming back £50 or less, you should apply at the end of the tax year. If the amount is more than £50, you can claim it back during the tax year. Either way, you'll receive your money by cheque once we have received your completed Repayment Claim form R40 (SP)(M).

Can I claim tax back on savings held jointly?

Yes. You can claim for tax to be repaid to you on your share of income from savings held jointly with someone else.

If you are both entitled to a repayment you must make separate claims.

Who can register for 'gross' interest?

You can register for interest without tax taken off if

you are the account holder, you are 16 or over, and the money belongs to you

you are the parent or guardian of an account holder under 16 years of age

you have power of attorney for the account holder

you are the parent, guardian, spouse, or child aged 16 or over, of a person who is incapable of managing his or her own affairs

you are a receiver or person appointed by any court in the United Kingdom to handle the affairs of a person who is incapable of managing his or her own affairs

you have been appointed by the Department of Social Security to claim or receive benefits on behalf of a person who is incapable of managing his or her own affairs.

Remember, you can register only if the total taxable income of the person entitled to the interest - you, or, if you are doing it for someone else, the person on whose behalf you are acting - is covered by his or her tax allowances. You cannot register accounts which include gifts from a parent which, either alone or when added to other gifts from the same parent, produce more than £100 income a year. If you are in any doubt, don't register. Ask any Tax Enquiry Centre or Tax Office for help first, or call the Inland Revenue Registration Helpline on 0645 800645. Your call will be charged at local rates.

The Registration form asks for my National Insurance number. Where can I find it?

You need your National Insurance (NI) number only if you have been employed or self-employed in the UK in the last three years.

Your NI number looks similar to this - AB 12 34 56 C.

Some of the places you will find it are

your pension book

form P45 or P60, or a letter from the Tax Office

a payslip

a letter from the Department of Social Security

a letter awarding unemployment benefit.

If you have worked in the UK in the last three years but you cannot find your NI number, leave the box on the Registration form blank. Complete the rest of the form and send it to

Inland Revenue,

NINO Tracing,

FREEPOST,

Bootle,

L69 9HA

(You won't need a stamp)

The NI number (or official stamp) will be entered on the form which we will return to you to give to your bank or building society. This service is available only for Registration form R85.

If I have several accounts, can I register just one account for gross interest?

If your taxable income, including any pension and income from all your savings, is fully covered by your tax allowances, you can register all your accounts. If your taxable income is not fully covered by your tax allowances, you cannot register any account to receive gross interest.

You can claim back some of the tax taken off your interest if it is more than the amount you should have to pay for the year.

If I have a joint account, say with my husband or wife, can I register for gross interest?

Yes. If neither of you has to pay tax, you should each complete a Registration form. It will help your bank, building society or local authority if the forms are sent together.

If one of you doesn't have to pay tax but the other does, then it depends on whether your bank, building society or local authority will accept 'split' registrations. If they can't arrange this, you can still claim tax back from us by completing Repayment Claim form R40 (SP)(M).

When I register, should I also claim back tax already paid that year?

When you complete a Registration form (R85), some banks, building societies and local authorities may pay back tax already taken off your interest during that tax year. For example, your building society interest might be credited to you on 31 December 1998 with tax already taken off. If you hand in the Registration form to the building society before 5 April 1999 you might be able to get the tax back from them. You would not then need to apply to us to get the tax back.

If your bank, building society or local authority doesn't give you this tax back, you can claim it back from us by completing Repayment Claim form R40 (SP)(M).

How often do I need to complete a Registration form R85?

You normally have to complete only one form for accounts held with the same bank, building society or local authority or when a new account is opened (though children have to register in their own right to continue getting gross interest after their 16th birthday). Registration then continues indefinitely unless you or we cancel it.

You can get more Registration forms from your bank, building society or local authority or from any Tax Enquiry Centre or Tax Office.

Can I register to have dividends paid 'gross'?

No. Unlike bank and building society interest and local authority bonds, you cannot register to have dividends paid 'gross'.

I have an account earning interest, but the interest won't be paid until the next tax year. Do I include the gross interest earned this year when working out my taxable income?

No. Your interest is taxable in the tax year that it is paid to you, or credited to your account, even if part of it has been earned in the previous tax year.

How is interest taxed if a person with a bank or building society account dies?

Interest is taxable when it is paid or credited to an account.

When people die, interest credited to their account before the date of death is treated as their income. The personal representatives (executors) can claim tax back if the tax taken off that interest was more than the person who has died was due to pay.

Interest credited to someone's account after the date of death is treated as the income of the deceased person's estate. The personal representatives, who administer the estate, cannot normally claim tax back on this interest. However, they may make payments to beneficiaries who are entitled to the income of the residue of the estate. These payments are treated as made after deduction of tax at the basic or lower rate as appropriate. The personal representatives can provide a certificate showing how much tax is involved.

A beneficiary who is a non-taxpayer may be able to claim back the tax. The amount of tax that can be claimed will depend on the total taxable income of the beneficiary and the amount of his or her allowances. Where there is more than one beneficiary entitled to the income of the residue of the estate, each one is treated as receiving his or her share of the income and may be able to claim tax back on the share, depending on the particular circumstances.

What can I do if I am not happy with the way my tax affairs have been handled?

Naturally, we hope this will not arise, on repayment or any other tax matters. However, if you have a complaint which the Officer in Charge of your own Tax Office or Inland Revenue Office cannot settle, you should contact the Inland Revenue Director responsible for the area dealing with your tax affairs. Our leaflet IR120 'You and the Inland Revenue' tells you how to do that. It is available from any Tax Enquiry Centre or Tax Office.

If the Director does not settle your complaint to your satisfaction, you can ask the Adjudicator to look into it and recommend appropriate action. The Adjudicator, whose services are free, is an impartial referee whose recommendations are independent. The address is

The Adjudicator's Office

Haymarket House

28 Haymarket

London, SW1Y 4SP

Telephone: 0171 930 2292

Fax: 0171 930 2298

Finally, you can ask a Member of Parliament to refer a complaint to the independent Parliamentary Commissioner for Administration, commonly known as the 'Ombudsman', whose address is

The Parliamentary Commissioner for Administration

Millbank Tower

Millbank

London, SW1P 4QP

Telephone: 0171 217 4163

The Ombudsman for Northern Ireland is

The Parliamentary Ombudsman and Commissioner for Complaints

Progressive House

33 Wellington Place

Belfast, BT1 6GD

Telephone: 01232 233821

Examples

In these examples the figures are for the tax year 1998-99 unless otherwise stated.

Example 1

Paul King is a single person aged 76 who has a State pension and a small pension from his former employer. Added together, his pensions come to £4,900. He also has £1,000 bank interest from which the bank has taken off lower rate tax at 20%. Paul's total taxable income comes to slightly more than his personal allowances. He is liable to pay only at the lower tax rate of 20% on the first £4,300 of income above his allowances. As more tax has been taken off his bank interest than he is due to pay, he can claim back some of the tax.

Pensions	£4,900
Gross bank interest (that is before tax is taken off)	£1000	Tax taken off at 20%	£200
Total income	£5,900
Less Paul's personal allowance	£5,600
	£300	Tax due at 20%	£60
		Tax overpaid	£140
Paul can claim back £140 by completing a form R40(SP)(M), which (with guidance notes on how to complete it) he can get from any Tax Enquiry Centre or Tax Office, and sending it to us.

Example 2

Anne Smith is a widow aged 66. She has £10,000 in a building society account which she has not registered to get her interest paid gross (with no tax taken off) because she didn't know she could do that.

Someone has told Anne that because her income is small she can probably claim back the amount of tax that has been taken off her interest. First, Anne needs to work out what her total taxable income is likely to be. To do this she needs to add in the amount that was taken off her interest for tax.

Gross building society interest (that is, before tax is taken off)	£500	Tax taken off at 20%  £100
Plus other annual income including her pension money	£3,120
Total income	£3,620
As a widow of 66, Anne's personal allowance is £5,410, so she can have income up to that amount without paying tax. As her income is less than her personal allowance, she can fill in the green Registration form R85 in this guide, hand it in at her building society, and they will stop taking tax off her interest. They may also be able to repay any tax already taken off in that year.

If the building society can't repay the tax taken off, Anne should also fill in a Repayment Claim form R40 (SP)(M), which (with guidance notes on how to complete it) she can get from any Tax Enquiry Centre or Tax Office, and send it to us. She will get back all the £100.

She can also claim tax back for the last five years (1993-94 to 1997-98) if her circumstances were more or less the same.

Example 3

Peter and Susan Brown are a married couple. Peter is 61 and works part-time. Susan is 57 and also works. They have a joint bank account. They have decided that the whole of the married couple's allowance should be set against Peter's income.

In 1998-99, Peter's income and allowances are as follows.

Wages	£4,000
Peter's half of the £800 gross bank interest (that is before tax is taken off)	£400	tax taken off (at 20%)	£80
Peter's total income is	£4,400
Less his personal allowance	£4,195
Amount taxable	£205
Tax due on £205 at 20%	£41
Less married couple's allowance £1,900 at 15%	£285
Amount of married couple's allowance unused (£285 - £41.00)	£244
Provided the bank will accept a split registration, Peter can register, on the form R85, to have half the interest on the joint bank account paid with no tax taken off. He can reclaim the £80 tax already taken off his interest if the bank cannot re-credit it to the account or does not accept split registrations. He should use a Repayment Claim form R40(SP)(M), which (with guidance notes on how to complete it) he can get from any Tax Enquiry Centre or Tax Office, and send it to us. He can also transfer the unused part of the married couple's allowance to Susan to set against her tax bill. Peter should contact his Tax Office to arrange this.

Susan's income and allowances are as follows.

Wages	£5,700
Susan's half of the £800 gross bank interest (that is before tax is taken off)	£400	tax taken off (at 20%)	£80
Susan's total income is	£6,100
Less her personal allowance	£4,195
Amount taxable	£1,905
Tax due on £1,905 at 20%	£381
Less unused married couple's allowance transferred from Peter	£244
Susan's final tax bill	£137
Less tax taken off bank interest	£80
Tax to pay	£57
Example 4

Henry Green is a married man aged 58. He has part-time earnings and some savings in a building society. Henry and his wife have decided that the whole of the married couple's allowance should be set against Henry's income.

In 1997-98 he registered to get his interest paid gross (that is, with no tax taken off) because his taxable income was fully covered by his tax allowances.

1997-98
Earnings	£4,180.00
Gross building society interest (with no tax taken off)	£400.00
Henry's total income was	£4,580.00
Less Henry's personal allowance	£4,045.00
Amount taxable	£535.00
Tax due on £535 at 20%	£107.00
Less married couple's allowance £1,830 at 15%	£274.50
Amount unused	£167.50
As the tax due on £535 was fully covered by the married couple's allowance, Henry had no liability to tax in 1997-98. The £167.50 unused balance of the married couple's allowance was passed to Henry's wife to set against her tax bill.

For 1998-99 the married couple's allowance is £1,900. In Henry's case the value of the allowance goes from £274.50 (£1,830 x 15%) in 1997-98 to £285 (£1,900 x 15%) in 1998-99. If Henry's income goes up he might become liable to tax as in the following.

1998-99
Earnings	£5,500.00
Gross building society interest (with no tax taken off)	£400.00
Henry's total income is	£5,900.00
Less Henry's personal allowance	£4,195.00
Amount taxable	£1,705.00
Tax due on £1,705 at 20%	£341.00
Less married couple's allowance £1,900 at 15%	£285.00
Tax to pay	£56.00
He should therefore tell his building society to start deducting tax from his interest from 6 April 1998 onwards. The building society will deduct £80 tax from his interest (£400 at 20%). Henry will be able to claim back the tax deducted which exceeds his tax bill of £56, that is £24 (£80 - £56).

He should use a Repayment Claim form R40(SP)(M) which (with guidance notes on how to complete it) he can get from any Tax Enquiry Centre or Tax Office, and send it to us.

Example 5

Hazra Patel has income from her part-time job, dividends on some shares, and building society interest from an account held jointly with her husband.

Hazra is 37 and entitled to a Personal Allowance of £4,195. She and her husband have decided that the whole of the married couple's allowance should be set against her husband's income.

When Hazra works out what her total taxable income is, she must add in what has been taken off for tax already.

Earnings	£2,875
Dividends and tax credit	£750	tax credit	£150
Her half of the £1,200 gross building society interest (that is before tax is taken off)	£600	tax taken off	£120
Total income	£4,225	total tax paid	£270
Less her personal allowance	£4,195
Amount taxable	£30	tax due at 20%	£6
Excess of tax credit and tax taken off over tax due			£264
Hazra should claim the £264. If her circumstances in the years 1993-94 to 1997-98 were similar, she will also be able to make claims for those years.

Hazra cannot ask for her building society interest to be paid gross as her taxable income is not covered by her tax allowances. She will have to go on making claims but we will send her claim forms for future years. She can make an initial claim by using a Repayment Claim form R40(SP)(M) which (with guidance notes on how to complete it) she can get from any Tax Enquiry Centre or Tax Office, and sending it to us .

List of Inland Revenue Offices dealing with Repayment Claim forms

Area	Inland Revenue Office
Former Avon	St Austell 2
Bedfordshire	Bootle 1
Berkshire	St Austell 2
Buckinghamshire	Bootle 1
Cambridgeshire	Bootle 1
Cheshire	Glenrothes
Former Cleveland	Bootle 1
Cornwall/Isles of Scilly	St Austell 2
Cumbria	Bootle 1
Derbyshire	Leicester 7
Devon	St Austell 2
Dorset	St Austell 2
Durham	Bootle 1
East Sussex	Belfast 7
Essex	Leicester 7
Gloucestershire	Belfast 7
Greater Manchester	Glenrothes
Hampshire	St Austell 2
Hereford/Worcester	Belfast 7
Hertfordshire	Leicester 7
Former Humberside	Bootle 1
Isle of Wight	St Austell 2
Kent	Belfast 7
Lancashire	Bootle 1
Leicestershire	Leicester 7
Lincolnshire	Leicester 7
Merseyside	Bootle 1
Middlesex	Bootle 1
Norfolk	Leicester 7
Northamptonshire	Bootle 1
Northumberland	Bootle 1
North Yorkshire/York	Bootle 1
Nottinghamshire	Leicester 7
Oxfordshire	Belfast 7
Shropshire	Belfast 7
Somerset	St Austell 2
South Yorkshire	Leicester 7
Staffordshire	Belfast 7
Suffolk	Leicester 7
Surrey	Glenrothes
Tyne and Wear	Bootle 1
Warwickshire	Belfast 7
West Midlands	Belfast 7
West Sussex	St Austell 2
West Yorkshire	Leicester 7
Wiltshire	St Austell 2
Wales	Belfast 7
Northern Ireland	Belfast 7
Scotland	Glenrothes
London E1-18, EC1-4, N1-22	Leicester 7
SW1, 3, 5-7, 10, 13-14, 19-20, W1-14	Bootle 1
SE1-29, SW2, 4, 8-9, 11-12, 15-18	Glenrothes
WC1 & 2, NW1-11	Bootle 1
Inland Revenue Office Addresses

St Austell 2	Penhaligon House, Trinity Street,  St Austell, Cornwall PL25 5BA 01726 624200
Bootle 1	1st Floor, The Triad, Stanley Road, Bootle, Merseyside L69 9HB 0151 300 5000
Glenrothes	Saltire House, Pentland Park,  Glenrothes, Fife KY6 2AL 01592 222500
Leicester 7	Attenborough House, 109-119 Charles Street,  Leicester LE1 1FY 0116 262 4445
Belfast 7	Dorchester House, 52-58 Great Victoria Street,  Belfast BT2 7BB 01232 236633
These notes are for guidance only and reflect the tax position at the time of writing. They do not affect any right of appeal.

Issued by the External Communications Unit of the Inland Revenue

April 1999

©Crown Copyright 1999


AO1
AO1 - How to complain about the Inland Revenue and the Valuation Office Agency

This leaflet explains how you can complain to the Adjudicator if you are unhappy about the way the Inland Revenue or the Valuation Office Agency have handled your affairs or treated you. It is available only from The Adjudicator's Office, Haymarket House, Haymarket, London, SW1Y 4SP.

This leaflet is also available in the following languages: Bengali, Chinese, Greek, Gujarati, Hindi, Punjabi, Turkish, Urdu, Vietnamese and Welsh.


At home with tax

Title	Number	Year
Letting and your home. Including the 'Rent a Room' scheme and letting your previous home when you live elsewhere	IR87	1999
Mortgage interest relief. Buying your home	IR123	1996
Taxation of rents. A guide to property income	IR150	1996


Basic tax information

Title	Number	Year
17th March 1998 Budget Proposals	IR (Insert)  1998-99	1998
Extra-statutory concessions	IR1	1996
Residents and non-residents. Liability to tax in the UK	IR20	1996
Tax allowances and reliefs	IR90	1998
Tax relief for vocational training	IR119	1997
Volunteer drivers	IR122	1997
Our heritage. Your right to see tax exempt works of art	IR156	1996


Benefits and tax

Title	Number	Year
Income tax and job seekers	IR41	1996
Lay-offs and short-time work	IR42	1992
Income tax and students	IR60	1997
Income tax and Incapacity Benefit	IR144	1995


CGT1 short
CGT1 - Capital gains tax. An introduction

This booklet is a general guide for people who need information about capital gains tax (CGT). It will also be useful if you have disposed of any assets and need to know whether to report any gains or losses to your Tax Office.


COP1
COP1 - Code of Practice 1. Mistakes by the Inland Revenue

There are occasions when the Revenue makes mistakes. This booklet sets out how a taxpayer may claim any additional costs when, for instance there is a delay, or the Revenue persists in getting something wrong.


COP10
Code of Practice 10 - Information and advice

It is the Revenue's policy to help taxpayers, including businesses, to understand their rights and obligations, to get their tax affairs right and to pay their tax on time. This Code of Practice sets out the various ways in which the Revenue aims to achieve this. This edition includes a new section on 'post-transaction rulings'.


COP11
Code of Practice 11 - Enquiries into tax returns by local Tax Offices

This Code of Practice tells you how local Tax Offices will carry out enquiries into Self Assessment tax returns issued from April 1997. It promises you fair treatment under the law and in accordance with the Taxpayer's Charter, which is reproduced at the back of the booklet.


COP2
Code of Practice 2 - Investigations

If your affairs are being investigated, you still have the same rights as any other taxpayer. This booklet tells your how local Tax Offices carry out an investigation. It promises that you will be treated fairly and courteously, in accordance with the law and Taxpayer's Charter.


COP3
Code of Practice 3 - Inspections of employers' and contractors' records

The Revenue inspects a sample of employers' and contractors' records to make sure they are correct and complete. This booklet tells you how the inspections are carried out. It also explains the rules that are worked to and your rights and responsibilities in particular situations.


CTO - Eng & Wales
England & Wales

Capital Taxes Office

Inland Revenue

Ferrers House

PO Box 38

Castle Meadow Road

NOTTINGHAM

NG2 1BB

Tel: 0115 974 2400


CTO - Northern Ireland
Northern Ireland

Capital Taxes Office

Inland Revenue

Level 3

Dorchester House

52-58 Great Victoria Street

BELFAST

BT2 7QL

Tel: 01232 315556


CTO - Scotland
Scotland

Capital Taxes Office

Inland Revenue

Mulberry House

16 Picardy Place

EDINBURGH

EH1 3NB

Tel: 0131 556 8511


CWG1
CWG1 - Employer's quick guide to Pay As You Earn and National Insurance contributions

This is a series of cards for use by employers. They tell you what you need to know about working out, recording and paying income tax, Class 1 and Class 1A NICs, Statutory Sick Pay and Statutory Maternity Pay. These cards replace CA27 'National Insurance quick guide for employers' and P8 'Employer's basic guide to PAYE'.


CWL1 short
CWL1 - Starting your own business?

Part of the Closer Working series produced jointly by the Inland Revenue, HM Customs and Excise and the Contributions Agency.

This booklet is for anyone setting up in business and deals with income tax, VAT and National Insurance contributions. It tells you what you need to tell the Revenue and how to get things right from the start. It contains a form that you can use to notify all three departments when you start your business.

FULL TEXT


CWL1 - Starting a business
Starting a business (CWL1)

CWL1

Starting your own business?

Here's three lots of help in one!

This leaflet is for anyone setting up in business in a self-employed capacity.

It deals with

income tax

National Insurance contributions (NICs)

Value Added Tax (VAT), Excise and Inland Customs.

It is issued by the Inland Revenue, and HM Customs and Excise who are working together to provide a better service to businesses.

It tells you

what you need to tell us

what you need to do to get things right from the start

how you can get more free help and information.

Quick Guide

Basics

How do I know whether I am self-employed?

Who do I need to tell I've started a business?

How do I let you know I am now self-employed?

Income Tax

What is income tax?

What accounting date should I use?

How are my profits taxed?

When do I have to pay?

How do I prepare my accounts?

Simple tax accounts

Partnerships

Construction Industry Scheme

What does 'Self Assessment' mean?

National Insurance

What are National Insurance contributions?

Class 2 National Insurance contributions

Paying your Class 2 NICs by direct debit

How do I pay by Direct Debit?

How will payments be made?

What happens if I am ill?

What do I do if I change my Bank or Building Society?

The Direct Debit Guarantee

What if I am unable to pay my Class 2 contributions by Direct Debit?

Small earnings exception

Working abroad

Class 4 National Insurance contributions

Deferring payments

Share fishermen

Change of circumstances

VAT

What is VAT?

How does VAT work?

Who collects VAT?

Do I have to register with Customs and Excise?

What happens if I have taken over a business from someone else?

Can I be registered if my turnover is below the limits?

Can I be registered before I make taxable supplies?

How do I account for VAT?

Special schemes

Can I claim VAT back?

Excise and Inland Customs

What is Excise?

What is Inland Customs?

Do I have to register with Customs and Excise?

Keeping Records

What do I need to do about keeping records?

How long should I keep my records for income tax purposes?

What if I decide to register for VAT?

Other Help

What if I decide to employ someone?

Where can I get your leaflets and forms?

Can I phone for the information I want?

Employer's Helpline

New Employer's Helpline

What other help is there?

Business Link

Useful publications from the DTI

What can I do if I am not happy with the service I receive?

Data Protection

Help us to help you

Form CWF1 - Joint Notification of self-employment

Form CA5601 - Application to pay Class 2 National Insurance contributions by Direct Debit

Basics

How do I know whether I am self-employed?

By 'self-employed' we mean people who work for themselves on their own, or in partnership with one or more people.

For example, an individual running his or her own shop is likely to be self-employed, but a worker engaged to assist in the shop is likely to be an employee.

If you are unsure about whether you are self-employed or not, leaflet IR56/NI39 'Employed or self-employed? A guide for tax and National Insurance' will help.

Who do I need to tell I've started a business?

As soon as you start a business in a self-employed capacity you must tell

the Inland Revenue (NI Contributions) Office

your local Tax Office

Customs and Excise: if your taxable turnover (total sales) is more than £50,000 in a 12 month period, you must register for VAT

your Job Centre if you are registered with one. (In Northern Ireland it would be the Training and Employment Agency.)

How do I let you know I am now self-employed?

We have designed a special form to enable you to tell the Inland Revenue (NI Contributions) Office, your Tax Office, and Customs and Excise that you have started in business. The form, CWF1 'Notification of self-employment', can be found at the back of this leaflet. It tells all three of us in one go, and registers you for Class 2 (self-employed) National Insurance contributions and tax. Just fill it in and send it to the Inland Revenue (NI Contributions) Office.

Make sure that you know your National Insurance (NI) number as you will need it to complete the form. Your National Insurance number is personal to you. It is your account number for all dealings with the Department of Social Security and the Inland Revenue on National Insurance issues. It is not proof of identity. It looks something like this: AB 12 34 56 C.

If you do not know, or have lost, your National Insurance number, there are several ways to find it. For example: P60 - end of year statement of tax and National Insurance, wages slips and official correspondence. If you are still unable to locate your number you should contact your nearest Social Security office.

If you change your forename(s), surname or title, let your nearest Social Security office or Inland Revenue (NI Contributions) Office know as soon as possible.

Send the completed form CWF1 to the Inland Revenue (NI Contributions) Office. If you have left a previous job or have signed off from your local Job Centre, you should enclose parts 2 and 3 of the form P45 given to you by your last employer or the Job Centre. (In Northern Ireland it will be given to you by your Social Security office.) There is no need to send in form CWF1 until you are about to start self-employment. However, if you do not intend to start straight away, you should send parts 2 and 3 of your P45, in advance, to your local Tax Office. In all cases, keep part 1A of your P45 for your own records.

Your local VAT Business Advice Centre, VAT Registration Unit or Enquiry Unit will advise you whether you need to register for VAT. They are listed under 'Customs and Excise' in the phone book.

The Inland Revenue (NI Contributions) Office will automatically pass the information about your self-employment to your local Tax Office and Customs and Excise.

Income Tax

What is income tax?

The main tax most people have to pay is income tax, which is charged on earnings of all kinds as well as on investment income like bank interest.  If you are an employee, your employer deducts your tax weekly or monthly from your pay, but when you are self-employed with a trade or profession you are responsible for paying your own tax.  That's why you need to keep full and accurate records of all your trading or professional transactions.

If you are thinking of employing someone for the first time there is further information below.

What accounting date should I use?

You may not wish to draw up formal accounts.  The Tax Office will require a return of your business income and expenses in standard format, and you may decide that you will not need formal accounts as well. If you do decide to make up accounts, the date to which you make them up is for you to decide, but if you have an accountant, ask for advice. For example, you can make up your accounts from the date your business started

to the end of your first year's trading

to the end of a particular month

for the calendar year ending on 31 December, or

to the end of the tax year on 5 April.

You should bear in mind that formal accounts may be required for reasons unconnected with tax. For example, your bank may want to see formal accounts when considering an application for a business loan.

If your business is a seasonal one, it may suit you to choose a date when trade is slack and stocks are low.  Whatever date you choose, it is best to stick to it and to make up accounts every twelve months.

How are my profits taxed?

Tax calculations are made for tax years which run from 6 April. For example, the tax year 1999/2000 runs from 6 April 1999 to 5 April 2000.

Broadly speaking, your tax calculation for any year will be based on your trading or professional profits for the accounting year which ends in that same tax year.

This means that if you work out your profits to, say, 30 September each year, your 2000/2001 calculation will be based on your profits for the accounting year which ends on 30 September 2000.

Special rules apply when you start in business and when your business ends.

For your first year, you are taxed on the profits for the period from the date you started to the following 5 April.

For the second year, you are taxed on the profits of the twelve months to your accounting date in that year, providing that date falls twelve months or more after the date on which you started in business.  If your accounting date in the second year falls less than twelve months after the date on which you started in business, you will be taxed instead on the profits of the first twelve months of your business.

For the third year, you are taxed on the profits for your accounting year ending in that year.

If these rules result in some of your profit being used more than once, you are entitled to an adjustment known as 'overlap relief' usually when your business ends.  This adjustment ensures that over the lifetime of your business you are taxed on the profits made by the business, no more and no less.

When do I have to pay?

Each year, in April, you will receive a tax return.  This will ask you for all the information required to calculate your income tax and capital gains tax bill for the year.  If you want you can calculate this bill yourself - there will be notes explaining how to do this with the return - or you can ask us to calculate it for you.  It is entirely up to you. If you want us to calculate your bill for you, you must send back your completed tax return by 30 September. If you want to calculate the bill yourself you have four months longer, until 31 January, to send back your return.

The tax return will also explain how you calculate any Class 4 National Insurance contributions that are due. These contributions should be paid at the same time as your tax.

You should set aside money regularly, so that you will be able to pay your tax and Class 4 NI contributions when they become due. After your first year in self-employment you will be required to make two payments on account towards your tax bill each year, one on 31 January, one on 31 July.  A final payment of the balance of any tax due will be required on the following 31 January (together for the first payment on account for the following tax year).

If you make a loss you may be able to set it against any other taxable income you have, or the loss may be carried forward to offset your profits in later years.

How do I prepare my accounts?

Your accountant, if you have one, will draw up your trading or professional accounts. Whoever prepares them, you are still responsible for their accuracy and correctly declaring the amount of the profits.

Under Self Assessment, you do not have to send in your accounts with your tax return.  Instead you will be asked to include the accounts information in a special section in the return. Your Tax Office may ask to see your formal accounts (if you have had them prepared) with your business records, to check the figures in your return.

Accounts are usually in two parts

the trading and profit and loss account, which is a summary of the year's trading transactions

the balance sheet, which shows the assets and the liabilities of the business.

Simple tax accounts

If your business turnover (total sales or fees) before expenses is below £15,000 for a full year, you will not have to provide detailed accounts information in the return.  Instead, a simple three-line summary will do.  For example

Turnover	£13,847
Less purchases and expenses	£3,017
Net profits	£10,830
Partnerships

There are special rules that apply for income tax purposes if you are in business with a partner. Basically your tax bill is calculated as if your share of the partnership is profits that you have made in business on your own. Ask your Tax Office for more details.

Construction Industry Scheme

If your business operates within the construction industry, you will need to know about the Construction Industry Scheme. Ask your Tax Office for more details.

What does 'Self Assessment' mean?

We have made the tax system clearer for people who get tax returns.  The new system is called 'Self Assessment'. It is a more straightforward, efficient and clear way of working out tax.  It is not a new tax.

Self Assessment applied from 6 April 1996, the start of the tax year 1996/97, the first new style Self Assessment tax returns were issued in April 1997.

Our leaflet SA/BK8 'Self Assessment. Your guide' explains how things will work under Self Assessment.

National Insurance

What are National Insurance contributions?

Most people who work are liable to pay National Insurance contributions unless they come into any of the groups excepted from liability to pay.

There are six classes of contributions in all, and the class you pay depends on whether you are an employee, self-employed, non-employed or an employer. Depending on your status, you may have to pay more than one class of contribution at the same time. Some contributions count towards benefits such as Incapacity Benefit and Retirement Pension.

Self-employed people are liable to pay two classes of contributions

Class 2 National Insurance contributions, and

Class 4 National Insurance contributions, which are paid on profits and gains at, or above, a set level.

If you are thinking of employing someone for the first time there is further information below.

Class 2 National Insurance contributions

Class 2 National Insurance contributions are a flat rate payment collected by the Inland Revenue (NI Contributions) Office. The weekly Class 2 NI contribution rate for 1999/2000 is £6.55.

Class 2 NI contributions do not count for contribution-based Jobseeker's Allowance but they do count for Incapacity Benefit, Retirement Pension, Widow's Benefit and Maternity Allowance.

Unless you have applied for and been granted a small earnings exception, or are a married woman or widow with reduced liability, you must pay Class 2 NI contributions in respect of each week, including holiday periods, if you are

normally self-employed and

age 16 or over and

under pension age (60 for a woman, 65 for a man).

It is your personal responsibility to ensure that your Class 2 National Insurance contributions are up to date. Class 2 National Insurance contributions are a personal liability and not a business liability. If you do not pay them on time then you may have to pay them at a higher rate. Late payment may also affect any benefit claim that you make. The Inland Revenue (NI Contributions) Office will take whatever action it considers necessary to obtain payment.

Paying your Class 2 NICs by Direct Debit

Direct debit has many advantages.  It is easy to set up, runs automatically, and can help your budgeting.  The majority of self-employed customers (over 1.5 million) already use this method. (Payment from your personal bank account rather than a business account will not incur bank charges provided you have sufficient funds to meet the payment.) We regret that the facility to pay by Direct Debit is not available to share fishermen.

Class 2 National Insurance contributions paid by Direct Debit are collected by monthly payments in arrears. You will not be asked to pay contributions in advance, although liability for Class 2 National Insurance contributions will arise weekly.

How do I pay by Direct Debit?

If you have not previously told us of your self-employment you must fill in form CWF1 'Notification of self-employment' in addition to the Direct Debit application form CA5601.

You must return both forms to the Contributions Agency.

How will payments be made?

The application form asks you if you wish to pay by Direct Debit from the start of your self-employment. In most cases this means that all contributions due from the start of your self-employment will be collected with the first payment from your bank or building society.

If you do not wish to pay Direct Debit from the start of your self-employment or we cannot arrange this, your Direct Debit will be started from a current date. We will then send you a separate bill for any contributions due from the start of your self-employment to the date your Direct Debit begins.

We will act at once to set up your Direct Debit, it may take some weeks before the first National Insurance contributions are collected from your account. We will write to tell you when the first payment will be made. Please ensure that you have enough funds in your account to meet your first payment.

After that, payments

will be made automatically for as long as you wish, and

will normally be deducted from your account on the second Friday of each month.

These payments will cover National Insurance contributions for either four or five weeks, depending on the number of Sundays in the preceding tax month. The tax month ends on the 5th of each month.

A regular check of your Bank/Building Society statements will reassure you that payments have been made correctly.

What happens if I am ill?

You do not have to pay National Insurance contributions for any complete week (Sunday to Saturday) of illness. If you want to be credited with National Insurance contributions for these weeks you must provide evidence of your illness to your local Social Security Office. In Northern Ireland send in sick notes to Incapacity Benefits Branch, Castle Court, Royal Avenue, Belfast BT1 1SB. We will reduce your Direct Debit payments to take into account full weeks of sickness as quickly as possible. You must still pay National Insurance contributions for any part weeks of illness. If you do claim Incapacity Benefit credits your local Benefits Agency (in Northern Ireland, Incapacity Benefits Branch) will advise us when your period of incapacity ends. If your Direct Debit payments do not restart, please let us know immediately.

What do I do if I change my bank or building society

You should tell us if you change your bank or building society. You will have to fill in another Direct Debit application form as Direct Debits cannot be transferred between banks or building societies. However, this is not necessary if you are only changing branches of the same bank or building society.

The Direct Debit Guarantee

This guarantee is offered by all banks and building societies that take part in the Direct Debit Scheme. The efficiency and security of the Scheme is monitored and protected by your own bank or building society.

If the amounts to be paid or the payment dates change, the Inland Revenue (NI Contributions) Office will notify you 10 working days in advance of your account being debited or as otherwise agreed.

If an error is made by the Inland Revenue (NI Contributions) Office or your bank or building society, you are guaranteed a full immediate refund from your branch of the amount paid.

You can cancel a Direct Debit at any time by writing to your bank or building society. Please send a copy of your letter to the Inland Revenue (NI Contributions) Office.

What if I am unable to pay my Class 2 contributions by Direct Debit?

If you are unable to pay by Direct Debit you will be sent a bill every thirteen weeks (Quarterly Bill). Information about Quarterly Bills will be sent to you when we receive your completed self-employment notification form CWF1 (the green form at the back of the booklet). You can also obtain more information about Direct Debit or Quarterly Bills by ringing the Self Employment Directorate Call Centre on

06451 54655 or by writing to the Inland Revenue (NI Contributions) Office, Self Employment Directorate, Customer Accounts Section, Longbenton, Newcastle upon Tyne NE98 1ZZ.

Small Earnings Exception

You can apply for exception from paying Class 2 NI contributions if your net earnings from self-employment (that is, your profits after deducting expenses) will be less than a fixed amount. Known as the 'exception limit', it is set in advance of each tax year. For 1999/2000 it is £3,770.

Our leaflet CA02 National Insurance contributions for self-employed people with small earnings gives more information and also contains an application form CF10.

Working abroad

If you will be going abroad to work you should contact the Inland Revenue (NI Contributions) Office International Services for advice about liability to pay Class 2 NI contributions while working abroad. Their telephone number is 06451 54811.

You will need to give details about the country you will be working in, when you propose to go and for how long.

Class 4 National Insurance contributions

If your profits are over a certain amount, you may have to pay Class 4 National Insurance contributions as well as Class 2 contributions.

Class 4 NI contributions are based on a percentage of annual profits between a lower and upper profit level.  The levels are set each year by the Chancellor in the Budget. For the 1999/2000 tax year the percentage rate and profit levels are

percentage rate	6.0%

lower profit level	£7,350

upper profit level	£26,000

Class 4 NI contributions are normally self assessed in the same way as tax, and collected by the Inland Revenue together with Schedule D tax. As with tax, if payment is overdue, you may have to pay interest.

Class 4 NI contributions do not entitle you to any benefit, but they do help to share the cost of funding the benefits paid to all self-employed people in the fairest way.

Deferring payments

If you are both employed and self-employed and expect to pay, or have paid, more than a fixed amount of National Insurance contributions for any tax year, you may be able either to

defer payment of your Class 2 and Class 4 National Insurance contributions until your true liability has been worked out at the end of the relevant tax year, or

get a refund of any overpaid contributions.

The minimum amount you need to pay before being granted deferment is linked to the contribution rates in force for any given year. For the 1999/2000 tax year

your Class 4 NI contributions will be deferred if you can show that you are likely to pay more than a total of £1,455.35 in Class 1 and Class 2 NI contributions, and

your Class 2 NI contributions will also be deferred if you show that you are likely to pay more than a total of £2,300.20 in Class 1 NI contributions.

Initial applications for deferment of payment of Class 2 and Class 4 National Insurance contributions are made on form CA72B. This, together with more information about deferment and refunds, is contained in leaflet CA72 'National Insurance contributions. Deferring payment'.

Share fishermen

Special rules and Class 2 NI contribution rates apply to share fishermen. Our leaflet CA11 'National Insurance for share fishermen' gives more information.

If you are starting work as a share fisherman you should still complete form CWF1 and send it to the Inland Revenue (NI Contributions) Office. They will then write to you with more information. We regret that the facility to pay by direct debit is not available to share fishermen.

Change of circumstances

You must inform the Inland Revenue (NI Contributions) Office in writing if you change address or if you stop being self-employed so we can amend your National Insurance account.

Other changes that should be reported are

change of name

change of marital status - women only

change of home or trading address

change of bank (if paying by Direct Debit)

change of trading name

change of telephone number.

To report any of these changes contact the Inland Revenue (NI Contributions) Office, Self Employment Directorate, Customer Accounts Section, Longbenton, Newcastle upon Tyne NE98 1ZZ.

Their telephone number is: 06451 54655. Calls made to this number are charged at local rates. Please note your calls may be monitored or recorded in order to improve the quality of our service.

VAT

What is VAT?

VAT stands for 'Value Added Tax'. It is a tax charged on most goods and services by the suppliers of those goods and services.

Almost any business transaction can constitute what is known as a 'taxable supply' for VAT purposes, for example

sale of goods

performance of services

an exchange of goods or services

a gift in kind.

Not all supplies are liable to VAT.  For example, no tax applies to certain services such as finance, education, etc.  These are known as 'exempt supplies'.

Taxable supplies can be chargeable to VAT at the following rates.

Zero rate

Nil percentage rate applies.  Certain goods such as food, children's clothing, etc. come under this heading.

Reduced rate

This is 5% and is limited to domestic fuel and power.

Standard rate

The current rate is 17.5% and is applied to all goods and services that are not exempt or liable at the zero or reduced rates.

'Exempt' and 'zero' are not the same. Exempt supplies are supplies of goods or services which have no VAT charged on them at either the standard, reduced or zero rate. There are further details in VAT Notice 700 'The VAT Guide'.

How does VAT work?

Briefly, VAT is based on what are known as 'output tax' and 'input tax'.  If you are a business registered for VAT, output tax is the VAT charged by you to your customers and input tax is the VAT charged to you by your suppliers.

Who collects VAT?

VAT is collected at every stage in the distribution of goods and services by 'taxable persons' registered with Customs and Excise. The term 'taxable person' includes self-employed individuals, partnerships, limited companies, clubs, etc.

Do I have to register with Customs and Excise?

If you are in business and your taxable supplies to customers exceed, or are likely to exceed, a set limit in a 12 month period, then you will have to register with Customs and Excise. The limit is currently £50,000, but this is reviewed annually.

You may have to register if you make acquisitions from other European Community countries or supply goods under the distance-selling arrangements to the UK.

You cannot register, however, if you only supply goods or services exempt from VAT.

You must register if

at the end of any month, the total value of the taxable supplies you have made in the past twelve months or less is more than £50,000, or

at any time you expect that the value of your taxable supplies will be more than £50,000 in the next 30 days.

What happens if I have taken over a business from someone else?

You must look carefully at the taxable turnover of the business under the last owner to decide whether you need to register. It does not matter whether the last owner was registered or not. If the business is trading at a level above the limit then you will need to register. Your date of registration will be the day on which you take over the business.

If you have to register, please do not delay your application, as there may be a financial penalty for late registration. You will find out more about this in VAT Notice 700/41 'Late registration penalty'.

Can I be registered if my turnover is below the limits?

If your taxable turnover is below the limits you can apply for voluntary registration. You will have to prove to us that what you do is a business for VAT purposes. Before you apply you should think carefully whether registering will benefit you. Once you are registered you will have to account for output tax on all your taxable supplies, but you can also take credit for any input tax on those taxable supplies. You will also have to send in VAT returns regularly and keep proper accounts so that VAT officers can inspect them.

Can I be registered before I make taxable supplies?

If you are not yet making taxable supplies, but have started a business, you can register before you start as long as you are going to make supplies in the future. You will also have to prove to us that you are going to make taxable supplies as part of your business.

How do I account for VAT?

If your business is like most businesses, you will collect more VAT from your customers than you pay to your suppliers.  You can fill in a VAT return every quarter and pay the surplus VAT to Customs and Excise, or you can opt to complete an annual return, provided that the annual value of your taxable supplies is less than £300,000.

If, regularly, you pay out more VAT than you collect, you may fill in a return every month and Customs and Excise will make a refund.

Special schemes

There are special schemes to help make things easier. For example

'The Annual Accounting scheme'.  Instead of completing returns and paying quarterly, once you have been registered for a year you can pay a number of monthly payments by Direct Debit and send in just one return. There are details in VAT Notice 732 'Annual Accounting'.

'The Cash Accounting scheme' lets you account for VAT on the basis of payments received and made, rather than tax invoices issued and received.  The scheme gives automatic bad debt relief and is useful if you intend to give periods of credit. There are details in VAT Notice 731 'Cash Accounting'.

Can I claim VAT back?

You can claim back your input tax from Customs and Excise, but there are a number of exceptions. For example, you cannot reclaim input tax

paid on your purchases if you supply only exempt goods or services

on some motor cars

paid on certain business and entertainment expenses.

Excise and Inland Customs

What is Excise?

Excise is a duty payable on goods and services.

Goods liable to Excise duty are

beer

wine

spirits

mineral oils

tobacco

Services liable to Excise duty generally fall under the heading of 'Betting and Gaming'. The exceptions to this are air passenger duty, landfill tax and insurance premium tax. The six betting and gaming services which attract Excise duty are

general betting

bingo

casinos

gaming machines

pool betting

lottery

It is possible to claim reliefs from Excise duty. Primarily these ensure that UK commercial interests are not disadvantaged by having to pay duty in the course of a manufacturing process, storage, or on goods produced for export.

What is Inland Customs?

Inland Customs refers to duties levied in respect of imported goods. These duties also have a number of reliefs and special schemes designed to relieve the burdens on business.

Do I have to register with Customs and Excise?

If you are carrying out an Excise or Inland Customs activity you must notify Customs and Excise. Depending on the nature of your business, you may be asked to register with Customs and Excise, provide a financial security or complete returns.

Your local Excise and Inland Customs Advice Centre will supply you with public notices and forms about Excise and Inland Customs. You can find them listed in the phone book under 'Customs and Excise'.

You might find the following notices useful

206 - Excise Traders

501 - Guide to Exports

502 - Guide to Imports

There are also notices about each specific duty and relief. Your Advice Centre will be able to provide you with the appropriate notice.

Keeping Records

What do I need to do about keeping records?

Keeping clear and accurate records is very important.  You should

record all your business transactions

keep documents like receipts, bills, bank statements and cheque stubs to back them up

separate your business transactions from your personal finances.

You can get various account books for recording the figures. Some of these books are designed specially for small businesses.  It may also be helpful to have an accountant.

How long should I keep my records?

Under Self Assessment you are obliged by law to keep records of your income and capital gains. These records have to be kept in case your Tax Office needs to check the figures in your return.

If you are self-employed, whether on your own or in partnership, you will have to keep your business records for five years. This period starts from the date on which your annual tax return is due back (normally the 31 January in the year following the year to which the return relates).

Our leaflet SA/BK3 'Self Assessment. A guide to keeping records for the self-employed' and SA/BK4 'Self Assessment. A general guide to keeping records' tells you more about this and about what records to keep.

What if I decide to register for VAT?

If you become registered for VAT you must keep a record of all the supplies you make and receive and a summary of VAT for each tax period covered by your tax returns.  The summary is called the 'VAT account'.

Records do not have to be kept in any set way, but they must be up to date and the figures that you use to fill in your VAT return must be easy to find.  Usually, your normal business records can quite easily be adapted to give this information.  Invoices or daily takings normally form the basis of your records.

Our VAT Notice 700/21 'Keeping records and accounts' tells you more about this.

If you register for VAT you will normally be expected to keep your records for six years.

Other Help

What if I decide to employ someone?

If you are thinking of employing someone for the first time, you should tell your Tax Office.  The Tax Office dealing with your business may be different from the one that will deal with your employees' tax.  If you tell your Tax Office, they will send the information on to the right office.  The Tax Office will then automatically send you a New Employer's Starter Pack which contains all the instructions, tables and forms you will need.

As an employer, you will be responsible for deducting tax and Class 1 National Insurance contributions from the pay of your employees under the Pay As You Earn system (PAYE).  You send the tax and National Insurance contributions you have deducted to the Inland Revenue Accounts Office.

So you will need to

work out the tax and NICs due each pay day

pay this over to the Inland Revenue Accounts Office each month.  This can be done quarterly if your average monthly payments of tax and NICs are below £600

tell your Tax Office at the end of each tax year how much each employee has earned and how much tax and NICs you have deducted. You must also give details of benefits paid

give your employees statements showing their earnings, tax and NICs deductions made for the year and any benefits provided.

If you employ someone abroad, advice about Class 1 NI contributions should be obtained from the Inland Revenue (NI Contributions) Office on 06451 54811.

Where can I get your leaflets and forms?

Your local Tax Office, or Inland Revenue Enquiry Centre will supply you with leaflets and forms about tax. Their addresses are in your local telephone book under 'Inland Revenue'. Most offices are open to the public from 8.30am to 4.30pm Monday to Friday.  Some are also open outside these hours.

Some leaflets you may find useful are

IR List	Catalogue of leaflets and booklets
IR14/15 (CIS)	Construction Industry Scheme
IR40 (CIS)	Construction Industry Scheme. Conditions for getting a sub-contractor's tax certificate
IR56/NI39	Employed or self-employed? #
IR120	You and the Inland Revenue * #
IR125	Using your own car for work
IR160	Inland Revenue enquiries under self assessment
CWG1	Employer's quick guide to PAYE and NICs
CWG2	Employer's further guide to Pay As You Earn and National Insurance contributions
CWL2	National Insurance contributions for self-employed people. Class 2 and Class 4
In addition the Inland Revenue have produced the following leaflets on Self Assessment

SA/BK3	Self Assessment. A guide to keeping records for the self-employed
SA/BK4	Self Assessment. A general guide to keeping records
SA/BK5	Self Assessment. Electronic version of the tax return
SA/BK6	Self Assessment. Penalties for late returns
SA/BK7	Self Assessment. Surcharges for late payment of tax
SA/BK8	Self Assessment. You guide
# - These leaflets are also available in Welsh

* - Available in Bengali, Chinese, Greek, Gujarati, Hindi, Punjabi, Turkish, Urdu and Vietnamese

Your nearest Inland Revenue (NI Contributions) Office will supply you with leaflets and forms relating to National Insurance contributions.

Some leaflets you may find useful are

CA01	National Insurance contributions for employees #
CA02	National Insurance contributions for self-employed people with small earnings #
CA04	National Insurance contributions. Class 2 and Class 3 Direct Debit.  The easier way to pay #
CA07	National Insurance contributions - unpaid and late paid contributions
CA08	National Insurance contributions.  Voluntary contributions
CA09	National Insurance contributions for widows
CA11	National Insurance contributions for share fishermen
CA13	National Insurance contributions for married women
CA25	National Insurance contributions  for agencies and agency-supplied workers
CA72	Deferring payment #
CWG1	Employer's quick guide to PAYE and NICs
CWG2	Employer's further guide to PAYE and NICs
CWL2	National Insurance contributions for self-employed people. Class 2 and Class 4
FB30	Self-employed? A guide to NI contributions and Social Security benefits #
NI38	Social Security abroad
NI132	National Insurance abroad. A guide for employers of people working abroad
PP3	Personal pensions for the self-employed #

# - These leaflets are also available in Welsh

Your local VAT Business Advice Centre will supply you with public notices and forms about VAT. They are listed under 'Customs and Excise' in the telephone book. Most offices are open to the public from 9.30am to 4 pm, Monday to Friday.

Some notices you may find useful are

700	The VAT Guide
700/12	Filling in your VAT return
700/15	The Ins and Outs of VAT
700/21	Keeping records and accounts
700/41	Late registration penalty
731	Cash accounting
732	Annual accounting
999	Catalogue of Publications

Full details about registration are in the following VAT Notices

700/1	Should I be registered for VAT? *
700/1A	Should I be registered for VAT?  Distance selling
700/1B	Should I be registered for VAT?  Acquisitions

Excise and Inland Customs

206	Excise Traders
501	Guide to Exports
502	Guide to Imports
Can I phone for the information I want?

Yes.  For general help and advice on tax, ring or call in at your local Tax Office or Inland Revenue Enquiry Centre. Their addresses are in your local telephone book under 'Inland Revenue'. Most offices are open to the public from 9am to 5pm Monday to Friday.  Some are also open outside these hours.

You can order leaflets about Self Assessment from our Orderline on  0645 000404. Calls are charged at local rates and lines are open between 8am and 10pm seven days a week. Or you can order by fax on 0645 000604 or by e-mail on saorderline.ir@gtnet.gov.uk.

For specific National Insurance advice on the following subjects ring

Class 2 NI contributions	06451 54655*#
Deferment	06451 57141*
Working abroad	06451 54811*

 * - Calls made to these numbers are charged at BT local call rates.

# - Please note your calls may be monitored or recorded in order to improve the quality of our service.

For help and advice on VAT ring your VAT Business Advice Centre or Enquiry Office listed in the telephone book under 'Customs and Excise'.

Employer's Helpline

From now on as an employer, if you ever have a general question on tax, National Insurance or basic VAT registration, you can ring call:

Employer's Helpline

From now on as an employer, if you ever have a general question on tax, National Insurance or basic VAT registration, you can ring:

The Employer's Helpline - 0345 143 143

This service has been set up by the Inland Revenue and Customs and Excise offering general advice on matters such as Employer's PAYE and P11D expenses and benefits, Statutory Maternity and Sick Pay, and Value Added Tax basic registration details.

It saves time and, for the price of a local call, it saves money. Lines are open Monday to Friday 8.30am - 5pm.

New Employer's Helpline

Call the New Employer's Helpline if you are a new employer and would like general help and advice. You are a 'New employer' if you are in business and are thinking of taking on an employee for the first time or have been employing people within the last three years.

Free leaflets are available as well as presentations on a wide range of tax and National Insurance topics

The New Employer's Helpline - 0845 6143143

Lines are open Monday to Friday 8.30am to 5pm and Saturday and Sunday 10am to 4pm.

What other help is there?

You can get a video which tells self-employed people about Self Assessment.  It is called 'Get yourself sorted' and is available from your local Inland Revenue Enquiry Centre or Tax Office.

If you register for VAT you will be sent a menu of 'Learn about VAT' options and asked to choose the option which suits you best.  The options include

a free video entitled 'Welcome to VAT'

one-to-one consultations

seminars.

Business Link

Business Link is a national network of information and advice centres providing a single point of access for local companies. All key local business support agencies, including the Training and Enterprise Council, the Local Enterprise Agency, the Chamber of Commerce and the Local Authority have been brought together to offer customised services to local businesses. The Signpost line on 0345 567 765 can put you in touch with your nearest Business Link.

Useful Publications from the DTI

The Department of Trade and Industry (DTI) produces a series of free booklets which give sources of information and advice to small businesses. The titles include 'A Guide to Help for Small Firms' and 'Setting up in business - a guide to regulatory requirements'. You can order these from the DTI Small Firms Publications Orderline on 0870 150 2500 or fax 0870 150 2333.

What can I do if I am not happy with the service I receive?

Naturally we hope this question won't arise, but with many thousands of enquiries every day, misunderstandings and errors can happen.

If you have a complaint about the way in which we have handled your affairs, first write to the officer in charge of the office concerned.  He or she will then do everything possible to resolve the problem quickly.

If, after this, you are still unhappy, you should contact

the Inland Revenue Controller responsible for the area dealing with your tax affairs.  Our leaflet IR120 'You and the Inland Revenue' tells you how to do that'

the Customs and Excise Collector responsible for the office concerned. The Customs leaflet 'Complaints and putting things right'. Our Code of Practice (Notice 1000) tells you how to do that.

If the Department concerned does not settle your complaint to your satisfaction, you can ask the Adjudicator for the Inland Revenue, Contributions Agency and Customs and Excise to look into it and recommend appropriate action.

The Adjudicator, whose services are free, acts as an impartial referee where people feel their affairs have been badly handled.  The Adjudicator's recommendations are independent.  The address is

The Adjudicator's Office

Haymarket House

28 Haymarket

London, SW1Y 4SP

Telephone: 0171 930 2292

Fax: 0171 930 2298

email: adjudicators@gtnet.gov.uk

Finally you can ask your MP to refer your complaint to the independent Parliamentary Commissioner. The 'Ombudsman' will accept a referral from any MP, but you should approach your own MP first.  Further information is available from

The Parliamentary Commissioner for Administration

Church House

Great Smith Street

London, SW1P 3BW

Tel: 0171 276 2130/3000

Data Protection

The Inland Revenue is a Data Controller under the Data Protection Act. We hold information for the purposes specified in our notification made to the Data Protection Commissioner and may use this information for any of them.

We may get information about you from others, or we may give information to them. If we do, it will only be as the law permits, to check accuracy of information, prevent or detect crime or protect public funds.

We may check information we receive about you with what is already in our records. This can include information provided by you as well as other Government Departments and agencies and overseas tax authorities. We will not give information about you to anyone outside the Inland Revenue unless the law permits us to do so.

Help us to help you

We welcome your comments on this leaflet.  Please tell us what you think so that we can find out how to provide you with a better service.

Write to

External Communications Unit

Inland Revenue

G12, New Wing

Somerset House,

Strand

London, WC2B 4PP

Remember

To tell us about your self-employment you must fill in

form CWF1 (coloured green) and send it to the Inland Revenue (NI Contributions) Office and

form CA5601 (coloured peach) to pay your Class 2 National Insurance contributions by Direct Debit.

These notes are for guidance only and reflect the position at the time of writing.  They do not affect your right of appeal about your tax, National Insurance or VAT.

Issued by the Inland Revenue, Inland Revenue (NI Contributions) Office and H M Customs and Excise

April 1999

Reproduced by permission of the Board of Inland Revenue

 © Crown Copyright 1999


CWL2 short
CWL2 - National Insurance contributions for self-employed people. Class 2 and Class 4

This leaflet is for self-employed people. It contains information about Class 2 and Class 4 National Insurance contributions and explains which benefits you can claim if you are self-employed.

FULL TEXT


CWL2 - NI Contributions
National Insurance Contributions (CWL2)

CWL 2

National Insurance contributions for self-employed people. Class 2 and Class 4

Introduction

This leaflet is for self-employed people and contains information about Class 2 and Class 4 National Insurance (NI) contributions.

It is issued by the Contributions Agency and Inland Revenue and explains the

National Insurance contributions you have to pay

benefits you can claim

It also contains some basic information about Class 3 (voluntary) National Insurance contributions.

As a self-employed person, you

normally have to pay Class 2 National Insurance contributions

may also have to pay Class 4 National Insurance contributions if your profits or gains are above a certain limit

All amounts, rates and dates in this leaflet are for the tax year 6 April 1999 to 5 April 2000. Current benefit rates are in leaflet NI196 (NIL196 in Northern Ireland), 'Social Security benefit rates'. Copies are available from your nearest Social Security office or Inland Revenue (NI Contributions) Office.

Other information available to you

Leaflet CWL1 'Starting your own business?', is available from your local Inland Revenue Enquiry Centre, Customs and Excise VAT Business Advice Centre, Inland Revenue (NI Contributions) Office or Tax Office. It contains basic information about

your National Insurance number

what National Insurance contributions are

Class 2 National Insurance contributions

how to pay Class 2 National Insurance contributions

small earnings exception

what to do if you are going to work abroad

Class 4 National Insurance contributions

deferring payment of National Insurance contributions

share fishermen

what to do if your circumstances change

registering for VAT

National Insurance contributions

Self-employed people are liable for Class 2 National Insurance contributions, but they may also have to pay Class 4 National Insurance contributions if their profits or gains are above a certain limit.

Class 2 National Insurance contributions are

flat-rate payments

collected by the Inland Revenue (NI Contributions) Office.

Class 4 National Insurance contributions are

profit related

collected by the Inland Revenue with Schedule D tax based on the taxpayers' own self assessment.
All NI contributions shown on self assessment forms relating to self employment are Class 4.

If you are self-employed and working for an employer as well, you may have to pay Class 1, Class 2 and Class 4 National Insurance contributions.

Class 1 National Insurance contributions are

earnings related

paid by people who work for an employer if their earnings reach the lower earnings limit (see the Glossary below). For more details about Class 1 National Insurance contributions, see leaflet CA01 'National Insurance contributions for employees'

Class 2 National Insurance contributions

Who pays Class 2 National Insurance contributions?

Self-employed people pay Class 2 National Insurance contributions, for example

shopkeepers

members of professions in independent practice, for example, solicitors, barristers, architects

doctors and dentists, both NHS and private

authors and artists

farmers, crofters and smallholders

There are special arrangements for share fishermen. See leaflet CA11 'National Insurance contributions for share fishermen' for more details.

You must pay Class 2 National Insurance contributions for each week of self-employment, including holiday periods, if you

are normally self-employed and

are aged 16 or over and

are under pension age and

have not been excepted from liability to pay Class 2 National Insurance contributions.

Self-employed people with small earnings

You can apply for exception from paying Class 2 National Insurance contributions if your net earnings from self-employment (that is your profits after deducting expenses) will be less than a fixed amount. For 1999/2000 this is £3,770. There are time limits for applications for exception, so apply as soon as possible. You will be sent a Certificate of Exception if your application is successful.

If you are excepted from liability, you may, if you wish, pay Class 2 National Insurance contributions voluntarily to keep up your rights to the benefits they provide.

For more details and an application form, see leaflet CA02 'National Insurance contributions for self-employed people with small earnings'.

Please note that you may be prosecuted if you fail to pay any National Insurance contributions for which you are liable.

What happens if you are sick?

You do not have to pay a Class 2 National Insurance contribution for any complete week, Sunday to Saturday, for which you are

getting

- Incapacity Benefit

- Maternity Allowance

- Unemployability Supplement to Industrial Injuries Benefit or to War Disablement Benefit

incapable of work even if you are not getting any benefit

You may be able to get credits for complete weeks of sickness, Sunday to Saturday.

If you are only sick for part of the week, even if you have a sick note, you

must pay Class 2 National Insurance contributions

cannot get a credit

If you also work for an employer, you should send them sick notes regularly, even if your employer pays you Statutory Sick Pay. For more details, see leaflet IB202 'Incapacity Benefit' (IB202 (NI in Northern Ireland).

Married women and widows

Married women and some widows used to be able to choose

not to pay Class 2 National Insurance contributions when self-employed

to pay Class 1 National Insurance contributions at a reduced rate when employed

However, they still had to pay Class 4 National Insurance contributions in full.

This is called reduced liability. Reduced rate National Insurance contributions do not count towards benefit. The reduced liability option is no longer available, but if you had reduced liability on 5 April 1978, you can keep it unless

your marriage ends in divorce or is annulled

your Widow's Benefit ends for a reason other than remarriage

you are widowed and do not qualify for Widow's Benefit

you have not been liable to pay NI contributions for two consecutive tax years after 5 April 1978 and you have not been self-employed in those tax years.

If you have kept the right to reduced liability, you should hold a Certificate of Election (form CA270). If you do not have this certificate or it is out of date, contact the Inland Revenue (NI Contributions) Office, Class 1 Caseworker Section, Longbenton, Newcastle upon Tyne, NE98 1YX.

As long as your certificate is current, you will not have to pay Class 2 National Insurance contributions but you may still have to pay Class 4 National Insurance contributions.

You can give up your right to reduced liability if you wish. However, once you have given it up, you cannot get it back. For more information, please contact Class 1 Caseworker Section at the above address or see leaflet CA13, 'National Insurance contributions for married women'.

After State Pension Age

You do not have to pay Class 2 National Insurance contributions after you reach State Pension Age, 65 for men and 60 for women, even if you have not retired.

You have to pay Class 4 NI contributions for the tax year in which you reach State Pension Age if your profits are above the limit at which Class 4 National Insurance contributions become due.

National Insurance contribution rates for the 1999/2000 tax year

The contribution rates for the 1999/2000 tax year are

Class 2 self-employed £6.55 per week

Class 2 share fishermen £7.20 per week

Class 3 voluntary £6.45 per week

What are the time limits for payment?

You are liable to pay National Insurance contributions even if they are too late to count for benefit purposes. If you get behind with your National Insurance contributions, the Inland Revenue (NI Contributions) Office will take any necessary action to obtain payment.

National Insurance contributions which are not paid until the second tax year after the one in which they were due may be charged at a higher rate.

For more details, see leaflet CA07 'National Insurance - unpaid and late paid contributions'.

What benefits do Class 2 National Insurance contributions count for?

Class 2 National Insurance contributions count towards

Incapacity Benefit, see leaflet IB202 'Incapacity Benefit' (IB202(NI) in Northern Ireland)

Retirement Pension, see leaflet NP46 'A guide to Retirement Pension'

Widow's Benefit, see leaflet NP45 'A guide to Widow's Benefit'

Maternity Allowance, see leaflet NI17A 'A guide to Maternity Benefits'  (NIL17A in Northern Ireland)

Class 2 National Insurance contributions do not count towards contribution-based Jobseeker's Allowance.

Notifying self-employment for the first time

If you are notifying us of self-employment for the first time, you must complete form CWF1 'Notification of Self-Employment'. This form is available from the Inland Revenue (NI Contributions) Office, Self Employment Directorate Customer Accounts Section, Longbenton, Newcastle upon Tyne, NE98 1ZZ. Their telephone number is: 06451 54655. Calls are charged at BT local rates.* Please note your calls may be monitored or recorded in order to improve the quality of our service.

Voluntary Class 3 National Insurance contributions

When you are self-employed, you can also pay voluntary Class 3 National Insurance contributions to help you qualify for some benefits. This could be because

you are not liable to pay National Insurance contributions

you have been excepted from paying Class 2 National Insurance contributions

your contribution record is not good enough to qualify for benefit

Class 3 National Insurance contributions are paid at a flat rate.

If you have not paid or been credited with, enough National Insurance contributions during the tax year to make it a qualifying year for Retirement Pension or Widow's Benefit, you will be notified by the Inland Revenue (NI Contributions) Office about 18 months after the end of the tax year.

In these cases, it may be worth you paying voluntary Class 3 National Insurance contributions. This is because unless you pay enough National Insurance contributions to make the year a qualifying year, any National Insurance contributions you have paid in that year, will not count towards Retirement Pension or Widow's Benefit. For more details, see leaflet CA08 'National Insurance contributions. Voluntary contributions'.

If you think you may not have paid enough National Insurance contributions and have not been contacted by the Inland Revenue, get in touch with your nearest Social Security Office.

Please remember, you must pay Class 2 National Insurance contributions, not Class 3, for any period when you were self-employed, unless you were excepted from Class 2 liability.

Class 4 National Insurance contributions

Who pays Class 4 National Insurance contributions?

Class 4 National Insurance contributions are paid by self-employed people, on profits or gains from any trade, profession or vocation, if those profits or gains are over a certain amount. This is as well as Class 2 National Insurance contributions. However, there are a few exceptions. You do not have to pay Class 4 National Insurance contributions or apply for exception if you are

aged 65 or over for men or 60 or over for women, at the beginning of the year of assessment (see the Glossary below). This includes people whose 65th/60th birthday falls on 6 April. If you reach 65/60 during the tax year, you will still be liable for Class 4 National Insurance contributions up to the following 5 April

not resident in the United Kingdom (UK) for income tax purposes during the year of assessment

a trustee, executor or administrator, in some cases only

a sleeping partner, that is, you supply capital and take a share of the profits but take no active part in running the trade or

a diver or diving supervisor

- working in connection with exploration or exploitation activities on the UK continental shelf or in UK territorial waters, whose earnings are taxed under certain special rules and

- who has earnings assessed for tax under Schedule D

If you are excepted from paying Class 4 National Insurance contributions, you should note the appropriate box on the tax return.

If you are under 16 on 6 April 1999, you will have to apply for exception from liability to pay Class 4 NI contributions. You should apply before 6 April by completing form CA2835U 'Application for exception from liability for Class 4 contributions for persons under 16 years of age', which you can get from the Inland Revenue (NI Contributions) Office, Deferment Group, Longbenton, Newcastle upon Tyne, NE98 1ZZ.

You only need to apply once because the other years for which you qualify for exception will be covered by that application. If you were granted exception for the 1998/99 year, there is no need to apply again for 1999/2000.

What if I am not exempt from payment?

The Class 4 National Insurance contributions you need to pay for any tax year are based on your taxable profits for that year.

For tax years up to and including 1995/96, the Inland Revenue generally worked out and assessed your Class 4 National Insurance contributions at the same time as the income tax on your profits.

From 1996/97 onwards, the new Self Assessment rules apply which means that you must work out the profits on which National Insurance contributions are due when completing your annual tax return. There are notes in the tax return to help you do this.

Then you can either

send back your completed tax return by 30 September following the year of assessment and the Inland Revenue will calculate the tax and Class 4 National Insurance contributions due for you or

calculate the tax and Class 4 National Insurance contributions yourself, in which case you have until 31 January following the year of assessment to send back your completed return and self assessment

For example, your annual tax return for 1998/99 will normally be issued in April 1999. If you send back your completed return by 30 September 1999, the Inland Revenue will calculate the tax and Class 4 National Insurance contributions due. If you opt to calculate the tax and Class 4 National Insurance contributions due yourself, you have until 31 January 2000 to send back your completed return and self assessment.

When is payment due?

Under Self Assessment, the income tax (which includes your Class 4 National Insurance contributions) which is due for any one year which is payable without demand, normally in three instalments.

For example, consider the tax year 1999/2000. Two 'payments on account' are required, the first by 31 January 2000 and the second by 31 July 2000. Then a final 'balancing payment' will be required by 31 January 2001. In simple terms

each payment on account is one half of the income tax and Class 4 National Insurance contributions bill for the previous year, 1998/99

the balancing payment or repayment is simply the difference between the total income tax (including Class 4 National Insurance Contributions) and capital gains tax due for the year and the sum of your payments on account.

Not everyone will need to make payments on account because they will be based on the net income tax and Class 4 National Insurance contributions due for the previous year after taking into account any tax deducted at source during that year. You do not need to make a payment on account if

each payment would be less than £250 or

80% of the income tax and Class 4 National Insurance contributions bill for the previous year was met by tax deducted at source. For example, if sufficient tax is deducted under PAYE or the SC60 scheme, all that would be needed for 1999/2000 would be a single balancing payment (or repayment) by 31 January 2001.

It will also be possible for a taxpayer to make a claim to reduce or cancel the payments on account due for any year if they believe they will add up to more than the net income tax (including Class 4 National Insurance contributions) actually due for that year or that there will be no liability.

Remember, if a payment is overdue, you may have to pay interest.

What is the rate of Class 4 National Insurance contributions?

Class 4 National Insurance contributions are based on a percentage of annual profits between a lower and upper limit. The levels are set each year by the Chancellor in the Budget. The rates for 1998/99 and 1999/2000 are

	1998/99	1999/2000
Lower profit limit	£7,310	£7,530
Upper profit limit	£25,220	£26,000
Rate of National Insurance contributions on profit between the limits	6%	6%

The maximum Class 4 National Insurance contributions you would have to pay for 1999/2000 on profits or gains of £26,000 or more would be £1,108.20. this is calculated as follows

Profit	£26,000
less 1999/2000 lower profit limit	£7,530
NI contributions payable on	£18,470	@6% = £1,108.20
On what income do I have to pay Class 4 National Insurance contributions?

The income you have to pay Class 4 National Insurance contributions on is

your trading profits as calculated for income tax, including any adjustments for capital allowances and balancing charges, plus

any Enterprise Allowance you receive

You can deduct from your income

certain interest and annual payments.

losses.

When you are working out the amount on which you have to pay Class 4 National Insurance contributions, do not take into account

personal tax allowances

retirement annuity relief, personal pensions relief and superannuation contributions

Deducting interest and annual payments

You can deduct interest and annual payments when calculating profits for Class 4 National Insurance contributions if they

are wholly and exclusively for the purpose of the trade

have not been deducted in working out the trade profits for tax purposes

For example, an annual payment to an ex-partner out of profits is not an allowable expense in calculating trading profits for income tax purposes. However, if the payment was incurred for the purposes of the trade, it can be deducted from the profit for Class 4 National Insurance contribution purposes.

If the amounts you can deduct exceed the profits you made in the year, the balance can be carried forward and deducted from future profits.

Claiming relief for losses

For Class 4 National Insurance contributions, trading losses can be set against trading profits using the same rules as for income tax.

Relief for income tax trading losses can be claimed in several ways

trading losses can be set against income of the same or the previous year

a trading loss in any of the first four years of self-employment can be set against the three previous year's income

trading losses can be set against future income of the same trade

Relief for Class 4 National Insurance contributions can only be set against trading income.

Any trading losses set against non-trading income for tax purposes, have not been relieved for Class 4 National Insurance contribution purposes. They  can be carried forward to set against the trading profits for the next tax year until they have been fully relieved for Class 4 National Insurance contribution purposes. This means that profits charged to Class 4 National Insurance contributions in the following years will be lower than the profits charged to income tax. For an example, see below.

If a husband and wife are both in business, a loss by one cannot be set against any trading profit by the other.

For an example of a tax calculation, see below.

Tax relief for Class 4 National Insurance contributions

For the tax years 1985/86 to 1995/96, self-employed people were allowed tax relief at 50% on their Class 4 National Insurance contributions as a deduction in calculating the person's total income, not as a business expense.

From 1996/97

the 50% deduction was withdrawn

the Class 4 National Insurance contribution rate was reduced to compensate

The changes were made to simplify the calculation of Class 4 National Insurance contributions under Self Assessment.

What if a husband and wife are both self-employed?

A husband and wife who are both self-employed

have their Class 4 National Insurance contributions worked out separately

are responsible for paying their own tax and Class 4 National Insurance contributions.

If they are in partnership, Class 4 National Insurance contributions have to be paid on each part of the partnership profit.

Partnerships

The Inland Revenue will collect the Class 4 National Insurance contributions arising from profits or gains made by each partner in a partnership.

Class 1 National Insurance contributions on earnings included in the calculation of Class 4 National Insurance contributions

Some people may have to pay Class 1 National Insurance contributions as employees on earnings which are also included in their trading profits in their tax returns or self assessments which form the basis of their Class 4 National Insurance contributions assessment.

If this applies to you, the amount of Class 4 National Insurance contributions for the year may be reduced. You may either

apply for deferment of the Class 4 National Insurance contributions before the start of the tax year for which the Class 4 National Insurance contributions will be due. See below for further details about deferring Class 4 National Insurance contributions

apply for a refund of the Class 4 National Insurance contributions at the end of the tax year by contacting the Inland Revenue (NI Contributions) Office, Deferment Group, Longbenton, Newcastle upon Tyne, NE98 1ZZ and requesting form CA5610.

If you cannot apply for deferment before the start of the tax year, you can make a late application which will be considered if your Class 4 liability is not fully paid or under enquiry.

Example of a tax and Class 4 National Insurance contribution calculation

Andrew Strong is a car dealer and agent. He also has income from furnished lettings. His tax returns show the following income assessable for 1998/99 and 1999/2000

1998/99
Trading income	£
Car dealer	15,000
less Capital allowances	3,600
	11,400
Agent	2,500
Total trading profit	13,900
Other income: Furnished lettings	8,500
1999/2000
Trading income:	£
Car dealer (loss £14 400)
Agent	3,000
Other income: Furnished lettings	9,500

Calculating the income tax payable for 1998/99

	Original (£)	Revised (£)
Car dealer	15,000	15,000
less Capital allowances	3,600	3,600
	11,400	11,400
Agent	2,500	2,500
Furnished lettings	8,500	8,500
	22,400	22,400
less Loss		14,400
		8,000
less Personal allowance	4,195	4,195
	18,205	3,805
Tax at 20% on first £4,300 and 24% on the excess	4,058.15	761.00 *

* Under Self Assessment, if a claim is made to set trading loss against a previous year's income, the previous year's assessment will not be amended. Instead, an adjustment in terms of tax, will be made to the self assessment for the year of the claim. The amount of the adjustment is the amount by which the liability for the previous year would have changed if the previous year's assessment had been amended. Earlier years' assessments are not reopened under Self Assessment.

Calculating the Class 4 National Insurance contributions payable for 1998/99

Andrew's Class 4 National Insurance contributions for 1998/99 are worked out on his trading profit of £13 900. When it is known that he made a loss of £14,400 as a car dealer in the 1998/99 tax year, the Class 4 National Insurance contributions are revised

	Original (£)	Revised  (£)
Trading profit	13,900	13,900
		(less loss 13,900)
	13,900	0
less Lower profit limit	7,530	7,530
	6,370	NIL
Class 4 NI contributions payable £6,370 x 6%	382.20	NIL*

The total trading loss is £14,400 but because Andrew has only used £13,900 against trading profit, there is a balance of £500 to carry forward to his Class 4 National Insurance contributions calculation for future trading profits.

* Please see the previous asterisked paragraph. Adjustments for National Insurance contributions are also made to the self assessment for the year of claim.

Credits

What are credits and what do they count for?

Credits

protect your National Insurance record for Retirement Pension and Widow's Benefit

maintain your entitlement to other benefits

Credits count

as Class 1 National Insurance contributions at the lower weekly earnings limit

only towards basic benefit, not towards earnings related benefit

towards Incapacity Benefit and contribution-based Jobseeker's Allowance in certain circumstances.

For most benefits, a certain amount of National Insurance contributions must also have been paid. Credits only count in certain circumstances. For example, they do not count towards the qualifying conditions for Maternity Allowance. For more details, see the individual benefit leaflets.

Who can get credits?

You may be able to get credits instead of paying Class 2 National Insurance contributions if you are

sick for a full calendar week, Sunday to Saturday. To get credits, you will normally have to send in sick notes to your local Social Security office, or in Northern Ireland to Incapacity Benefits Branch, Castle Court, Royal Avenue, Belfast, BT1 1SB

entitled to Maternity Allowance, Invalid Care Allowance or Unemployability Supplement

entitled to Statutory Sick Pay or Statutory Maternity Pay

taking a course of approved training. For more details, see leaflet CA12 'Training for further employment and your National Insurance record'

receiving Disability Working Allowance. These credits are only available to the self-employed if either Small Earnings Exception has been granted, or you have received a refund of Class 2 National Insurance contributions because of low earnings for the week(s) concerned. More information is available about small earnings for the self-employed in leaflet CA02 'National Insurance contributions for self-employed people with small earnings'.

a man aged 60 or over who is not liable to pay National Insurance contributions. See the section below 'Credits and men approaching or over the age of 60'

receiving a compensatory payment such as a payment in lieu of notice or a payment in lieu of remuneration

if you have claimed Maternity Allowance but have not satisfied the contribution conditions you may still be entitled to credits.

You may be entitled to credits when you are unemployed if you are

available to work for an employer

actively seeking work throughout each complete week from Sunday to Saturday.

To get credits, you will normally have to make a labour market declaration at a Jobcentre or Benefits Agency Office, or in Northern Ireland you will normally have to attend your local Social Security Office.

You will not be able to get credits if you are a married woman/widow with reduced liability and therefore have the right

to pay reduced rate Class 1 National Insurance contributions when an employee

not to pay Class 2 National Insurance contributions when self-employed

Credits and men approaching or over the age of 60

If you are a man aged 60 or over, or will reach 60 in the 1999/2000 tax year, special provisions apply. You will get National Insurance credits automatically if you

are not liable to pay National Insurance contributions as an employed or self-employed earner

have not been absent from Great Britain or Northern Ireland for more than six months (182 days) of the tax year.

If your earnings from self-employment are less than the small earnings exception limit (for 1999/2000 the limit is £3,770), it could be worthwhile applying for an exception from paying Class 2 National Insurance contributions so you can get these credits.

If you are claiming contribution-based Jobseeker's Allowance and you are not entitled to or have exhausted your entitlement to benefit, you do not have to keep making declarations at the Employment Service Jobcentre, or Social Security office in Northern Ireland, to get these credits. They will be given to you automatically.

The Jobcentre or Benefits Agency Office or Social Security Office in Northern Ireland should send you a letter (CR8) explaining a special arrangement which will automatically continue your period of interruption of employment. You should keep the letter as you may need it later.

If you do not receive a letter, contact the Jobcentre or Benefits Agency Office or Social Security Office in Northern Ireland.

Deferring payment and getting refunds if you have more than one job

Deferring Class 2 and Class 4 National Insurance contributions

You may be able to defer payment of your Class 2 and Class 4 National Insurance contributions until your true liability has been worked out after the end of the tax year if you

expect to be both employed and self-employed during the tax year and

expect your earnings as an employee to be substantial and

believe that your total National Insurance contribution liability will be over the maximum by more than £10.

If you show that you are likely to pay more than a total of

£1,455.35 in Class 1 and Class 2 National Insurance contributions, your Class 4 National Insurance contributions will be deferred

£2,300.20 in Class 1 National Insurance contributions, your Class 2 and Class 4 National Insurance contributions will be deferred.

If your National Insurance contributions are deferred, the calculation and collection of any Class 4 National Insurance contributions will be transferred from your Tax Office to the Inland Revenue (NI Contributions) Office. Your Tax Office will supply the Inland Revenue (NI Contributions) Office with a certificate of your profits and gains. The Inland Revenue (NI Contributions) Office will inform your Tax Office when payment has been received. For more details and the application form to apply for deferment, see leaflet CA72 'National Insurance contributions.  Deferring payment'.

If you have not notified the Inland Revenue (NI Contributions) Office of your self-employment, you will need to complete form CWF1 'Notification of self employment' which is attached to leaflet CWL1. You can get a copy of this leaflet by

ringing the Self Employment Directorate Call Centre on 06451 54655#. Calls are charged at BT local rates or

contacting the Inland Revenue (NI Contributions) Office, Self Employment Directorate, Customer Accounts Section,  Longbenton, Newcastle upon Tyne, NE98 1ZZ.

See below for further details. The leaflet is also available from Inland Revenue Enquiry Centres, Tax Offices and the Internet.

# Please note your call may be monitored or recorded in order to improve the quality of our service.

If you have more than one job

If you have more than one job and pay more than the prescribed amount of National Insurance contributions for a tax year, you may be able to get a refund. You should apply for a refund if you pay more than

£2,300.09 in Class 1 and Class 2 National Insurance contributions in the 1999/2000 tax year

£1,455.85 in Class 1, Class 2 and Class 4 National Insurance contributions in the 1999/2000 tax year.

In these circumstances, you can get a refund of the Class 4 National Insurance contributions.

Class 1 National Insurance contributions paid at non-standard rates, for example, contracted-out or married women's reduced rate, are converted to standard rate to work out if you have paid too much. Your employer's National Insurance contributions are not counted.

Applying for a refund

You can apply for a refund if

you did not apply for exception or deferment in time and paid Class 4 National Insurance contributions

your Class 4 National Insurance contributions are fully paid and you have paid more than the maximum amount of National Insurance contributions.

To apply for a refund, contact the Inland Revenue (NI Contributions) Office, Deferment Group, General Administration Section, Longbenton, Newcastle upon Tyne, NE98 lZZ. Please give full details of why you think a refund is due. Do not delay in applying, as refunds are usually only made if they are claimed within six years from the end of the tax year to which the payment relates.

Share fishermen

Share fishermen who have not made arrangements for someone to record and collect Class 4 National Insurance contributions on their behalf, must apply for deferment of special Class 4 National Insurance contributions. Write to the Deferment Group who will arrange for collection of your National Insurance contributions.

For more advice and information

About benefits and National Insurance contributions

Contact your nearest Social Security Office for more information and advice about benefits and the Inland Revenue (NI Contributions) Office about National Insurance contributions.

You can get copies of this and other Inland Revenue leaflets from your nearest Inland Revenue (NI Contributions) Office. Most offices are open to the public from 9.30am to 3.30pm, Monday to Friday.

Class 2 National Insurance contributions

For further information about Class 2 National Insurance contributions ring the Self Employment Directorate Call Centre on 06451 54655. Calls are charged at BT local rate. You can also contact the Inland Revenue (NI Contributions) Office, Self Employment Directorate Customer Accounts Section, Longbenton, Newcastle upon Tyne, NE98 1ZZ

About deferring payment of National Insurance contributions

For more information about deferring payment of National Insurance contributions, ring the Deferment Group Helpline on 06451 57141; calls are charged at BT local rate. You can also contact the Inland Revenue (NI Contributions) Office, Deferment Group, Longbenton, Newcastle upon Tyne, NE98 1ZZ. Further information about deferment, as well as other National Insurance services are available via the Internet. Our address is www.inlandrevenue.gov.uk

About Schedule D and Class 4 National Insurance contributions

If you need further information about Schedule D tax and related Class 4 NI contributions, contact your local Inland Revenue Enquiry Centre or Tax Office.

Publications available from the Inland Revenue

The Inland Revenue's 'Catalogue of leaflets and booklets', gives information about all the publications you can get from Inland Revenue Enquiry Centres, Tax Offices and Inland Revenue (NI Contributions) Office. Addresses are in your local telephone directory under 'Inland Revenue'. Most offices are open to the public from 8.30 am to 4.30 pm, Monday to Friday and some are also open outside these hours.

Your local Citizens' Advice Bureau may also have copies of Inland Revenue leaflets.

If you are unhappy with the service provided by the Inland Revenue

Leaflet IR120 'You and the Inland Revenue' gives details of our complaint

procedures. You can get this leaflet from any Social Security office, Inland Revenue Enquiry Centre, Citizens Advice Bureau and main libraries.

Data protection

The Inland Revenue is a Data Controller under the Data Protection Act. We hold information for the purposes specified in our notification made to the Data Protection Commissioner and may use this information for any of them.

We may get information about you from others, or we may give information to them. If we do, it will only be as the law permits, to check accuracy of information, prevent or detect crime or protect public funds.

We may check information we receive about you with what is already in our records. This can include information provided by you as well as other Government Departments and    agencies and overseas tax authorities. We will not give information about you to anyone outside the Inland Revenue unless the law permits us to do so.

Glossary

Small Earnings Exception limit

This is the limit on earnings from self-employment below which people may, if they apply, be excepted from liability for Class 2 National Insurance contributions. The limit for the 1999/2000 tax year is £3,770.

Lower Earnings Limit

If you work for an employer and earn above a certain amount, called the Lower Earnings Limit, you have to pay Class 1 National Insurance contributions. The Lower Earnings Limit for the 1999/2000 tax year is £66 a week, £286 per month, £3,432.00 per year.

Qualifying year

This is a tax year in which you have paid enough National Insurance contributions or been awarded enough credits for it to count for Retirement Pension and Widow's Benefit.

Reduced liability

This applies to some married women and widows who have elected not to pay Class 2 National Insurance contributions when self-employed and reduced rate Class 1 National Insurance contributions when employed.

State Pension Age

At the moment, men can get their State Pension at age 65 and women at 60. State Pension will be equalised at age 65 for both men and women from 6 April 2020. The change from 60 to 65 for women will be phased in over a ten year period from 2010 to 2020.

This means that women born

before 6 April 1950 can still get their State Pension at 60

between 6 April 1950 and 5 April 1955, will get their State Pension between age 60 and 65 (for more information, see leaflet EQ P1a, available from your nearest Social Security office)

on or after 6 April 1955 will be able to get their State Pension at 65.

Tax year

This starts on 6 April one year and ends on 5 April in the next.

Tax deducted at source

Tax deducted before a payment is made to you.

Year of assessment

The year on which National Insurance contributions are based. It starts on 6 April one year and ends on 5 April in the next.

These notes are for guidance only and reflect the position at the time of writing. They do not affect your right of appeal about your tax, National Insurance or VAT.

Issued by the Inland Revenue, Contributions Agency and Customs and Excise

April 1999

Reproduced with the permission of the Board of Inland Revenue

© Crown Copyright 1999


Codes of practice

The Inland Revenue aims to provide a first-class service for taxpayers. These leaflets are intended to support the Taxpayer's Charter. They outline the standards the Revenue sets itself and the rights that taxpayers have in particular situations.

Title	Number	Year
Code of Practice 1 - Mistakes by the Inland Revenue	COP1	1996
Code of Practice 2 - Investigations	COP2	1995
Code of Practice 3 -Inspections  of employers' and contractors' records	COP3	1997
Code of Practice 10 - Information and advice	COP10	1998
Code of Practice 11 - Enquiries into tax returns by local Tax Offices	COP11	1996


IR133 - Company cars - a guide for employees
Company cars - a guide for employees (IR133)

Personal Taxpayer Series IR 133

Income tax and company cars from 6 April 1994: a guide for employees

We produce a wide range of free leaflets each designed to explain a different aspect of the tax system in plain English. A leaflet related to this one is IR 132 'The Taxation of Company Cars from 6 April 1994. Employers' Guide'.

Our 'Catalogue of Leaflets and Booklets' lists the publications you can get from Tax Enquiry Centres and Tax Offices. Their addresses are in your local phone book under 'Inland Revenue'. Most offices are open to the public from 10am to 4pm, Monday to Friday and some are also open outside these hours. Your local library or Citizens' Advice Bureau may also have copies of our leaflets.

THE NEW SYSTEM OF TAXING COMPANY CARS

If your employer provides you with a car which you can use for private travel it is a benefit in kind and you may have to pay tax on it. The old system for working out how much tax you pay on a company car, based on scale charges depending on the car's engine size or original market value, will no longer apply after 6 April 1994. From that date there will be a new system, based on the price of the car. It will apply to existing cars still available after 5 April 1994, and to cars newly provided after that date. This leaflet explains how the new system will work.

What is a company car?

It is a car made available by an employer (including cars provided under a leasing arrangement) for the private use of a director or employee, his or her family or household. Private use includes travel from home to work.

Motor cycles, invalid carriages, and vans or other commercial vehicles are not ‘company cars’.

Who has to pay tax on a company car?

If you earn £8,500 a year or more or are a director you have to pay tax on any benefit in kind you receive including your company car. Your earnings for this test include your wages or salary, payments for business expenses and the value of benefits such as the company car and private medical insurance.

What are the main features of the new system?

CAR BENEFIT

The amount on which you pay tax each year is 35% of the 'price' of the car less any reductions for business mileage and the age of the car as set out below.

PRICE

The price of a car will usually be its list price plus accessories and delivery charge, VAT, and Car Tax where appropriate. The price will be subject to an upper limit of £80,000. There are special rules for 'classic cars' and cars without a list price.

YOUR CONTRIBUTIONS

Contributions up to £5,000 which you make towards the cost of the car and/or accessories will reduce its 'price' for calculating the amount on which you pay tax.

BUSINESS MILEAGE

The car benefit (35% of the price) may be reduced for business mileage you do in the car by:

One third, for 2,500 to 17,999 business miles a year

Two thirds, for 18,000 or more business miles a year

OLDER CARS

After any reduction for mileage, there is a further reduction of one third for cars which are four or more years old at the end of the tax year.

PAYMENTS FOR USE

Payments you have to make for the private use of the car will continue to reduce, pound for pound, the amount on which you pay tax.

FUEL FOR PRIVATE USE

Where you are provided with fuel for private use it will continue to be taxed, as now, based on the car's engine size.

How is the price of a car calculated for tax purposes?

It will usually be the total of:

Manufacturer's or distributor's list price of the car on day before date of registration

Taxes (VAT, Car Tax if appropriate) but not Vehicle Excise Duty (Road Tax)

Delivery charges (including VAT)

The list price of any accessory fitted before the car is made available to you, including VAT and any delivery or fitting charges

The list price of any accessory or set of accessories (eg. alloy wheels) over £100 (including VAT, fitting and delivery) fitted after the car is made available to you. This only applies for accessories fitted after 31 July 1993. Where the price of your car is increased for accessories fitted after the car was made available to you, the increased price applies from the beginning of the tax year in which they were fitted and subsequent years (the tax year runs from 6 April in one year to 5 April in the next).

There are separate rules for

'Classic cars'

Cars without a list price: the price then is what would have been published if the manufacturer or supplier had published one.

And there is an upper limit of £80,000 on the price of a car for tax purposes. Where the price of a car exceeds this figure, its price for tax purposes will be £80,000.

EXAMPLE 1

Car A registered 8 April 1993 with standard equipment

List price including VAT	£10,250
plus delivery, number plates*	£385
Price of car for tax purposes	£10,635
Car benefit charge: 35% of price	£3,722
*Including VAT

EXAMPLE 2

Car B registered 1 November 1992, supplied with optional factory-fitted air conditioning, alloy wheels, metallic paint and dealer-fitted tow bar.

List price, including VAT and car tax	£12,650
plus delivery, number plates*	£363
air conditioning*	£755
alloy wheels	£305
metallic paint*	£185
tow bar*	£91
tow bar fitting charge*	£30
Price of car for tax purposes	£14,379
Car benefit charge: 35% of price	£5,033
*Including VAT

EXAMPLE 3

Car C registered 1 August 1993, supplied to employee with optional leather upholstery and alloy wheels; air conditioning fitted six months later.

List price, including VAT	£12,540
plus delivery, number plates*	£415
leather upholstery*	£875
alloy wheels*	£305
price of car for tax purposes at time made available	£14,135
Adjustment for accessory fitted later
add cost of air conditioning and fitting*	£1,240
Revised price of car for tax purposes	£15,375
Car benefit charge (35% of price)	£5,381
*Including VAT

Will there be any allowance if I contribute towards the cost of the car?

Yes. Any capital contributions - up to a limit of £5,000, including VAT - you make towards the cost of the car or accessories will reduce the price of the car pound for pound, for your tax purposes. This will also apply to contributions you made in the past towards a car which is still available to you after 5 April 1994.

EXAMPLE 4

(You contribute £3,500 to cost of car)

Total price of car when made available	£13,500
less your contribution	£3,500
Price of car for tax purposes	£10,000
EXAMPLE 5

(Same car as example 4; air conditioning added after 6 months; you pay half the cost of the air conditioning)

Plus air conditioning (including fitting etc)	£2,000
less your contribution	£1,000
Therefore price of accessory to add for tax purposes	£1,000
Revised price of car for tax purposes	£11,000
What do I pay tax on?

The car benefit charge will be 35 per cent of the price of the car. But you may get discounts from this for your business travel or for older cars.

What allowance is made for business mileage?

The car benefit charge (35 per cent of list price) will be reduced by

One third, for business mileage between 2,500 and 17,999 miles a year

Two thirds, for business mileage of 18,000 or more a year.

These discounts do not apply to second cars. The car benefit of a second car will only be reduced if your business use of it is 18,000 miles or more a year, and then the discount is one third.

Where you are provided with two cars the ‘second car’ is the one you use least for business travel.

What is ‘business travel’

A business journey is one which you are necessarily obliged to make in your employment. This means journeys which involve travel from one place of work to another.

'Business travel' does not usually include journeys between your home and work.

What allowance is made for the age of the car?

If your car is four or more years old at the end of the tax year, the tax charge (ie the car benefit, less any reduction for business mileage) is reduced by one third. The age of the car is measured from the date it was first registered: ie, cars registered before 6 April 1991 will start to qualify for a reduction in 1994-95.

EXAMPLE 6

(Car registered 1 August 1989; price: £12,500, business mileage: 9,500)

Car benefit: 35% of price	£4,375
less one third for business mileage	£1,458
	£2,917
less one third for age of car	£972
Taxable amount	£1,945
I have to pay for the private use of the car. Do I get a reduction for those payments?

Any payments you are required to make for the private use of the car, for example as part of the agreement for the car being made available to you, can be deducted from the taxable benefit. This is the same rule that applied before April 1994.

EXAMPLE 7

You are required to pay £100 a month for the private use of the car. Business mileage: 9,000. Price of car for tax purposes: £11,000.

Car benefit: 35% of price	£3,850
less one third for business mileage	£1,283
	£2,567
less payment for private use (12x£100)	£1,200
Amount on which you pay tax	£1,367
What are the special rules for classic cars?

Special rules apply if your car

Is 15 years old or more at the end of the tax year and

Has a market value of £15,000 or more which must be higher than the manufacturer's list price at time of registration.

The price of the car for tax purposes is then the open market value - for the car and accessories - on the last day of the tax year (or the last day in the tax year on which the car is available to you).

You can find the open market value of a classic car from valuations (eg for insurance) or prices in the market, or published prices.

Contributions you made towards the cost of the car or accessories can be deducted from the market value, up to a limit of £5,000.

What if I have a car for only part of the year?

The car benefit is reduced proportionately if your car is unavailable for part of the year, for example, if it is first provided for your use part way through the year. The car benefit will also be reduced if your car is not available for a continuing period of at least 30 days.

What tax do I have to pay if my employer provides me with fuel for private use?

If your employer provides you with any free fuel for private motoring in your company car, for example by paying for the fuel or providing it from the company's own pump, you will pay tax on the value of the benefit by reference to scale charges based on the engine size of the car. The charges for each year are set out in the Form P523 enclosed with your notice of coding. The current (1993-94) figures are

petrol engines	fuel charge
- up to 1400cc	£600
- 1401 to 2000cc	£760
- over 2000cc	£1,130
diesel engines
- up to 2000cc	£550
- over 2000cc	£710
You have to pay tax on the full scale charge if any free fuel is provided for private use. You do not pay tax if you make good the cost of all fuel provided for private motoring.

EXAMPLE 8

Your car in Example 6 has a 1,600cc petrol engine. It covers 9,500 business miles in the year and 6,500 private miles. Your employer pays 3/4 of the total fuel bill.

Taxable benefit of the car	£1,945
plus fuel benefit for engine size	£760
Revised taxable benefit	£2,705

If you pay for all your fuel, there will be no benefit charge for it and the taxable amount will remain £1,945.

How do I pay tax on my company car?

You will pay tax under the new system from 6 April 1994 on 35 per cent of the price of the car, less any reductions for business mileage, the age of the car, and payments for private use. You will also pay tax on any fuel benefit. The tax will normally be collected by an adjustment to your PAYE code or by an assessment after the end of the year, or both.

Under PAYE (Pay As You Earn), tax is deducted from your income by means of codes and tax tables which are designed, as far as possible, to ensure that the correct amount of tax is deducted during the tax year without the need for an assessment at the end of the year. The PAYE code is made up of personal allowances and other reliefs due, less any amounts to cover taxable income, such as a company car and other benefits in kind, to which PAYE cannot be applied.

Your employer normally provides information about your benefits in kind, including company cars, to the tax office so that your PAYE code can be worked out.

How will changing the new system affect the tax I pay?

The new system for taxing company cars means the tax for many employees with company cars will change. Most will be better off under the new rules; others will face increases in the tax they pay. How you will be affected depends on the car you have.

The new system starts in April 1994 and your PAYE code for that tax year will be issued in January 1994. To help us get PAYE codes adjusted ready for the start of the new system in April, employers have been asked to report list prices and other details of their employees' cars. Getting this information in time to adjust codes in January 1994 will avoid you paying too much tax from April 1994 or having to pay more tax at the end of the year.

If your employer has not done this, any car benefit included in your 1993-94 tax code will continue in 1994-95 until we are sent the details to recalculate it under the new rules.

What will happen when my car is changed?

When you car is changed after 5 April 1994, or you are first provided with a car after that date, your employer will send details of the car and its price to the Inland Revenue so that your PAYE code can be adjusted.

Where can I go for more help?

These notes do not cover every point but any Tax Enquiry Centre or Tax Office will be pleased to help you. Their addresses are in your local phone book under 'Inland Revenue'.

Where you do not understand or agree with the calculation of the price of your car and accessories, your employer may be able to help.

Issued by the Inland Revenue

November 1993

© Crown Copyright 1993

This leaflet is reproduced by kind permission of the Board of Inland Revenue


Construction industry

Title	Number	Year
The new Construction Industry Scheme. A handy guide	CIS FACT 5	1998
Construction Industry Scheme	IR14/15(CIS)	1998
Construction industry tax deduction scheme	IR14/15	1997
Construction Industry Scheme. Conditions for getting a subcontractor's tax certificate	IR40(CIS)	1998
Construction industry. Conditions for getting a sub-contractor's tax certificate	IR40	1997
Guide for sub-contractors with tax certificates	IR116	1997
A sub-contractor's guide to the deduction scheme	IR117	1997
Are your workers employed or self-employed? A guide for tax and National Insurance for contractors in the construction industry.	IR148/ CA69	1995
(CIS) Advice to subcontractors going onto deduction under the Construction Industry Scheme	IR164	1997


Contacting the Inland Revenue

Title	Number	Year
How to complain about the Inland Revenue and the Valuation Office Agency	AO1	1998
Appeals against tax	IR37	1995
Investigations. The examination of business accounts	IR72	1995
Investigations. How settlements are negotiated	IR73	1994
You and the Inland Revenue. Tax, Collection and Accounts Offices	IR120	1999
Open Government	IR141	1995

* Ethnic language version


Contents
Inland Revenue Leaflets

This Help file is intended to provide sources of further useful information contained in the leaflets and booklets published by the Inland Revenue.

TaxCalc contains brief details of a number of leaflets and the full text of some of the most popular leaflets which can be printed out if you have a printer attached. You may find them easier to read in hard copy than on the screen.

Unless otherwise stated, the leaflets and booklets listed are available free from your local tax office or tax enquiry centre which will be listed under Inland Revenue in the telephone directory. Your local library and Citizens' Advice Bureau may also have copies of the leaflets. For a full list of leaflets, call your local Inland Revenue Enquiry Centre and ask for the Inland Revenue catalogue of leaflets and booklets which is updated twice a year.

It is essential that you make sure that you have the most up-to-date version of the leaflet/booklet as changes may have been made since you purchased TaxCalc. If you are using one of the ones in TaxCalc it is worth phoning your nearest office to check that it is still current and has not been re-issued under a new number or title.

The Revenue have planned to withdraw and update certain leaflets. Where we know about this we have mentioned it in the leaflet description. Many leaflets are available on the internet at http://www.open.gov.uk/inrev/irleaf.htm.

The Revenue also provides material for schools.

Full text

SA/BK8 - Self Assessment. Your guide

CGT1 - Capital gains tax. An introduction

CWL1 - Starting a business

CWL2 - NI Contributions

IR65 - Giving to charity

IR80 - Income tax and married couples

IR87 - Letting and your home

IR110 - A guide for people with savings

IR120 - You and the Inland Revenue

IR121 - Income tax and Pensioners

IR125 - Using your own car for work

IR133 - Company cars - a guide for employees

IR145 - Low interest loans provided by employers

IR161 - Tax relief for employees' business travel

Brief details

At home with tax

Basic tax information

Benefits and tax

Capital gains tax

Codes of practice

Construction industry

Contacting the Inland Revenue

Employing other people

Income from abroad

Inheritance tax

Self Assessment

Tax and gifts

Tax in later years

Working for an employer

Working for yourself

You and your family

Your savings and investments

© Crown Copyright

Leaflets are reproduced with the permission of the Board of Inland Revenue

All leaflets and details of leaflets were correct at April 1999. Brief details of leaflets extracted from the Inland Revenue's catalogue of leaflets and booklets, December 1998 edition.


Employing other people

Title	Number	Year
Thinking of taking someone on? PAYE tax and National Insurance contributions for employers	CWL3	1997
Employer's quick guide to Pay As You Earn and National Insurance Contributions	CWG1	1998
Employer's further guide to Pay As You Earn and National Insurance contributions	CWG2	1997
Employer compliance reviews and negotiations	IR109	1997
Taxation of company cars from 6 April 1994. Employer's guide	IR132	1993
Income tax and company vans.	IR136	1994
PAYE settlement agreements	IR155	1996
Employee travel. A tax and NICs guide for employers	490(1998)	1998


IHT14
IHT14 - Inheritance tax. The personal representative's responsibilities

This booklet explains what the personal representatives of a deceased person should do about inheritance tax.


IHT15
IHT15 - Inheritance tax. How to calculate the liability

This booklet explains how to calculate the amount of inheritance tax when a person dies or makes a gift.


IHT16
IHT16 - Inheritance tax. Settled property

This booklet explains the rules for charging inheritance tax on assets which are included in a settlement.


IHT17
IHT17 - Inheritance tax. Businesses, farms and woodlands

This booklet explains the inheritance tax reliefs available for businesses, farms and woodlands.


IHT2
IHT2 - Inheritance tax on lifetime gifts

This leaflet explains which gifts are free from inheritance tax, which may count for inheritance tax, and how a 'Potentially Exempt Transfer' can affect the amount of inheritance tax payable.


IHT3
IHT3 - Inheritance tax. An introduction

Some basic facts about IHT. You should find it useful if you want to know whether or not tax will have to be paid on your estate after your death.


IHT8
IHT8 - Alterations to an inheritance following a death. Inheritance tax

Inheritances can be changed after a death, whether or not a will has been made. This leaflet explains how alterations may affect the tax.


IR (Insert) 1998-99

This insert shows the proposed allowances and rates of tax for the tax year 1998-99 as announced in the budget on 17 March 1998.


IR1
IR1 - Extra-statutory concessions

A list of extra-statutory concessions (ESCs) up to 31 August 1996. An ESC is a relaxation of the tax laws to give taxpayers a reduction in the amount of tax they need to pay.

There are two supplements to this leaflet, issued in November 1997 and November 1998.


IR101
IR101 - Approved company share option plans. An outline for employees

This booklet explains briefly about the tax advantages available to you if your company sets up a share option plan which is approved by the Inland Revenue.


IR109
IR109 - Employer compliance reviews and negotiations

This leaflet explains what happens at the end of an employer compliance review. It describes how an agreement is reached if the Revenue feels you have to pay anything following the review and what happens if an agreement cannot be reached.


IR110
IR110 - A guide for people with savings

Do you need to pay tax on your savings? Banks, building societies and local authorities are required to take income tax from the interest they pay to savers. However, people whose taxable income is covered by their tax allowances can register to receive their interest 'gross' (that is, without tax taken off). This guide explains how to work out if you can claim tax back and how to register to get your interest gross.

FULL TEXT


IR113
IR113 - Gift Aid. A guide for donors and charities

Gift Aid is a tax relief for single cash gifts made to charity. The booklet explains how individuals and companies can use the Gift Aid scheme.


IR114
IR114 - TESSA Tax free interest for taxpayers

This leaflet explains the rules for Tax Exempt Special Savings Accounts (TESSAs). You can open a TESSA if you are a taxpayer, but want to receive tax free interest. Following the Finance Act 1998, a new tax-free savings scheme, the Individual Savings Account (ISA) will supersede the current TESSA scheme from 6 April 1999.


IR115
IR115 - Tax and child care

This leaflet explains the tax and National Insurance rules relating to child care. It also gives parents and employers other useful information about their tax position.


IR116
IR116 - Guide for sub-contractors with tax certificates

This describes the tax certificates and vouchers used in the construction industry and tells you when and how they should be used.


IR117
IR117 - A sub-contractor's guide to the deduction scheme

This leaflet is for self-employed people working in the construction industry without a sub-contractor's tax certificate. It explains why contractors make deductions from payments and what forms they use.


IR119
IR119 - Tax relief for vocational training

Are you training for a National Vocational Qualification (NVQ) or a Scottish Vocational Qualification (SVQ), up to and including level 4? This leaflet shows you how tax relief is available on the payments you make for training.


IR120
IR120 - You and the Inland Revenue

Are you happy with the service you have received from the Revenue? Do you have any comments or suggestions for improvement? If so, this is the leaflet for you. It tells you how to get help and information. It also includes the Taxpayer's Charter which sets out the standard of service you can expect.

Available in Bengali, Chinese, Greek, Gujarati, Hindi, Punjabi, Urdu and Vietnamese. Also available in clear print, audio cassette and Braille.

FULL TEXT


IR121
IR121 - Income tax and pensioners

This leaflet tells you about personal allowances, how these can be affected by income and what sort of income is taxable and what is not. It is particularly helpful if you are about to become a pensioner.

FULL TEXT


IR123
IR123 - Mortgage interest relief. Buying your home

A short guide to mortgage interest relief for a loan used to buy your home. It explains which loans qualify for Mortgage Interest Relief At Source (MIRAS), how the relief is given to you, and how it is shared out if you are buying with someone else.


IR125
IR125 - Using your own car for work

This booklet is for employees who use their own cars for business journeys. It tells you how using your own car for work affects your tax, how car mileage allowances are taxed, how to work out your business motoring costs and what information you should give to the Inland Revenue.


IR125 - Using your own car for work
Using your own car for work (IR125)

Personal Taxpayer Series IR125

Using your own car for work

CONTENTS

Introduction

How using your own car for work affects your tax

Working out taxable profit on allowances

Tax relief on business motoring costs

Information your employer will give you

Information you should give to the Revenue

Where you can get help

We produce a wide range of free leaflets each designed to explain a different aspect of the tax system in plain English. Some you might find useful are listed below.

CWL1	Starting your own business?
IR34	PAYE
IR56/NI39	Employed or self-employed? A guide for tax and National Insurance.
IR90	A guide to tax allowances and reliefs
IR122	Volunteer drivers.
Our leaflet IR120 ‘You and the Inland Revenue’ tells you more about the standard of service you can expect from us. It also tells you the steps you can take if you want to make any comments on the service you receive, or complain about the way in which your tax affairs have been handled.

Our IR List ‘Catalogue of leaflets and booklets’ shows all the publications you can get from Tax Enquiry Centres and Tax Offices. The addresses are in your local phone book under ‘Inland Revenue’. Most offices are open to the public from 9.30am to 4pm, Monday to Friday, and some are also open outside these hours.

Your local library or Citizens’ Advice Bureau may also have copies of our leaflets.

In addition , the following booklets on Self Assessment are available

*Self Assessment - A general guide (SA/BK1)

*Self Assessment - A guide for the self-employed (SA/BK2)

Self Assessment - A guide to keeping records for the self-employed (SA/BK3)

Self Assessment - A general guide to keeping records (SA/BK4).

You can order booklets on Self Assessment from the special Self Assessment Orderline on 0645 000604. All calls are charged at local rates and the lines are open between 8am and 10pm seven days a week. You can order by fax on 0645 000604 or by e-mail on saorderline.ir@gtnet.gov.uk

The Self Assessment booklets are also available on the Internet at

http://www.open.gov.uk/inrev/irleaf.htm

* Note these booklets have now been withdrawn

This leaflet is for employees who use their own cars for work.

It tells you

how using your own car for work affects your tax

how to work out if you have a taxable profit on your allowances or if you can get tax relief on your business motoring costs

what information your employer will give you

what information you should give the Inland Revenue.

Using your own car for work

This means using your car for business journeys that you have to make to carry out your job. Usually this involves travel between one place of work and another. You get tax relief for the cost of these journeys to the extent that your employer does not meet them. (Tax relief reduces the amount of tax that you have to pay on your income).

Journeys between home and your normal place of work are not business journeys. But if, instead of going to your normal place of work, you travel directly between your home and a temporary place of work you can get tax relief for

the travel costs you incurred; or

the costs you would have incurred if your journey had started and finished at your normal place of work,

whichever is lower.

Private travel

You do not get tax relief for private journeys.

If your employer pays you an allowance for purely private travel your employer should deduct tax from it under Pay As You Earn (PAYE).

If you have any questions about whether a journey is business or private travel ask your Tax Office or local Tax Enquiry Centre, or your accountant/professional advisor if you have one. You will find our telephone number under ‘Inland Revenue’ in your local directory.

How does using my own car for work affect my tax?

Car or mileage allowances

Most employees who use their own cars for business travel are paid an allowance to cover costs by their employer. Usually these payments are based on an amount per mile for the mileage travelled but they can also be in the form of a lump sum or periodic payment.

How do car or mileage allowances affect my tax?

It depends on whether the car or mileage allowances you received from your employer during the tax year come to more than the costs of your business travel. (A tax year runs from 6 April to the following 5 April.)

If the answer is

yes, you have received a profit which is taxable

no, you can get tax relief against your earnings.

We give some examples later on in the leaflet of how to work out whether your allowances come to more or less than your business motoring costs.

Keeping a record of your car or mileage allowances

To work out if the car or mileage allowances you received from your employer come to more or less than the cost of your business travel, you need to know what allowances you were paid during the tax year. From the tax year 1996-97 onwards your employer will tell you, by 6 July after the end of the tax year, about any allowances which were not dealt with under PAYE. But in cases where it is clear that tax would not normally be due on the allowances, the Inland Revenue may have agreed what we call a ‘dispensation’ to save your employer having to report details for each employee. So it is important that you keep your own record of the car or mileage allowances you receive.

How do I work out if I have a taxable profit on my allowances or if I can get tax relief on my business motoring costs?

There are two ways you can do it.

There is an ‘exact’ method using actual motoring costs. To do this you have to keep records of your actual motoring costs during the tax year and of your business and private mileage. You can then work out the proportion of the costs that relates to your business travel and compare it with the allowances you received from your employer during the tax year. If the amount of the allowances comes to more than your business motoring costs you have received a taxable profit. Example 2 shows you what to do.

Alternatively,  for the tax year 1996-97 onwards, you can use a simpler method to work out your business motoring costs. It does not give such an exact figure but it saves you work. You simply apply the tax-free mileage rates which we publish each year for the Fixed Profit Car Scheme (FPCS) to the number of miles you travelled on business in the tax year. This gives you an amount for your tax-free business motoring costs which you can compare with the allowances you received from your employer during the tax year. If the amount for your business motoring costs comes to more than the allowances you received, you can claim the difference against your earnings. Example 1 shows you what to do.

If you use this simpler method, you still need to keep a record of miles travelled on business journeys and a record of the car or mileage allowances you receive. But you do not have to keep records of your actual motoring costs.

The FPCS tax-free mileage rates

These rates are estimates of the average motoring costs for a range of car engine sizes. They are calculated each year for the FPCS, which is a voluntary arrangement between employers and the Inland Revenue. Under this scheme, employees who use their own cars for business travel are taxed only on the amount by which the car or mileage allowances received from the employer exceed the Inland Revenue’s table of tax-free mileage rates.

Where your employer operates a FPCS, any tax that is due on your car or mileage allowances (because they come to more than the tax-free mileage rates) will be collected automatically through an adjustment to your PAYE tax code. We review the position after the end of the tax year, when your employer has sent details of your business mileage to the Tax Office.

If the car or mileage allowances you received in the tax year do not exceed your motoring costs using the tax-free mileage rates, we accept that there is no tax to pay.

Each year, shortly after the Budget, we announce the tax-free mileage rates for the following tax year. For each range of car engine size there are two rates

a higher rate for the first 4,000 business miles, and

a lower rate for each business mile over 4,000 miles.

The table below shows the tax-free mileage rates for 1995-96 and 1996-97. Your Tax Office or local Tax Enquiry Centre will be able to tell you the rates for other years.

Tax-free rate per mile for business travel
	on the first 4,000 miles in the tax year		On each mile over 4,000 miles in the tax year
Size of car engine	1995-96	1996-97	1995-96	1996-97
Up to 1,000cc	27p	27p	15p	16p
1,001 - 1,500cc	34p	34p	19p	19p
1,501 - 2,000cc	43p	43p	23p	23p
over 2,000cc	60p	61p	32p	33p

The different tax-free rates for business mileage over 4,000 miles a year reflects the fact that some costs, such as road tax and insurance do not increase with greater mileage. Others such as depreciation increase, but not in line with increasing mileage. The higher the total mileage, the lower the cost per mile of running a car. The different rates take account of this.

If your employer operates a FPCS you may be given, after the end of the year, a figure for the taxable profit. You can use that figure when completing your tax return, if you get one.

Remember, the FPCS is a voluntary arrangement. Whether or not your employer operates a FPCS, you can use the actual costs of business motoring rather than the Revenue’s tax-free rates to work out if tax is due on your car or mileage allowances, or if relief is available on your business motoring costs. You will need to have kept a record of your actual motoring costs during the tax year and your business and private mileage. You must also include in your calculation the car or mileage allowances you received.

How do I work out the tax position on my business travel using the Inland Revenue’s tax-free rates?

You need to do two things

add up all the car or mileage allowances you received from your employer during the tax year, and

multiply the tax-free rate (or rates) for your car engine size by the number of business miles you travelled in the tax year.

Example 1

Alan Smith uses his own 1,800cc car for business travel. In 1996-97, that is between 6 April 1996 and 5 April 1997, Alan travels 5,000 miles on business. His employer pays him a motor mileage allowance of 42p a mile.

		£
Step 1
The mileage allowance received was 5,000 miles at 42p a mile	=	2,100
Step 2
For 1996-97, the tax-free mileage rates for this size of car are
4,000 miles at 43p a mile	=	1,720
1,000 miles at 23p a mile	=	230
Total tax-free rates		1,950
Step 3
Allowances received	=	2,100
less the tax-free rates	=	1,950
Amount of profit	=	150

You can use the following working sheet to work out your tax position using the tax-free rates.

(Unfortunately we have been unable to reproduce this working sheet successfully in TaxCalc. Please contact your local Tax Enquiry Centre for a hard copy of the leaflet if you need it.)

How do I work out the tax position on my business travel using actual motoring costs?

You need to have details of three things

the car or mileage allowances you received from your employer during the tax year

your motoring costs for the tax year, and

a record of your business and private mileage during the tax year.

You can then work out the proportion of the costs that relate to business travel and compare it with the allowances you received from your employer. If the total allowances you received come to more than the business proportion of the costs, then you have received a profit which is taxable.

If the costs come to more than the allowances you can get tax relief for the difference against your earnings.

There are examples and working sheets in the following paragraph which show you how to do the calculations you need.

What motoring costs should I include?

Insurance

Road fund licence

Fuel and oil

Servicing and repairs

Depreciation

The allowance for depreciation is called a ‘capital allowance’.  It is based on the cost of the car if it was bought during the year or on its ‘written down value’, if it was bought in an earlier year. The ‘written down value’ is the original cost less the total capital allowances for earlier years. The maximum allowance due each year is 25% of the cost or written down value but is limited to £3,000 in any one year.

You can use the following working sheet to work out the capital allowances on your car.

(Unfortunately we have been unable to reproduce this working sheet successfully in TaxCalc. Please contact your local Tax Enquiry Centre for a hard copy of the leaflet if you need it.)

Special rules apply for the year when the car is sold, or when you stop using it for work.

If you have used the exact method of calculating actual motoring costs in every year that you used the car for work, the allowance for the final year is the difference between

- the sale proceeds (or the value of the car when you stopped using it for work) and the written down value at the start of the year.

The £3,000 limit for cars which cost more than £12,000 does not apply in the year of sale.

If you have not used the actual cost calculation in every year (because in some years you used the simpler method) the allowance for the final year calculated above must be multiplied by the fraction A/B where

- A is the number of years when you used the actual cost calculation, and

- B is the total number of years that you used the car for work.

If the sale proceeds (or the value of the car when you stopped using it for work) is more than the written down value at the start of the year, the part of the difference that relates to business travel (over the life of the car) is added to your taxable pay for the year. This is called a ‘balancing charge’.

What about loan interest?

If you are buying your car with a loan or on hire purchase, you can get tax relief for some of the interest. (Be careful to count only the interest you pay, not the loan or hire purchase instalments themselves.)

In the same way as for other motoring costs, you can get tax relief for the proportion of the interest relating to your business travel. So if you drive 20,000 miles in the tax year of which 5,000 were on business you can get tax relief for a quarter of the interest.

Example 2

(a) When the written down value of a car is less than £12,000

Ann Jones uses her own 1,400cc car for business travel. In 1996-97, that is between 6 April 1996 and 5 April 1997, Ann travels 10,000 miles, 3,000 of them on business. Her employer pays her a mileage allowance of 30p a mile.

		£
Step 1
The mileage allowance received was 3,000 miles at 30p a mile	=	900
Step 2
Calculate the total motoring costs for the year as follows
Insurance		400
Road fund licence		140
Fuel and oil		1,200
Servicing and repairs		300
Total motoring costs for the year	=	1,500
Step 3
Proportion of motoring costs relating to business travel for the year
3,000 x £3,540 10,000	=	1,062
less total mileage allowance received	=	900
Amount on which tax relief is due	=	162

Ann can get tax relief for the difference of £162 (£1,062 - £900) against her earnings. If she gets a tax return she would enter this figure in box 1.32 in the employment income pages of her tax return.

(b) When the written down value of a car is more than £12,000

		£
Step 1
The mileage allowance received was 3,000 miles at 30p a mile	=	900
Step 2
Calculate the total motoring costs for the year as follows
Insurance		400
Road fund licence		140
Fuel and oil		1,200
Servicing and repairs		300
Capital allowance The written down value at the beginning of the tax year was £15,000. Capital allowance for the year is limited to £3,000		3,000
Total motoring costs for the year		5,040
Step 3
Calculate the proportion of motoring costs relating to business travel for the year  3,000 x £5,040 10,000	=	1,512
Step 4
Proportion of motoring costs relating to business travel less total mileage allowance received	= =	1,512    900
Amount on which tax relief is due	=	612

Ann can get tax relief for the difference of £612 against her earnings.

You can use the following work sheet to work out the tax position on your business travel using actual motoring costs.

We tell you in this leaflet what to do when you have worked out if there is a taxable profit or if you can claim tax relief.

What information will my employer give me?

For 1996-97 onwards your employer will give you the details of car and mileage allowances paid to you for using your own car for business journeys. You should receive the information from your employer by 6 July after the end of the tax year.

If your employer does not operate a FPCS you will receive the details of the mileage allowances which your employer has put on Form P11D (or equivalent) and sent to the Inland Revenue. This will be

the total amount of the allowances paid to you in the year

the amount from which any tax has been deducted, and

the difference which is the taxable payment.

If your employer does operate a FPCS you will be given details of either

the amount of the taxable profit under the FPCS arrangements, or both the following

- the total amount of the car allowances and the motor mileage allowances paid in the year for business travel, and

- the total number of business miles travelled for which the motor mileage allowances were paid.

Your employer does not have to give you information where

there is no taxable profit; and

a dispensation has been agreed with the Revenue to save the work of reporting details for each employee.

Where car or mileage allowances are covered by a dispensation you do not have to include them on your tax return.

What information should I give the Inland Revenue?

This depends on whether or not you get a tax return.

If you receive a tax return

You may receive a tax return after the end of the tax year. Using this leaflet, you should decide which method you want to use to work out if you have a taxable profit on your car or mileage allowances or if you can get relief on your business motoring costs. You can use the working sheets in this leaflet to calculate the figures. For 1996-97 onwards, if you get a Self Assessment tax return, you can then enter the total in the employment pages in box 1.15 or 1.32 of your tax return, whichever is appropriate.

If your employer operates a FPCS and gives you a figure for taxable profit for the year, you can use that figure in your tax return.

If you do not receive a tax return

Your employer normally tells us what car or mileage allowances you were paid in the tax year. We then collect any tax that is due through an adjustment to your PAYE tax code.

If you have worked out that your business motoring costs come to more than the car or mileage allowances you received in the tax year, send us your calculation using either the exact or the simpler basis to work out your business motoring costs. Remember to include in your calculation the car or mileage allowances you received from your employer in the tax year.

You can send your calculation by letter to your Tax Office, or ask for the Expenses Claim form P87.

Where can I get help?

If you have any further questions, please contact any Tax Enquiry Centre or Tax Office. The address and telephone number of your nearest one is in your local phone book under ‘Inland Revenue’.

These notes are for guidance only and reflect the tax position at the time of writing. They do not affect your right of appeal about your own tax.

Issued by the Corporate Communications Office of the Inland Revenue

March 1996

Reproduced by permission of the Board of Inland Revenue

© Crown copyright 1996


IR128
IR128 - Corporation tax pay and file. Company leaflet

A simple guide that gives a brief outline to the rules for paying corporation tax.


IR129
IR129 - Occupational pension schemes. An introduction

This leaflet will help you if you are thinking about joining an occupational pension scheme.


IR132
IR132 - Taxation of company cars from 6 April 1994. Employer's guide

If you provide an director or employee, or a member of his or her family (or household), with a car that can be used for private travel - usually called a company car - the director or employee may have to pay tax on the car benefit. This booklet explains the changes that came into effect from 6 April 1994.


IR133 short
IR133 - Income tax and company cars from 6 April 1994. A guide for employees

If your employer provides you with a car that you can use for private travel it is a benefit in kind and you may have to pay tax on it. This leaflet explains how the tax system works.

FULL TEXT


IR134
IR134 - Income tax and relocation packages

If your employer helps you to move house, any payments you receive, or any goods or services provided for you, are part of your taxable earnings. This leaflet explains how you are taxed if you receive this type of help.


IR136

IR136 - Income tax and company vans

How the private use of a company van is taxed. This leaflet answers the questions most often asked by both employees and employers.


IR137
IR137 - The Enterprise Investment Scheme

This scheme has been set up by the Government to help some types of unquoted companies raise finance from outside investors. This booklet provides a general outline of the scheme.


IR138
IR138 - Living or retiring abroad? A guide to UK tax on your UK income

This booklet explains how the income from investments in the UK and your UK pension will be taxed if you live or retire abroad.


IR139
IR139 - Income from abroad? A guide to UK tax on overseas income

This booklet explains how overseas income is taxed in the UK. It also explains how you can obtain relief from 'double taxation' if your overseas income is subject to tax both in the UK and in another country.


IR14/15
IR14/15 - Construction industry tax deduction scheme

This booklet explains the current arrangements, which apply until 31 July 1999, for the taxation of certain payments made by 'contractors' and 'sub-contractors' in the construction industry.


IR140
IR140 - Non-resident landlords, their agents and tenants

This booklet tells you about the scheme for taxing the UK rental income of non-resident landlords. The scheme applies to rents and other income of a UK rental business paid on or after 6 April 1996.


IR144
IR144 - Income tax and Incapacity Benefit

This leaflet is for people who are claiming Incapacity Benefit. It explains how it is taxed and how you can get help from the Tax Office if you need it.

This leaflet is available in clear print, audio cassette and Braille versions.


IR145 short
IR145 - Low interest loans provided by employers

A low interest loan given to you, or a relative, by your employer or someone connected with your employer is taxable. This booklet outlines the tax position from 6 April 1994. A low interest loan which your employer guarantees, finances or helps with in other ways is also taxable.

FULL TEXT


IR148/CA69
IR148/CA69 - Are your workers employed or self-employed? A guide for tax and National Insurance for contractors in the construction industry

When you take on workers you must consider whether the terms and conditions you engage them on make them employees or self-employed. The position in the construction industry is no different from any other industry and this leaflet is intended to complement IR56/NI39 'Employed or self-employed' and CWG2 'Employer's guide to PAYE and NICs'.


IR150
IR150 - Taxation of rents. A guide to property income

This guide describes the income rules that apply if you receive rental income and other income from land and property from 6 April 1995 onwards. It provides guidance about what income is within Schedule A, what expenses can be set against that income and how to arrive at the taxable profit or allowable loss of a tax year. It also covers income from overseas property.


IR155
IR155 - PAYE settlement agreements

This leaflet is for employers who make expenses payments to their employees or give them benefits in kind.


IR164
IR164 - (CIS) Advice to subcontractors going onto deduction under the Construction Industry Scheme

This leaflet gives advice to subcontractors who have been issued with a Registration Card (CIS4) because they no longer qualify for a 714 certificate under the new Construction Industry Scheme. For example, they may not meet the new turnover test or other requirements. This means that deductions on account of tax and NICs will be made by the contractor from 1 August 1999.


IR16
IR16 - Share acquisitions by directors and employees. Explanatory notes

This booklet describes the circumstances in which directors and employees may become chargeable to income tax on the grant and exercise of options to acquire shares. It also covers shares generally.


IR160
IR160 - Inland Revenue enquiries under Self Assessment

This leaflet explains what happens at the end of an enquiry into your tax return.


IR161
IR161 - Tax relief for employees' business travel

A short guide for employees about the tax treatment of their travel expenses from 6 April 1998.

In general, you are taxed on travel expenses which your employer pays or provides for you; this is because the law says they are part of your income. however, this leaflet explains how you can claim tax relief for the cost of business journeys in the course of your job or to get you from home to a place where you have to be for your work.

FULL TEXT


IR20
IR20 - Residents and non-residents. Liability to tax in the United Kingdom

This booklet describes the residence rules and how to work out whether or not you are resident in the UK for tax purposes.


IR33
IR33 - Income tax and school leavers

A basic guide that young people should find useful. It explains what income tax, PAYE, tax allowances and tax codes are.


IR34
IR34 - Pay As You Earn

This is for all employees who want to know more about the 'Pay As You Earn' (PAYE) system.


IR37
IR37 - Appeals against tax

This leaflet explains the procedure for making a tax appeal. It is intended mainly for people who do not have professional advice in dealing with their tax affairs.


IR40
IR40 - Construction industry. Conditions for getting a sub-contractor's tax certificate

This leaflet explains the current arrangements, which apply until 31 July 1999, for applying for a subcontractor's tax certificate.


IR41
IR41 - Income tax and job seekers

Jobseeker's Allowance (JSA) replaced Unemployment Benefit and Income Support for unemployed people on 7 October 1996. This leaflet is for people who are claiming JSA because they do not have a job. It explains how tax is affected by unemployment, and whether or not you can claim a tax refund if you are unemployed.


IR42
IR42 - Lay-offs and short-time work

This is a guide for people who have a job, but are claiming benefits because they have been laid-off or are on short-time work.


IR45
IR45 - What to do about tax when someone dies

This leaflet will help you understand the tax consequences that arise when someone dies. It gives information about income tax, capital gains tax and inheritance tax. There are sections about the responsibilities of personal representatives and trustees, and about the tax treatment of beneficiaries.


CWL3
CWL3 - Thinking of taking someone on? PAYE tax and National Insurance contributions for employers

You may be thinking of employing someone for the first time. Perhaps because your business is expanding and you need another pair of hands. This leaflet takes a brief look at the things you will have to do as an employer, such as work out tax and Class 1 NICs. It also answers some of the questions new employees ask.


IR56/NI39
IR56/NI39 - Employed or self-employed? A guide for tax and National Insurance

This can help you decide whether or not you are employed or self-employed - an area that causes a lot of confusion. It also tells you how tax and National Insurance affect you, whatever your employment status.


IR60
IR60 - Income tax and students

If you are a student this leaflet will help you understand the income tax system and how it affects you. It explains tax allowances, holiday earnings and Jobseeker's Allowance.


IR64
IR64 - Giving to charity. How businesses can get tax relief

Companies and individuals in business can get tax relief for payments made to charity. This leaflet describes how the relief is given.


IR65
IR65 - Giving to charity. How individuals can get tax relief

A brief explanation of how you can get tax relief on gifts made to UK charities through the Payroll Giving Scheme, deeds of covenant and Gift Aid.


IR65 - Giving to charity
Giving to charity (IR65)

Personal Taxpayer Series IR65

Giving to charity

How individuals can get tax relief

CONTENTS

Payroll Giving Schemes

Deeds of covenant

Gift Aid

Some other points

Contact with the Tax Office

We produce a wide range of free leaflets each designed to explain a different aspect of the tax system in plain English. Some you might find useful are listed below.

IR64	Giving to charity - how businesses can get tax relief
IR113	Gift Aid - a guide to donors and charities
IR120	You and the Inland Revenue
CGT1	Capital gains tax - an introduction

Our IR List ‘Catalogue of leaflets and booklets’ shows all the publications you can get from Tax Enquiry Centres and Tax Offices. The address of the nearest Tax Office is in your local phone book under ‘Inland Revenue’. Most offices are open to the public from 9.30am to 4pm, Monday to Friday, and some are also open outside these hours.

Your local library or Citizens’ Advice Bureau may also have copies of our leaflets.

If you are thinking of giving some money to charity, this leaflet looks at the ways the tax system can help you do so.

You can get tax relief on gifts to charities set up in the United Kingdom if you choose to give in any of the following three ways.

Join a Payroll Giving Scheme, if your employer runs one.

Make a deed of covenant and pay a regular amount for a number of years.

Make a gift under Gift Aid.

In this leaflet we look at each of these in turn and explain how you can get tax relief on the payments you make.

This is only a brief guide and may not cover every question you might have. If there is anything else you would like to know, please ask any Tax Enquiry Centre or Tax Office. The notes above tell you how to find your nearest office and when it is open. Or you can contact our Helpline numbers for deeds of covenant or Gift Aid.

Payroll giving schemes

What is Payroll Giving?

It’s a way for employees to give to charity directly from their pay and get tax relief on their payments.

Does every employer have to run a Scheme?

No. If your employer doesn’t run one, you can still give to charity in one of the other tax-effective ways mentioned above.

How does Payroll Giving work?

Your employer deducts the money from your pay and hands it over to a charity agency, which will pass it on to the charity or charities of your choice. Ask your employer for an application form. The completed form will allow them to take the gift from your pay.

Can all employees join the Scheme?

Yes, and pensioners can join their former employer’s Scheme if tax is deducted from their pension under Pay As You Earn.

How much or how little can I give?

The most you can give under the Payroll Giving Scheme is £900 in any tax year (which starts on 6 April in one year and ends on 5 April in the next).

The limit applies to each person. So a husband and wife can each give up to £900 in any one tax year and get tax relief.

Some employers may have a minimum donation you can make, and your employer will tell you what this is.

Can I choose any charity?

Yes, and you can choose more than one if you want. You can also make your gift to a group of charities, known as a consortium, which has been approved by the Inland Revenue to accept nominations in favour of its members under the Payroll Giving Scheme. Your employer can get details for you.

How do I get tax relief?

Your employer deducts the gift from your pay or pension before your PAYE tax is worked out. So you will pay tax only on the amount left after the gift has been deducted.

Will I get tax relief on the whole gift?

Yes, but remember the most you can give is £900 in any one tax year. The relief will be given at your highest rate of tax.

Can I ask for a refund of my donations?

No. Once a gift has been taken out of your pay and you have been given tax relief on it, it must go to charity.

Can I stop paying at any time?

Yes, but your employer may need some notice that you wish to stop paying.

Can I make payments under a deed of covenant through the Payroll Giving Scheme?

No, because then you would get tax relief twice on the same payment.

But you can make separate payments under a deed of covenant and get tax relief under both systems.

Will my employer have to know to which charity I want to give?

Not necessarily. It may depend on the arrangements between your employer and the agency, but it should be possible to keep your choice confidential.

Deeds of covenant

What is a deed of covenant?

It is a legally binding agreement to give away part of your income each year.

How do I make a deed of covenant?

Most charities have standard forms and will be pleased to send you one.

How long must the covenant run?

If you want to get tax relief, it will have to run for more than three years. Charitable covenants usually run for four years.

How do I get tax relief?

You take off tax at the basic rate when paying your gift to the charity. Provided you are paying at least that much basic rate tax yourself, you get your tax relief by keeping what you have deducted.

How does the charity get tax relief?

The charity claims back the tax from the Inland Revenue, so it is not out of pocket.

How does it work?

The usual way is to make a ‘net of tax’ covenant. Say, for example, you want to give the charity an amount which will cost you £75 after taking basic rate tax into account. The first step is for you to sign a covenant under which you agree to pay the charity every year ‘such a sum as after the deduction of tax is equal to £75’.

You then pay £75 to the charity each year. But this is really worth £100 from which you have deducted tax, at the basic rate of 25%, £25. As long as you are already paying at least this much basic rate tax, you need do nothing more. But the charity can claim the tax back, so it gets the full £100: £75 from you and £25 from the Inland Revenue.

Alternatively, you may decide to make a ‘gross’ covenant.

This means you sign a covenant agreeing to pay the charity, say £100 every year. If you are a taxpayer you are entitled to tax relief on the payment. You get the relief by deducting and keeping basic rate tax of £25 from the payment, and you pay £75 to the charity. The charity then claims back the £25 you have deducted from the Inland Revenue, so it gets the full £100.

What if I pay tax at the higher rate?

Enter the net amount of your covenant on your tax return. Your Tax Office will give you the extra relief, usually through your PAYE code or your tax assessment.

What if I pay tax only at the lower rate?

You must still deduct basic rate tax from your payments and you will be liable to pay this to the Inland Revenue instead of the lower rate tax you would otherwise pay.

If you get a tax return, you must enter the net amount of your covenant(s), that is the amount you actually paid to each charity, in the relevant section.

What if I am not paying any tax?

You must pay to the Inland Revenue any tax you deduct from payments to the charity. There is no advantage in having a deed of covenant if you are not a taxpayer - it is simpler just to give your donations to charity.

If you do not pay tax, you may wish to review any charitable covenant arrangements you have. It may be better for your husband or wife - if he or she pays tax - to make a deed of covenant instead.

What about joint covenants?

If you and your husband or wife make a joint covenant you are treated as paying half each, unless you can show that you do not make equal payments. You can each claim tax relief on the amount of the payments you make.

If one of you is not a taxpayer, you will have to pay over to the Inland Revenue the tax deducted from that part of the covenant payment. Also, if the wife does not pay tax, the husband will not be able to get higher rate relief on her share of the payments.

Can I get relief under both the Payroll Giving Scheme and a deed of covenant?

Yes. If you make gifts under both systems you are entitled to tax relief under each. But you cannot make your covenanted payments through the Payroll Giving Scheme. The two systems are separate and you will not get relief twice for the same payment.

If you would like more information about this, call our Covenant Helpline on 0151 472 6037.

Gift Aid

What is Gift Aid?

It is a way for you, if you are a UK resident and a taxpayer, to get tax relief for single cash gifts to charity. Each gift must be at least £250. This must be the net amount you actually pay to the charity after basic rate tax. The charity then claims the tax back from the Inland Revenue. If you would like more information about this, ask for a copy of our booklet IR113 ‘Gift Aid - a guide for donors and charities’ at any Tax Enquiry Centre or Tax Office. Or you can call our Gift Aid Helpline on 0151 472 6038.

Some other points

Inheritance tax

All outright gifts and bequests to UK charities are completely free of inheritance tax.

Capital gains tax

You are not liable to capital gains tax when you make a gift of assets, such as land or stocks and shares, to charity, even if the asset is worth more when you give it away than when you acquired it.

The tax liability is passed on to the charity when it disposes of the asset. But usually the charity will be exempt from capital gains tax on the total gain since you acquired the asset.

Our leaflet CGT1 ‘Capital gains tax - an introduction’ gives you more details about capital gains tax.

Contact with the Tax Office

As we said at the beginning, this leaflet does not cover every point. If you have any questions, the staff at your local Tax Enquiry Centre or Tax Office will be happy to answer them. They can also give you the other leaflets listed below.

These notes are for guidance only and reflect the tax position at the time of writing. They do not affect your right of appeal about your own tax.

Issued by the Inland Revenue

November 1993

Reproduced by permission of the Board of Inland Revenue

© Crown Copyright 1993


IR69
IR69 - Expenses payments and benefits in kind. How to save yourself work

This explains how employers can apply for a 'dispensation notice' to remove the need to report expenses payments on forms P11D. The leaflet includes an application form.


IR72
IR72 - Investigations. The examination of business accounts

What happens if your accounts are selected for investigation? This leaflet describes how the Revenue selects accounts to investigate and how a tax assessment is worked out.


IR73
IR73 - Inland Revenue investigations. How settlements are negotiated

What happens at the end of an investigation into someone's tax affairs? This describes the Revenue's approach to reaching an agreement if there is an amount owing.


IR78
IR78 - Personal pensions. A guide for tax

This leaflet covers what personal pensions are about, how they work, who can provide them, the tax reliefs available, and what happens if you 'contract-out' of SERPS (State Earnings Related Pensions Scheme).


IR80
IR80 - Income tax and married couples

This leaflet will help you understand the income tax system and how it affects married couples.

FULL TEXT


IR87
IR87 - Letting and your home

This leaflet shows how income from letting furnished rooms is treated for tax purposes. It explains the expenses you can claim, capital allowances and capital gains tax. It also explains the rules of the 'Rent a Room' scheme. This allows you to let furnished accommodation in your own home without having to pay tax on the rent you receive, so long as it is £4,250 or less.


IR87 - Letting and your home
Letting and your home (IR87)

Personal Taxpayer Series IR87

Letting and your home

We produce a wide range of free leaflets each designed to explain a different aspect of the tax system in plain English. Some you might find useful are listed below.

IR20	Residents and non residents - liability to tax in the United Kingdom
IR90	Tax allowances and reliefs
IR105	How your profits are taxed
IR123	Mortgage interest relief
IR140	Non resident landlords, their agents and tenants
IR150	Taxation of rents. A guide to property income
CGT1	Capital gains tax. An introduction

Our leaflet IR120 'You and the Inland Revenue' tells you more about the standard of service you can expect from us. It also tells you how you can make any comments on the service you receive, or complain about the way your tax affairs have been handled.

Our IR List 'Catalogue of leaflets and booklets' gives further information about our publications, most of which you can get from any Inland Revenue Enquiry Centre or Tax Office. Their addresses are in your local phone book under 'Inland Revenue'. Most offices are open to the public from 9.00 am to 5.00 pm, Monday to Friday, and some are also open outside these hours.

Your local library or Citizens' Advice Bureau may also have copies of our leaflets.

This leaflet will help you if you are thinking about letting furnished rooms and want to know if there will be any tax to pay on the income.

It describes the main tax rules that apply if you rent out rooms in your own home or let your previous home while you live somewhere else.

If you want to know about letting unfurnished property or letting property as holiday accommodation, our staff at your local Inland Revenue Enquiry Centre or Tax Office will be pleased to help you.

We also publish a more detailed guide on income from property subject to income tax -IR150 'Taxation of rents - A guide to property income'. If you let more than one property at the same time, you should read no further. Instead, ask at your local Inland Revenue Enquiry Centre or Tax Office for the guide IR150. Also, if you want further information on points covered only briefly in this leaflet, you will probably find the answer in the IR150

Income tax

Will I have to pay tax?

This will depend on

whether you come within the Rent a Room exemption scheme

if you do not, whether your taxable income for any year, including any profit from letting, is more than your personal tax allowances.

If you are not sure what personal tax allowances you can claim, ask at your local Inland Reveue Enquiry Centre or Tax Office for our leaflet IR90 'Tax allowances and reliefs.'

We look first at the Rent a Room scheme. It has special rules which usually apply when you take in a lodger (broadly, a lodger is someone who pays to live in your home, normally with meals provided, and who often shares the family rooms).

Below we explain the rules that apply if you do not come under the Rent a Room scheme.

Rent a Room

This section describes the special rules which can apply when you rent out furnished accommodation in your only or main home. In other words, where friends and correspondents would expect to find you and your family. Your only or main home is the property which is the family home for most of the time.

Under the scheme, a certain amount of gross (that is, before expenses) income you receive from furnished accommodation in your only or main home can be tax-free. You cannot then claim any expenses, or capital allowances.

For the tax years 1992-1993 to 1996-97, the first £3,250 can be tax free*. From 1997-98 the first £4,250** can be tax free. A tax year runs from 6 April in one year to 5 April of the following year.

The 1997-98 figure of £4,250 is the figure used in the explanation and examples in this leaflet.

* If letting jointly, £1,625 instead of £3,250 (see below)

** If letting jointly, £2,125 instead of £4,250 (see below)

You do not have to take part in the scheme if it is not to your advantage. Instead, you simply declare all your letting income and claim expenses and, where appropriate, capital allowances in the normal way.

Do the special rules apply only to owner occupiers?

No. They apply to people who rent as well as people who own their homes, but you should check whether your lease allows you to take in a lodger. If you have a mortgage you should check with your lender.

Do the rules mean I don't have to pay tax on the rent I get?

As long as the total rent you get during the tax year is no more than £4,250, you do not have to pay tax on that income. If your letting amounts to a trading activity, there are certain capital allowance considerations of which you must take account. These are explained below.

If the Tax Office does not sent you a tax return you do not even need to tell them about this income. If you do get a return, all you have to do is tick a box on it to confirm that your rental income is £4,250* a year or less.

* If letting jointly, £2,125 instead of £4,250.

Do the special rules have to apply?

No, there may be circumstances where you will not want them to. For example, if you are treated as carrying on a trade, and exceptionally you made a loss, you might wish to set that loss against other income.

You should let your Tax Office know by 31 January, 22 months after the end of the tax year in which the loss was made, that you do not wish to be within the Rent a Room scheme. (For years up to 1995-96 inclusive, the time limit is one year from the end of the year in which the loss was made.)

What if I share the house where I live?

If you share your home with another person and one of you lets a room to someone, the whole exemption will go to the person actually renting out the room. If you let the room jointly, or you each let a separate room, each of you will get half the exemption, that is, £2,125.

If three or more people let a room on a joint basis, they will each get an exemption of £2,125.

Where a home is owned by a husband and wife, the income from letting will normally be treated for tax purposes in equal shares. If services such as meals and cleaning are provided, however, the letting will probably amount to a trade and the income will arise to the spouse who carries on the trade.

What happens if the rent is more than £4,250*?

In that case you can choose between

A	paying tax on the profit you make from letting the room, worked out in the normal way, or

B	paying tax on the amount of rent over £4,250*.

If you choose method A, you need to work out your profit by taking your actual expenses away from the total rent you receive. If you decide on this option, see below which explains the expenses you may claim.

* If letting jointly, £2,125 instead of £4,250.

If you choose method B, you will pay tax on any amount of rent over £4,250* (including payments for any related services you provide - see below). If you decide on this option, you will need to tell your Tax Office by 31 January, 22 months after the end of the tax year, that you wish to be within the Rent a Room scheme and be taxed simply on the amount of rent etc. over £4,250*. So if you had income from letting a room during the tax year ended 5 April 1997, you must tell the Tax Office by 31 January 1999 that you want to be taxed using this method. (The time limit for tax years up to 1995-96 inclusive is one year after the end of the year.)

The time limits for letting the Tax Office know that you do not want your rental income to be exempt, or that you want to use method B, are strictly applied, though we are able to extend them in certain circumstances.

If you wish to take part in the Rent a Room scheme but have, for some good reason, missed the time limit you should consult your Tax Office.

How do I decide which method to choose?

You can choose whichever method is best for you. To do that you will need to work out how much profit you are making, in other words, how much rent you are left with after your expenses. You should then compare the figure with the amount of rent over £4,250*. Here are a couple of examples to show you what we mean.

* If letting jointly, £2,125 instead of £4,250.

Example 1

Susan lets a room for £110 a week.

Her total letting income (rent) for the year is £5,720.

She has expenses of £1,000 so her profit is £4,720.

The amount of rent over £4,250 is £1,470 (£5,720 - £4,250).

Using method A, she would pay tax on a profit of £4,720.

Using method B, she would pay tax on £1,470.

In Susan's case, method B is better.

Example 2

John also lets a room for £110 a week.

His total letting income (rent) for the year is £5,720.

He has expenses of £4,500 so his profit is £1,220.

The amount of rent over £4250 is £1,470 (£5,720 - £4,250).

Using method A, he would pay tax on a profit of £1,220.

Using method B, he would pay tax on £1,470.

In John's case, method A is better.

Can I change the method from year to year?

Yes. But each time you want to change you must tell your Tax Office by 31 January, 22 months after the end of the tax year.

Method B will automatically cease if the rent you get drops below £4,251. If, in the following year, your rent goes up and you want to use method B again, you must tell your Tax Office by 31 January, 22 months after the end of the tax year.

(The time limit for tax years up to 1995-96 inclusive is one year after the end of the tax year.)

I provide meals and a laundry service as well as accommodation. Does this affect my entitlement to Rent a Room relief?

No, but if you do provide these and any other related services, any payment you get for them has to be added to the rent for Rent a Room purposes. If the total rent and services is more than £4,250*, even if the rent alone is less, you will not be exempt. Your tax choice will be between method A and B shown above.

Can I get relief for losses under Rent a Room?

If you have any losses outstanding from earlier years when your rents were not within the scheme, these are not wasted.

If your rent is no more than £4,250* and you therefore have no tax to pay on that income, the losses from an earlier period can be carried forward against future letting profits.

If your rent is more than £4,250*, then - whether you use method A or B - the earlier losses can be set against your rents in the normal way.

I am treated as trading and can normally claim capital allowances. What happens if I use the Rent a Room scheme?

You cannot claim capital allowances on furnished lettings for any year in which you are within Rent a Room.

However, any balancing charge (this is basically a charge to recover capital allowances given in earlier years which may arise when, for example, you sell the equipment on which the allowance was given) will be

added to your gross rents when deciding whether they are no more than £4,250* and therefore whether you are exempt

taxable in the normal way if you use methods A or B as shown above.

* If letting jointly, £2,125 instead of £4,250.

Will I have to pay capital gains tax when I sell my home?

The Rent a Room scheme makes no difference to the capital gains tax rules which apply when you sell your home. Special rules apply if you have let part or all of your home as residential accommodation.

What happens if I move home during the year?

The special rules apply to the total rent you receive during the tax year. If you move home, and lettings in both your old and your new home qualify for Rent a Room relief during the same year, you must add together the rents from both to see if you need to pay tax.

What happens if I live abroad?

If you let your old home in the United Kingdom while you live abroad you will not normally be within Rent a Room. You should consult your Tax Office, especially if you were within Rent a Room before you left.

Furnished Lettings

If you do not come within the Rent a Room scheme, you need to know

what expenses you can claim

the tax reliefs available

how the tax is collected

and so on. Some special rules apply if you are treated as carrying on a trade.

What expenses can I claim?

The most common allowable expenses are

gas and electricity

insurance premiums for buildings and contents

maintenance and repair costs, but not the costs of improvements

water rates

rent, if you do not own the property

the fees an agent charges to let your home for you

council tax which you pay for the let property.

You can claim the expenses for the let part of your home. For example, if your house is in three storeys and you let the top floor you can claim

one-third of the expenses incurred on the whole house, plus

the full amount of the expenses incurred solely on the let part of the house, such as the cost of advertising for tenants.

Mortgage interest is not an allowable expense against your income from letting if you are claiming mortgage interest relief.

Payments made by members of your family towards household expenses are not taxed.

Please contact any Inland Revenue Enquiry Centre or Tax Office if there is anything you are not sure about - see details on the inside front cover.

What if these expenses are incurred before I start to let the property?

You may be able to claim relief for these if they

are incurred in the period beginning seven years before the date you started the letting, and

the expenses would have been allowable if you had already started the letting.

The relief works by treating the expenses as incurred in the first year of letting.

Your Tax Office will be able to help you with this if you are not sure.

What about the cost of furniture?

You cannot claim the cost of furniture when you first buy it, but you can choose to claim the actual cost of furniture when you replace it (after deducting the cost of any improvements and anything received on the disposal of the old furniture), or a 'wear and tear' allowance. The 'wear and tear' allowance is 10% of the annual rent after deducting any part of the occupier's council tax, water rates, and any other service charges which are normally paid by a tenant but which are paid by you.

Once you have made a choice you cannot change it.

My expenses are more than the income I receive from the letting. Can I claim the difference against the rest of my income?

You can get relief by carrying forward the deficit (the loss) and setting it against profits you make from both furnished lettings and unfurnished lettings in future years.

However, if you stop letting and there is a gap before you begin letting again, you may not be able to carry forward any earlier losses. However, if your property is temporarily unlet but remains available for letting throughout, you will normally be able to carry forward losses when the letting resumes.

Will my mortgage interest relief be affected?

Not usually, but it does depend on your circumstances, particularly the proportion of your home that you let.

If you have been getting relief under the MIRAS scheme (mortgage interest relief at source) arrangements, you can normally continue to get relief if you do not let more than one-third of your home. (If you start to let more than one-third of your property, you should tell your lender and your Tax Office straight away.) Similarly, if you have been getting relief outside the MIRAS arrangements, you can normally continue to get relief.

You may also be able to get relief by setting the interest you pay against your property income. But you cannot have both forms of relief and should choose whichever form of relief is better for you. See the leaflet IR150 'Taxation of rents - A guide to property income' if you want more information about this.

What happens if I let my whole house?

The basic rules are the same if you let your whole house, furnished, while you live or work elsewhere. Again, if you are getting mortgage interest relief you may choose whichever form of relief is better for you.

What records should I keep?

You must keep a careful note of the rents received and the expenses as they arise. You must retain these records, together with the back-up records such as receipts and invoices. All records have to be kept for six years after the tax year in question. These will help you if your Tax Office decides to make enquiries into your tax return.

What information will the Tax Office need?

If the Tax Office send you a tax return you should complete it and send it back at the latest by 31 January after the tax year in question. For example, you will have to send your completed return for the year ended 5 April 1997 to your Tax Office by 31 January 1998. You should enter the amount of rents you have received in the tax year and the expenses which you have paid on the return.

If you do not receive a tax return please write to your local Tax Office and they will send you one.

How is the income tax collected?

From 1996-97 your income from property will be included in your Self Assessment to tax on all of your income. For 1997-98 two payments on account will be due on 31 January 1998 and 31 July 1998 based on your income for 1996-97. If the payments on account are less than the amount finally due for 1997-98, you must pay the balance by 31 January 1999. (Special tax rules apply for 1996-97.)

However, if you are employed and the amount taxable in respect of your property income is small, your Pay As You Earn (PAYE) tax code will probably be adjusted to collect the tax due each year.

What if I live abroad?

You still have to pay income tax on the rent if you let your previous home in the United Kingdom (UK) while you live abroad.

Your letting agent, or your tenant where there is no letting agent, must deduct tax from your rental income and pay that tax to the Inland Revenue. You can then set off that tax against your personal tax bill when you complete your tax return.

Deduction of tax will not apply

where there is no agent and the rent paid is less than £100 per week, unless the tenant has been told to deduct tax by the Inland Revenue

where the Inland Revenue has issued a notice confirming that rents may be paid without deduction. You can apply to receive rental income without deduction of tax on the grounds that you do not expect to be liable to UK tax or your UK tax affairs are up-to-date and you will pay all tax due through Self Assessment.

For further guidance on the deduction scheme and how to apply to receive rents without deduction, ask your local Tax Office for leaflet IR140 'Non resident landlords, their agents and tenants'.

What happens if I take in a lodger and do not claim Rent a Room relief?

You will be entitled to extra relief for the additional expenses which are normally involved.

The extra services you may provide while you remain living at the same address, such as meals and laundry, mean that you will normally be treated as carrying on a trade for tax purposes. In practice, this makes little difference to the way you calculate your taxable income. You can still claim the same sort of expenses as if you were letting furnished rooms. In addition, you can claim the cost of providing the extra services and you may also be entitled to some other tax reliefs, described below.

Capital allowances

These replace the wear and tear allowances, or deductions for the costs of replacing furniture, given to people who let furnished rooms.

Additional loss relief

If in any tax year your expenses are more than the rent you receive, you may be able to claim the difference (the loss) against the rest of your income.

Your Tax Office will be able to tell you more about these reliefs.

Will I have to pay capital gains tax when I sell my home?

Special rules apply if you have let part of all of your home as residential accommodation.

Capital gains tax

When you sell a property you may have to pay capital gains tax (CGT) - not on the whole amount you sell it for but on the gain you make in selling it.

However, there are various tax reliefs available. See our leaflet CGT1 'Capital gains tax. An introduction' for more information on this. Below, we look at the main effects on CGT where you have let all or part of the property you sell.

What happens if I sell my home?

You do not have to pay CGT when you sell your home if you are the owner (or co-owner) of the property and you occupied the whole of it as your home throughout the time you owned it. Instead, you get a relief from CGT called the private residence relief. Our leaflet CGT1 'Capital gains tax. An introduction’ gives more details.

What happens if I have a lodger?

The private residence relief is not affected if you have a lodger who is treated as a member of your family, sharing the living rooms and eating with you, even if he or she has a separate bedroom.

What happens if I let my home?

However, if you let

part of your only or main home while you owned it, or

all of your home for part of the time you owned it

to someone who is not treated as a member of your family, you may have some capital gains tax to pay when you sell it.

In other words, the amount of private residence relief will be affected, depending on

how much of your home you let

the length of time you let it.

In addition, you may be entitled to a special lettings relief.

What is lettings relief?

If you let part or all of your home as residential accommodation, relief is available on the gain which would otherwise become chargeable as a result of the letting, up to the lower of

the private residence relief due to you, or

£40,000.

How do I decide if the let accommodation is part of my home?

It is a question of fact whether the let accommodation is your home, part of your home, or a separate dwelling for capital gains tax purposes.

For example, if you let part or all of a single dwelling which has been your home without making structural alterations or with only minor changes, the let part will not be treated as a separate dwelling-house. This applies even if the let part has its own areas for washing and/or cooking. You get the lettings relief in these circumstances.

If you occupy a self-contained flat as your home within a building and let all or part of the rest as residential accommodation you will not get the lettings relief.

If the building is altered so that the let part of it becomes a fully self-contained flat (whether or not it is treated as a separate dwelling-house), you will not get the lettings relief.

Do I get any other relief from capital gains tax when I have let property?

If you qualify for principal private residence relief on any part of your property at any time, you will be exempt on any gain on the property in the last three years in which you owned it.

The following examples show how these CGT rules work. In each example the let parts are let as residential accommodation.

Example 1

John Smith sells his house in 1994 after owning it for eight years. During that time he occupied one-sixth (1/6) of the property as his home and let the other five-sixths (5/6). His gain is £60,000.

John occupied 1/6 of the property so the proportion of the gain which qualifies for private residence relief is
1/6 x £60,000 - £10,000.

John also qualifies for the lettings relief because he let part of his house. The lettings relief is the lower of the principal private residence relief due to him (£10,000) or £40,000. So he gets lettings relief of £10,000.

Gain			£60,000
Less	- private residence relief	£10,000
	- lettings relief	£10,000
		£20,000
Chargeable gain			£40,000
Example 2

Mary Jones sells her house in 1994 after owning it for ten years. During that time she occupied two-fifths (2/5) of the property and let the other three-fifths (3/5). Her gain is £140,000.

Mary occupied 2/5 of the property so the proportion of the gain which qualifies for private residence relief is
2/5 x £140,000 = £56,000.

Mary qualifies for the lettings relief because she let part of her home. The lettings relief is the lower of £56,000 or £40,000, that is, £40,000.

Gain			£140,000
Less	- private residence relief	£56,000
	- lettings relief	£40,000
		£96,000
Chargeable gain			£44,000
Example 3

The facts are the same as in Example 2 except that Mary occupied the whole of her property for two years before letting the whole of it for the remaining eight years. In this case she is treated as occupying the whole property for the last three years of her ownership.

The proportion of her gain which qualifies for private residence relief is

first 2 years + last 3 years	= 5

10 year period of her total ownership	10

5/10 x £140,000 = £70,000

The lettings relief is the lower of £70,000 or £40,000, that is, £40,000.

Gain			£140,000
Less	- private residence relief	£70,000
	- lettings relief	£40,000
		£110,000
Chargeable gain			£30,000
Example 4

The facts are the same as in Example 3 except that after occupying the whole of her property for two years, Mary let three fifths (3/5) of the property for the remaining eight years. Again, she is treated as occupying the whole property for the last three years of her ownership.

The proportion of her gain which qualifies for private residence relief is

first 2 years + (2/5 of the next 5 years) + last 3 years = 7

10 year period of her total ownership	        10

7/10 x £140,000 = £98,000

The lettings relief is the lower of £98,000 or £40,000, that is, £40,000.

Gain			£140,000
Less	- private residence relief	£98,000
	- lettings relief	£40,000
		£138,000
Chargeable gain			£2,000
Advice on CGT

If you need any further help about how capital gains are calculated, your Tax Office will be able to supply further details.

More information

As we said earlier, if you need more information on letting property please speak to our staff at any Inland Revenue Enquiry Centre or Tax Office. See the inside front cover for details of how to find your nearest office.

If you want to know more about the general laws on letting rooms, ask your nearest Citizens' Advice Bureau for a copy of the Department of Environment leaflets 'Want to Rent a Room?' or 'Letting Rooms in Your Home'.

These notes are for guidance only and reflect the tax position at the time of writing. They do not affect your right of appeal about your own tax.

Issued by the Inland Revenue

April 1999

This leaflet is reproduced by permission of the Board of Inland Revenue

© Crown Copyright 1999


IR89
IR89 - Personal Equity Plans (PEPs). A guide for potential investors

This leaflet explains what Personal Equity Plans are and how they work. Following the Finance Act 1998, a new tax-free savings scheme, the Individual Savings Account (ISA), will supersede the current PEP scheme from 6 April 1999.


IR90
IR90 - Tax allowances and reliefs

This leaflet describes the main allowances and reliefs that are available to set against income and how to claim them.


IR91
IR91 - A guide for widows and widowers

This explains how income tax affects widows and widowers. It is especially helpful to those who have been recently bereaved.


IR92
IR92 - A guide for one-parent families

This leaflet tells you how income tax affects you as a one-parent family. It explains the kinds of income that are taxed and what tax allowances you may be able to claim.


IR93
IR93 - Separation, divorce and maintenance payments

This leaflet answers the sort of questions people ask about tax when they separate or divorce. It tells you about legally enforceable maintenance payments which receive tax relief, and voluntary payments which do not.


IR95
IR95 - Approved profit sharing schemes. An outline for employees

You may be able to share in the profits of the company you work for in a number of ways. This leaflet gives brief details of the tax relief available.


IR97
IR97 - Approved SAYE share option schemes. An outline for employees

This booklet describes the tax advantages if you join a savings-related share option scheme set up by the company you work for.


Income from abroad

Title	Number	Year
Residents and non-residents. Liability to tax in the UK	IR20	1996
Living or retiring abroad? A guide to UK tax on your income	IR138	1995
Income from abroad? A guide to UK tax on overseas income	IR139	1995
Non-resident landlords, their agents and tenants	IR140	1995


IR80 Income tax and married couples
Income tax and married couples (IR80)

Personal Taxpayer Series IR80

Income tax and married couples

This leaflet is to help you understand the income tax system and how it affects married couples

You are each entitled to receive a certain amount of income every year before starting to pay tax. That amount is  your 'personal allowance'. For the tax year 1998-99 (6 April 1998 to 5 April 1999), the 'basic' personal allowance is £4,195, but it can be more, depending on your age. There is also a married couple's allowance, which reduces your tax bill by a certain amount. In 1998-99 this is worth £1,900 x 15% = £285.00. The Chancellor sets the amounts of these allowances each year in the Budget.

We want you to pay no more tax than you have to. It is important for you to know what your allowances are, and what you can do if one of you has income that is less than your individual allowances.

We look at questions married couples often ask us. For example, can your surplus allowances (which are more than you need to set against your own tax) be transferred to your partner so that he or she pays less tax?

We cannot cover every question you might have in this leaflet. If there is anything else you would like to know, please ask the staff at any Inland Revenue Enquiry Centre or Tax Office. The notes on the inside front cover tell you how to find your nearest office.

How is our income taxed?

There is one important way in which married couples are treated as two separate individuals - and that is for income tax purposes. You

are each taxed on your own income.

can claim your own tax allowances.

pay your own tax either through Pay As You Earn (PAYE) or directly to the Collector of Taxes

can each receive repayments of any tax you have overpaid.

Usually you will not have the same Tax Office as your husband or wife. But if you do, we will handle your tax affairs separately and in strict confidence.

Tax allowances

What is a tax allowance?

A tax allowance is not a payment to you. It is a way of reducing the tax you pay on your income. There are two types of allowance. The personal allowance is income you can receive without having to pay any tax. The married couple's allowance, and certain other allowances, reduce your tax bill by a fixed amount.

What allowances can I claim?

Whether you are male or female, married or single, you are entitled to at least one allowance, the personal allowance. You can set it against your total income from work, savings and investments.

Does everyone get the same personal allowance?

No. If you are aged 65 or over and your income is below a certain limit, you get a higher allowance, and higher still if you are 75 or over.

Our leaflet IR121 - 'Income tax and pensioners' gives more details about this. Or ask at your local Inland Revenue Enquiry Centre or Tax Office

Is there a special allowance for married couples?

Yes. A married couple living together will have the benefit of the married couple's allowance.

There are three different amounts depending on your age. You can get a higher married couple's allowance in the year the elder of you reaches the age of 65 and subsequent years. When one of you reaches 75, you can get the highest married couple's allowance. However, these higher age-related allowances are reduced back to the basic level if the husband's income is above a certain limit. Again, see our leaflet IR121 for more details.

Who gets this allowance?

A husband and wife can jointly decide which of them shall get the allowance. Alternatively, either husband or wife can claim (elect) to have the allowance split equally between them. If there is no election, the husband will normally get the allowance. The extra allowance due because of age must go to the husband unless he does not have sufficient income to use it.

How does the married couple's allowance affect the tax I pay?

This allowance is restricted to give relief at a fixed rate. The rate of tax relief is 15% for 1995-96 to 1998-99 and 10% from 1999-2000. This means the allowance is not income you can receive without paying tax (as it was up to 5 April 1994). Instead it reduces your tax bill by a set amount. In 1998-99, if your allowance is £1,900, this amount can be calculated as

	£
the allowance	1,900.00
multiplied by the rate of relief	x 15%
= amount of tax reduction	285.00
How does this affect my PAYE code?

Because the married couple's allowance now works in a different way from the personal allowance which everybody gets, it has to be shown in a different way in your tax code. As well as the full amount of the allowance  shown on the left-hand side of your coding notice, most people will have a reduction, shown as 'ALLOWANCE RESTRICTION' on the right-hand side. This is designed to ensure that the tax you pay is reduced by the correct amount. We will check these restrictions after the end of the tax year. If you want more information, Inland Revenue Enquiry Centres and Tax Offices have a fact sheet called FS1 'Fact sheet on tax allowance restrictions', which explains the adjustment in more detail.

Why would we want to transfer the married couple's allowance?

You may simply feel it is fairer to share it. Usually it will make no difference to the amount of tax you pay as a couple.

How do we arrange for the allowance to be split equally or transferred from husband to wife?

You will need to tell your Tax Office what you want to happen before the start of the new tax year. It begins on 6 April. The allowance can be split or transferred immediately in the year you get married.

It is very simple to do. Ask your Tax Office for a Form 18 to complete. You can do this whatever the level of your income. If you need help filling in the form, your Tax Office will be pleased to help you.

Once you have done this, the change will apply until you decide to alter it. You do not need to complete a new form every year. If you do want to alter it, the new arrangements will take effect at the start of the tax year after you have told the Tax Office about the change.

What if I cannot use all my married couple's allowance?

If you get the married couple's allowance, you can transfer any of it that you cannot use to your husband or wife. The same applies if you receive blind person's allowance (our leaflet IR90 'Tax allowances and reliefs' tells you more about this allowance). To find out whether you can use your allowance, you need to work out your total taxable income.

How do I work out my total taxable income?

First add up what your income comes to before any tax has been taken off. Remember to include

all your own earnings

business profits

pensions

taxable social security benefits such as Jobseeker's Allowance

income from savings with a bank or building society (see below)

interest from National Savings investments (except National Savings Certificates and the first £70 of interest from ordinary accounts with the National Savings Bank)

dividends and their tax credits (as shown on your share dividend statements)

income from property

taxable gains on life assurance policies

your share of any other income received jointly with your husband or wife (normally half the income).

Then take away any amounts for which you get tax relief, such as work expenses.

Do not take away any of the following payments

mortgage payments

payments made minus basic rate tax to Free Standing Additional Voluntary Contribution Schemes

payments made minus basic rate tax to a Personal Pension Scheme

private medical insurance premiums for the over 60s which are paid minus basic rate tax

vocational training payments which are paid minus basic rate tax.

When you have added up all your income and taken away any amounts for which you get tax relief you are left with your taxable income. If you get the basic married couple's allowance and your taxable income is over £5,620 (for 1998-99) you will probably be able to use all the married couple's allowance yourself. You will not have any surplus.

If your taxable income is less than £5,620 you can transfer any surplus married couple's allowance to your husband or wife. Your Tax Office can tell you the amount of any surplus married couple's allowance available to transfer.

If you get higher age-related married couple's allowance, the amount of taxable income you can have before you will have any surplus married couple's allowance to transfer to your husband or wife will be higher.

Our leaflet IR121 'Income tax and pensioners' gives more detail about this. Or ask at your local Inland Revenue Enquiry Centre or Tax Office.

What is the next step?

If you think this applies to you or you are not sure, get in touch with your Tax Office or your husband's or wife's Tax Office (if you do not have one). They will sort it out for you. The example below shows how it is done.

Example

David and Anne are a married couple under 65. He goes out to work part-time. She stays at home and has no income of her own except interest from a building society account.

In 1998-99 David's allowances and income are as follows

	£
Income from his job	4,600
Income (interest) from his savings	515
David's total income	5,115
Less his personal allowance	4,195
Amount taxable	920
Tax due at 20%	184
	£
Married couple's allowance £1,900 at 15%	285.00
Less tax due	184.00
Value of allowance unused	101.00

So David could give £101.00 of the married couple's allowance to Anne to set against her income.

	£
Anne's income from her savings	4,871.00
Less Anne's personal allowance	4,195.00
	676.00
Tax due at 20%	135.20
Less David's unused married couple's allowance	101.00
Anne's final tax bill	34.20

So Anne's tax bill for the year is £34.20. If David had not transferred the unused part of his allowances, Anne would only have had her personal allowance, and so would have paid tax of £135.20 instead of £34.20.

What if we are unsure about what the exact amount of unused allowances will be?

If you ask, your Tax Office will estimate the amount and transfer it on a provisional basis. Soon after the end of the tax year, the Tax Office will check the estimate against your actual income to see if the right amount of tax has been paid.

Bank and building society interest

Do we need to pay tax on our interest from bank and building society accounts?

If your total income is less than your allowances, you can fill in a Form R85 and have your interest paid with no tax deducted. The form is available from your bank or building society. Our leaflet IR110 'A guide for people with savings', which includes the Form R85, explains how you can do this. It's known as 'registering' to get your interest with nothing taken off for tax.

Remember, if you do 'register' and then find that you are liable to tax, you must tell your bank or building society immediately. They will then arrange for tax to be deducted from your interest.

Can we claim back any tax that's already been deducted?

Yes, if the interest was paid on or after 6 April 1992, you may be able to get the tax back. Again, our leaflet IR110 tells you more.

Year of marriage

What happens in the year we marry?

The husband

can claim one twelfth of the married couple's allowance for each, whole or part, tax month of his marriage. (A tax month runs from 6th day of one month to 5th of the following month), or

can continue to get any married couple's allowance he is already receiving for a previous marriage, or

can choose to claim the additional personal allowance for a child living with him, instead of claiming the married couple's allowance. Our leaflet IR92 'A guide for one-parent families' goes into this in greater detail.

The wife

can continue to get the additional personal allowance if she had a child living with her before the date she married but within the year she married.

She can also

have half of the married couple's allowance the couple are entitled to for the year of the new marriage (and have the other half transferred to her husband), or

continue to get any married couple's allowance she is receiving for a previous marriage.

Separation and divorce

What happens if we separate or get divorced?

In the year of separation, each of you will continue to receive the same amount of married couple's allowance you were receiving at the time you separated. If you separated before 6 April 1993, the husband can claim the full married couple's allowance for that year.

If you have a child living with you after the separation, you may also be able to claim the additional personal allowance, but not if you already receive the full married couple's allowance. If you are getting only half the married couple's allowance, you can claim the additional personal allowance to make it up to the full amount of the married couple's allowance.

What about maintenance payments?

Our leaflet IR93 'Separation, divorce and maintenance payments' explains more about this.

Widows and widowers

What happens if my husband or wife dies?

Your allowances don't suddenly stop when one of you dies.

If a husband dies, the wife will get any part of the married couple's allowance for that tax year which cannot be used against his income up to the date of his death. But if she is already receiving all or half of the allowance in the tax year of her husband's death, as much as possible of that allowance must be transferred back and set against her late husband's income.

She will also receive the widow's bereavement allowance during the tax year of her husband's death and in the following year (unless she has remarried by the start of that tax year).

The allowances she gets in the tax year in which her husband dies can be set against any income she had in that tax year.

If a wife dies, her husband will receive both his personal allowance and all the married couple's allowance, less any part that his wife used against her income. In the following tax year he will just receive the personal allowance unless he remarries in that year.

For more on this, ask for our leaflet IR91 'A guide for widows and widowers'.

Tax relief for outgoings

Mortgage interest relief

If you take out a loan to buy your home, you may be able to get tax relief on all, or part, of the interest you pay. You can have tax relief for the interest on up to £30,000 of your loan. The rate of tax relief for 1998-99 is 10%.

Our leaflet IR123 'Mortgage interest relief. Buying your home' tells you more about this.

Usually, if the loan is a joint one, you share equally the tax relief on the interest payments up to the £30,000 limit. If the loan is in one of your names, that person gets tax relief up the limit.

Or, if you can jointly choose to share the tax relief up to the £30,000 limit in any way you want. For example, a wife can have all the tax relief even though the loan is in her husband's name. This is called an 'allocation of interest' election. Our leaflet IR123 explains this in more detail.

Charitable deeds of covenant

You can get tax relief on payments you make to a charity under a deed of covenant. You take off tax at the basic rate when paying your gift to the charity.

If you and your husband or wife make a joint covenant, you are treated as paying half each unless you can show that you are not making equal payments. You can each claim tax relief on the amount you pay.

If you pay tax at the higher rate, you can claim extra relief. You make the claim on your tax return.

If you pay tax only at the lower rate, you must still deduct basic rate tax from your payments. You are liable to pay this basic rate tax to the Inland Revenue instead of the lower rate you would otherwise pay.

If you do not pay tax, you have to deduct basic rate tax from the payment and pay it to the Inland Revenue. So there is no tax advantage in you having a covenant. If you are married, it may be better for your husband or wife - if he or she pays tax - to make a deed of covenant instead.

Our leaflet IR65 'Giving to charity. How individuals, can get tax relief' tells you more about deeds of covenants

Other tax reliefs

You may also be entitled to some of the tax reliefs listed below. But tax reliefs can only be given to the person who qualifies for them. You cannot transfer them from one person to another

income tax losses (for example, from a business)

interest paid on loans to buy machinery for use in a partnership or employment

investments made through the Enterprise Investment Scheme (EIS).

Joint income

How will our joint income be taxed?

If you hold any of the following in joint names you are treated as if you own it in equal shares. Each of you is taxed on half the income unless you tell your Tax Office otherwise. You will only have to pay tax on your half if you are liable to tax

bank or building society accounts

shares

property which you rent out

any other property which provides income.

If you want to know more about this please ask your Tax Office.

Capital gains tax

For the tax year 1998-99 and later years, you

are each taxed separately on any gains you make when you sell an asset

are each entitled to your own annual exempt amount (that is, the amount of gains which you can make without having to pay capital gains tax)

cannot set your losses against your husband's or wife's gains

will not be taxed immediately if you transfer an asset to your husband or wife when you are living together. Any gain or loss will be deferred until the asset is disposed of by the husband or wife who receives it.

Our leaflet CGT1 'Capital gains tax. An introduction' explains more about how gains are taxed.

Inheritance tax

In general, anything you give your husband or wife during your lifetime or leave in your will is free from inheritance tax. Our leaflet IHT3 'Inheritance tax. An introduction' tells you more about this.

Contact with the Tax Office

Most people are not asked to fill in a tax return every year but if you are sent one, please fill it in and send it back promptly. If you are not asked to make a return but you think you have income that is not being properly taxed, you must tell the Tax Office about it.

You must also remember to tell the Tax Office about changes which could affect your tax position. We want you to pay only the right amount of tax and if you do not let us know when your circumstances change you may pay more than you should or find you owe tax.

It is always helpful and can speed things up if you give us your reference number and National Insurance number.

What can I do if I'm not happy with the service I receive?

You can help us by telling us what you think of the service we offer. We would value your opinion, for example, on the way we've dealt with your tax affairs.

You may have particular ideas about improving our service. If you do, please let us know. We have customer service managers who will be happy to receive your suggestions. Any Tax Office will be pleased to give you the name and address of the customer service manager to contact.

We deal with thousands of enquiries and calculations every day, errors and misunderstandings can happen. We promise, however, to deal with complaints quickly and effectively.

Our leaflet IR120 'You and the Inland Revenue' explains our complaints procedure. If you have a complaint, first write to the Officer in Charge of the office or unit concerned. His or her name is on every letter we send out. In our experience, most issues are settled quickly and satisfactorily in this way.

What can I do if I'm still not happy?

If you have a complaint which the Officer in Charge of your own Tax Office cannot settle, you should contact the Inland Revenue Director responsible for the area dealing with your tax affairs. Our leaflet IR120 'You and the Inland Revenue' tells you how to do that. It is available from any Tax Enquiry Centre or Tax Office.

If the Director does not settle your complaint to your satisfaction, you can ask the Adjudicator to look into it and recommend appropriate action. The Adjudicator, whose services are free, is an impartial referee whose recommendations are independent. The address is

The Adjudicator's Office

Haymarket House

28 Haymarket

London

SW1Y 4SP

Tel: 0171 930 2292

Fax: 0171 930 2298

Finally, you can ask a Member of Parliament to refer a complaint to the Independent Parliamentary Commissioner for Administration, commonly known as the 'Ombudsman'. Further information is available from

The Parliamentary Commissioner for Administration

Millbank Tower

Millbank

London

SW1P 4QB

Tel: 0171 276 2130

The Taxpayer's Charter

You are entitled to expect the Inland Revenue

To be fair

By settling your tax affairs impartially

By expecting you to pay only what is due under the law

By treating everyone with equal fairness

To help you

To get your tax affairs right

To understand your rights and obligations

By providing clear leaflets and forms

By giving you information and assistance at enquiry offices

By being courteous at all times

To provide an efficient service

By settling your tax affairs promptly and accurately

By keeping your private affairs strictly confidential

By using the information you give only as allowed by law

By keeping to a minimum your costs of complying with the law

By keeping its own costs down

To be accountable for what we do

By setting standards for ourselves and publishing how well we live up to them

If you are not satisfied

We will tell you exactly how to complain

You can ask for your tax affairs to be looked at again

You can appeal to an independent tribunal

Your MP can refer your complaint to the Ombudsman

In return, we need you

To be honest

To give us accurate information

To pay your tax on time

This booklet gives general advice and does not cover all possibilities. It is for guidance only and reflects the tax position at the time of writing. It does not affect any right of appeal.

Issued by the External Communications Unit of the Inland Revenue

April 1999

© Crown Copyright 1999

This leaflet is reproduced by kind permission of the Board of Inland Revenue


IR121 - Income tax and pensioners
Income tax and pensioners (IR121)

Personal Taxpayer Series IR121

Income tax and Pensioners

This leaflet is to help you understand how income tax affects you as a pensioner

In this leaflet we try to give simple, straightforward answers to the sort of questions people ask when they reach retirement.

This leaflet explains

how the tax office can help with your enquiries

how to work out your taxable income

how to work out your allowances

how interest on your savings is treated

how to comment on the service you receive.

Whether you are about to retire or have already retired, this leaflet will help you work out how being a pensioner affects your tax bill. We want to make sure you pay only as much tax as you need to - if you need to pay tax at all.

Where can I go for help?

Any Tax Office or Tax Enquiry Centre. Look in your local telephone book under ‘Inland Revenue’ for the nearest to you.

You may visit, write or phone. The staff will probably be able to answer all your questions on the spot. If they do need to look up your records, they will simply contact the Tax Office which holds them to get any information they need.

Do I need to have a reference number?

Not if you want general information. But if your question is more complicated and we need to look up your records, we will ask you for your National Insurance (NI) number.

You will find your NI number on every letter or notice sent to you by your Tax Office. It looks similar to this

AB 12 34 56 C.

You will also find it on

your pension book

an old payslip

form P45 or P60

letters from the Inland Revenue (NI) Contributions Office or

When are the Offices open?

As explained on the inside cover, most are open for public enquiries between 9.30am and 4pm Monday to Friday and some are also open outside these hours. If these times are awkward for you, we will try to see you at a time that suits you.

What sort of questions can I ask the Tax Office or Tax Enquiry Centre?

We will answer any questions you may have about your own tax.

The sort of questions we are often asked are

How much of my income is taxable?

Am I getting all the allowances I am entitled to?

Can I claim any tax back?

Our staff can usually give you the answers there and then. They will be happy to explain anything you need to know.

They will also give you any forms you might need and can help you complete them.

Is there any other way the Tax Office can help me?

Yes. We produce a wide range of leaflets which explain different aspects of the tax system in plain English. The ones which may be of particular interest to you are listed on the inside front cover.

All Tax Offices have a stock of these leaflets and will be happy to supply any you need.

Is there anything I need to tell my Tax Office when I become a pensioner?

Yes. It is important you tell us

your date of birth so that we can give you the correct allowances , and

how much your state pension is and the date you will start getting it. Tell us as soon as you know. We can then change any PAYE tax code or include the correct details in any notice of assessment.

How much tax should I pay?

The amount of tax you have to pay depends on how much taxable income you have.

Your taxable income includes your pension, interest on your savings and dividends from shares.

But everyone is entitled to a certain amount of income which they do not pay tax on. The amount of income you can have before you start to pay tax depends on your allowances.

The next two sections of this leaflet explain how to work out your taxable income and your allowances.

Working out your taxable income

In this section we tell you

how to work out your taxable income

what sorts of income are taxable

what sorts of income are not taxable.

If you think there is something we haven’t covered that might apply to you please ask for help at the Tax Office. They will be happy to answer any questions. Your private affairs will be treated in the strictest confidence.

How do I work out my taxable income?

You need to add up your gross income for the tax year. The tax year runs from 6 April to the following 5 April. Your gross income is the income you have received in the year, before any tax has been taken off. To get this figure you may have to add back any tax that has been taken off your income before you get it. (For dividends you take the amount you receive and add on the tax credit or, in the case of foreign income dividends (FIDs), income tax treated as paid).

What income is taxable?

your old age (state retirement) pension

pensions from previous employers

invalid care allowance and invalidity addition paid with a retirement pension

widow’s pension

widowed mother’s allowance

incapacity benefit - all benefit paid in respect of new claims from 13 April 1995 (except benefit paid during first 28 weeks of incapacity)

gross interest from a bank, building society or local authority (remember, when working out your total taxable income, to add back any tax taken off your interest before you get it)

interest from National Savings investments (except National Savings Certificates and the first £70 of interest from ordinary accounts with the National Savings Bank)

dividends on shares and income from unit trusts (remember, when working out your total taxable income, to add on any tax credit or, if the dividend is a FID, income tax treated as paid; in the case of income from a unit trust, add on the income tax deducted.)

any earnings from a job or business

income from property

taxable gains on life assurance policies

your share of any joint income. If you are married this is usually half the total amount. You can find more information about joint income belonging to married couples in our leaflet IR80 ‘Income tax and married couples’.

There are two points worth remembering about state retirement pensions

For tax purposes, we treat a married woman’s state retirement pension as her income even if it is paid as a result of her husband’s contributions.

A state retirement pension may include an extra amount, known as the ‘adult dependency addition’. For example, this could be paid where the pensioner’s husband has not reached the state pension age.

Whoever the adult dependency addition is paid to, we treat it as part of that person’s taxable income.

In both cases, make sure you include all the pension you are entitled to when you work out your total income including any adult dependency addition.

What income does not count as taxable income?

You are not taxed on any of the following, so don’t include them

mortgage payments

widow’s payment

incapacity benefit paid for the first 28 weeks of sickness

incapacity benefit paid to someone who was receiving invalidity benefit before 13 April 1995, provided there has not been a break of more than 8 weeks in the claim

attendance allowance and mobility allowance

war widow’s pension

income support paid for reasons other than unemployment, strikes, temporary lay-offs or short-time working

income from tax-free National Savings investments such as Savings Certificates, Yearly Plan or the first £70 of interest on an ordinary account with the National Savings Bank

interest, dividends and bonuses from a tax exempt special savings account (TESSA) unless you closed your TESSA before the five years were up - for details ask the Tax Enquiry Centre or Tax Office for leaflet IR114, TESSA - tax free interest for taxpayers

interest and terminal bonuses under Save As You Earn schemes

dividends and other income from a Personal Equity Plan (PEP), or interest from a PEP unless you withdraw more than £180 interest - for details ask your Tax Enquiry Centre or Tax Office for leaflet IR89, Personal Equity Plans

Premium Bond, National Lottery and gambling prizes.

Working out your allowances

In this section we explain

what allowances you are entitled to

how the amount of your income may affect your allowances.

Again, if you think there is something we haven’t covered that might apply to you, please ask for help at the Tax Office.

What personal allowance can I claim?

Everybody gets at least one allowance - the personal allowance. This is the amount of income you can receive without having to pay any tax. The figures shown below are for the tax year 1998-99 that is from 6 April 1998 to 5 April 1999.

There are three levels of personal allowance

a basic amount if you are under the age of 65 (£4,195)

a higher amount if you are aged between 65 and 74 (£5,410)

the highest amount if you are aged 75 or over (£5,600).

The higher amounts depend on your income. Don’t forget - your Tax Office will only know your age if you have told them or shown your date of birth on a tax return or claim form. Once they do know your age they can give you the increased personal allowance when you become 65 or 75.

Is there a special allowance for married couples?

Yes. A married couple living together will have the benefit of the married couple’s allowance.

There are three different amounts depending on your age. In the year the elder of you reaches the age of 65 you may qualify for a higher married couple’s allowance. And when one of you reaches 75 you may get the highest married couple’s allowance.

It is important that you tell your Tax Office when one of you is about to reach 65 or 75. This will enable the Tax Office to give you any higher married couple's allowance for that tax year.

How does the allowance affect the tax I pay?

The married couple’s allowance (and certain other allowances) are slightly different from the personal allowance. They are not an amount of income on which you pay no tax; instead, they reduce your tax bill by a fixed amount. For more details of this, see our leaflet IR90 ‘Tax allowances and reliefs’.

Who gets this allowance?

In the first instance, the married couple’s allowance is normally given to the husband. But the basic amount of the allowance (for 1998-99, £1,900 at the 15% rate) can be split equally between husband and wife or, if they prefer, it can all be given to the wife. If either the husband or the wife do not have enough income to use their share of the allowance, the unused part can be transferred to the other. Our leaflet IR80 ‘Income tax and married couples’ will give you more information.

Can the amount of income I get affect my allowances?

Possibly. Every year there is a certain income ‘limit’. If your income is more than the limit you may not get the full allowances. For 1998-99 the limit is £16,200.

You will get the higher amount of personal allowance and married couple’s allowance in full if

your total taxable income is £16,200 or less, and

you are aged 65 or over.

But if your total taxable income goes above £16,200, it will affect your entitlement to the higher levels of personal allowance.

This is how it works.

For every £2 of taxable income you have over £16,200 you will get £1 taken off the higher amount of your personal allowance. However, no matter how large your income, you will still get the basic personal allowance given to everyone under 65.

The amount of married couple’s allowance you get can only be affected by the husband’s income. It only starts to be affected if his personal allowance is reduced to the basic personal allowance.

So, if you are a married woman and any part of the married couple’s allowance has been transferred to you, the amount will not be affected, whatever the level of your own income.

As with the personal allowance, the married couple’s allowance will never be lower than the basic amount given to every married couple under 65.

Some payments for which you get tax relief can be taken off your taxable income when you work out whether the £16,200 limit affects the amount of your higher allowances. A common example is a donation to charity under a deed of covenant or Gift Aid. Your Tax Office can give you more information on this.

How will the income limit affect my personal allowance?

The following examples will give you some idea. Remember, though, that everyone’s circumstances are different. These examples show you how the income limit affects the personal allowances in one case (as in example 2) but not in another (as in example 1).

We have not given examples that show the effect on the married couple’s allowance. If you have a question about that, ask your local Tax Office. You will need to give them all the details of your taxable income.

Example 1

Jim Smith retired on 31 December 1998, his 65th birthday. His income in 1998-99 is made up of his

Year’s pay to retirement date	£9,000
Pension from former employer	£1,500
State retirement pension	£1,000
Total income	£11,500
The income limit for 1998-99 is	£16,200
Jim’s total taxable income of £11,500 is below the limit of £16,200 so he is entitled to the full personal allowance for a person aged 65-74. In 1998-99 this is £5,410. Jim has to pay tax on his taxable income after the personal allowance is taken off

Taxable income	£11,500
less his personal allowance	£5,410
Amount taxed	£6,090
In the year 1998-99 Jim’s tax bill* will be

£4,300 x 20%  =	£860
£1,790 x 23%  =	£411
	£1,271
* In 1998-99 the first £4,300 of taxed income is taxed at 20%,  and the next £22,800 is taxed at 23%.

Example 2

Ann Jones is aged 76. Her income in 1998-99 is made up of her

Pension from former employer	£13,000
State retirement pension	£3,100
Income from property	£1,000
War widow’s pension	£800
National Savings Bank (ordinary account) interest	£40
Total income	£17,940
Ann’s war widow’s pension is not taxable and the interest from her National Savings Bank ordinary account is less than £70 so it is not taxable income either (see ‘What income does not count as taxable income?’)

So Ann’s taxable income is

Pension from former employer	£13,000
State retirement pension	£3,100
Income from property	£1,000
Total taxable income	£17,100
The income limit for 1998-99 is	£16,200
Ann’s total taxable income of £17,100 is £900 above the limit of £16,200 which means that her personal allowance is reduced by £1 for every £2 of income above the limit.  This works out at £450, or half of £900.

In 1998-99 the full personal allowance for a person aged 75 and over is £5,600. Ann’s personal allowance of £5,600 minus £450 works out at £5,150. Ann has to pay tax on her taxable income after the personal allowance is taken off

Taxable income	£17,100
Less her personal allowance	£5,150
Amount taxed	£11,950
In the year 1998-99 Ann’s tax bill* will be

£4,300 x 20% =	£860
£7,650 x 23% =	£1,759
	£2,619
* In 1995-96 the first £4,300 of taxed income is  taxed at 20% and the next £22,800 is taxed at 23%.

Remember - your personal allowance can never be reduced below the basic £4,195 given to everyone under 65, however large your income.

If I am a married man, will my wife’s income affect the income limit?

If you get a higher level of married couple’s allowance because you or your wife, or both of you, are over 65, we take only your income (not your wife’s) into account when applying the income limit. Your wife’s income never affects the amount of the married couple’s allowance. It does not matter whether all or part of that allowance is transferred to her.

If your own income is more than the income limit, this is how your personal allowance and the married couple’s allowance are affected.

First your personal allowance is reduced until it reaches the basic amount for people under 65.

Then, and only then, is the married couple’s allowance affected. It is reduced until it, too, reaches the basic amount of married couple’s allowance for people under 65. But just like the personal allowance, it can never be reduced below that figure.

Your Tax Office will work out your allowances for you as long as you tell them your age and give details of your taxable income. If you want to check their figures, they will give you any information you need.

How do I know what allowances my Tax Office have given me?

Look at your tax assessment or notice of coding sent to you by your Tax Office. Your allowances are clearly shown there.

If you think all your allowances aren’t included, or you don’t agree with some of the figures, tell your Tax Office straightaway. They are always happy to answer any of your questions.

Our leaflet IR34 ‘PAYE’ gives you more information about PAYE codes. Your Tax Office can give you a copy.

How will I be taxed on my State Retirement Pension?

Tax will not be deducted at source from your State Retirement Pension. If you have other income on which PAYE is operated, such as an occupational pension, your PAYE code will be adjusted to take account of your State Retirement Pension. This means that when you start to receive your State Retirement Pension, more tax will normally be deducted from your occupational pension.

The amount of State Retirement Pension on which you are taxed in any tax year is the amount you would have been paid had you chosen to receive your pension weekly. Although you may receive your pension monthly or quarterly, this does not affect the way the tax due on your pension is calculated.

How interest on your savings is treated

Do I have to pay tax on the interest from my savings?

It depends on your circumstances. Banks, building societies and local authorities have to take basic rate tax off your interest before they pay it. But if you are not liable to pay tax at all - because your taxable income is fully covered by your tax allowances - you can register with your bank, building society or local authority to get your interest ‘gross’ (that is, without tax taken off). You can also claim tax back from the Inland Revenue if the amount of tax taken off your interest is more than the amount you have to pay for the whole year on all your income. This can happen if, for example, you have unused allowances.

You can find out more from our leaflet IR110 ‘A guide for people with savings’. This guide explains how to work out

if you can register to get your interest gross

if you can claim tax back.

If you have registered to get your interest gross and then find that you should be paying tax, tell your bank or building society immediately. They will start to take tax off interest paid to your account.

You should also remember that, even if you have registered for interest to be paid with no tax taken off, you must include the gross figure when working out your taxable income.

What happens to my allowances if my husband or wife dies?

If your husband dies, you will get your personal allowance and any part of the married couple’s allowance for that year which cannot be used against your husband’s income up to the date of his death. But if you are already receiving all or half of the married couple’s allowance in the year of your husband’s death, as much as possible of that allowance must be transferred back and set against your late husband’s income.

You will also receive the widow’s bereavement allowance during the year of your husband’s death and the following year - unless you remarry before the start of the second year. Like the married couple’s allowance this reduces your tax bill by a fixed amount.

The allowances you get in the tax year in which your husband dies can be set against any income you have in that year.

If your wife dies, you will get both the personal allowance and the married couple’s allowance, less any part that your wife used against her income. In the following year you will just get the personal allowance unless you remarry in that year.

For more information about this, ask for our leaflet IR91 ‘A guide for widows and widowers’. We also have leaflets on Capital Gains Tax and Inheritance Tax.

Is there anything else I need to know?

As we said right at the start, we want you to pay only the right amount of tax. That depends on you telling us your taxable income and on what allowances you can claim. We hope this leaflet has helped you work out what they are.

All we ask is that you keep us up to date with your tax affairs. When we send you a tax return, fill it in and send it back as soon as possible.

Of course you don’t have to wait for us to send you a tax return if you think your income is not being properly taxed, or if your circumstances change. The important thing is to let us know the details as soon as you can.

How to comment on the service you receive

What can I do if I want to comment on the way my tax affairs have been dealt with?

We always value any comments on the service you have received from your Tax Enquiry Centre or Tax Office. We welcome any suggestions that could improve the service we provide for you.

If you have a complaint, first write to the officer-in-charge of the office or unit concerned. His or her name is on every letter we send out. In our experience, most issues are settled quickly and satisfactorily in this way.

If you have a complaint which the officer-in-charge of your own tax office cannot settle you should contact the Inland Revenue Director responsible for the area dealing with your tax affairs. Our leaflet IR120 ‘You and the Inland Revenue’ tells you how to do that. It is available from any Tax Enquiry Centre or Tax Office.

What can I do if I am still not happy?

If the Director does not settle your complaint to your satisfaction you can ask the Revenue Adjudicator to look into it and recommend appropriate action.

The Revenue Adjudicator, whose services are free, is an impartial referee whose recommendations are independent.

The address is

The Revenue Adjudicator’s Office

3rd Floor

Haymarket House

28 Haymarket

London, SW1Y 4SP

Tel: 0171 930 2292

Fax: 0171 930 2298.

At any time you can ask a Member of Parliament to refer a complaint to the independent Parliamentary Commissioner for Administration, commonly known as the Ombudsman, at

Parliamentary Commissioner for Administration

Millbank Tower

Millbank

London, SW1P 4QP

Tel: 0171 276 4163.

These notes are for guidance only and reflect the tax position at the time of writing. They do not affect your right of appeal about your own tax.

Issued by the Inland Revenue

April 1999

© Crown copyright 1999

This leaflet reproduced by kind permission of the Board of Inland Revenue


Inheritance tax

Apart from IHT2 and IHT3, the leaflets listed here are not available from Tax Enquiry Centres or Tax Offices but from the Capital Taxes Office for England & Wales, Scotland and Northern Ireland

Title	Number	Year
Inheritance tax on lifetime gifts	IHT2	1998
Inheritance tax. An introduction	IHT3	1998
Alterations to an inheritance following a death. Inheritance tax	IHT8	1995
Inheritance tax. The personal representatives' responsibilities	IHT14	1996
Inheritance tax. How to calculate the liability	IHT15	1996
Inheritance tax. Settled property	IHT16	1996
Inheritance tax. Businesses, farms and woodlands	IHT17	1996


List of Inland Revenue Offices dealing with Repayment Claim forms
Inland Revenue Offices

List of Inland Revenue Offices dealing with Repayment Claim Forms

(See below for addresses)

COUNTY	INLAND REVENUE OFFICE
Avon	St Austell 2
Bedfordshire	Bootle 1
Berkshire	St Austell 2
Buckinghamshire	Bootle 1
Cambridgeshire	Bootle 1
Cheshire	Glenrothes
Cleveland	Bootle 1
Cornwall/Isles of Scilly	St Austell 2
Cumbria	Bootle 1
Derbyshire	Leicester 7
Devon	St Austell 2
Dorset	St Austell 2
Durham	Bootle 1
East Sussex	Belfast 7
Essex	Leicester 7
Gloucestershire	Belfast 7
Greater Manchester	Glenrothes
Hampshire	St Austell 2
Hereford/Worcester	Belfast 7
Hertfordshire	Leicester 7
Humberside	Bootle 1
Isle of Wight	St Austell 2
Kent	Belfast 7
Lancashire (excluding Greater Manchester)	Bootle 1
Leicestershire	Leicester 7
Lincolnshire	Leicester 7
Merseyside	Bootle 1
Middlesex	Bootle 1
Norfolk	Leicester 7
Northamptonshire	Bootle 1
Northumberland	Bootle 1
North Yorkshire	Bootle 1
Nottingham	Leicester 7
Oxfordshire	Belfast 7
Shropshire	Belfast 7
Somerset	St Austell 2
South Yorkshire	Leicester 7
Staffordshire	Belfast 7
Suffolk	Leicester 7
Surrey	Glenrothes
Tyne and Wear	Bootle 1
Warwickshire	Belfast 7
West Midlands	Belfast 7
West Sussex	St Austell 2
West Yorkshire	Leicester 7
Wiltshire	St Austell 2
Wales	Belfast 7
Northern Ireland	Belfast 7
Scotland	Glenrothes
London
E1-18, EC1-4, N1-22	Leicester 7
SW1, 3, 5-7, 10, 13-14, 19-20, W1-14	Bootle 1
SE1-29, SW2, 4, 8-9, 11-12, 15-18	Glenrothes
WC1-1, NW1-11	Bootle 1
ADDRESSES

St Austell 2	Penhaligon House, Trinity Street, St Austell, Cornwall PL25 5BA 01726 70707
Bootle 1	1st Floor, The Triad, Stanley Road, Bootle, Merseyside, L69 9HB 0151 933 8466
Glenrothes	Saltire House, Pentland Park, Glenrothes, Fife, KY6 2AL 01592 610757
Leicester 7	Attenborough House,  109-119 Charles Street, Leicester, LE1 1FY 0116 262 4445
Belfast 7	Dorchester House,  52-58 Great Victoria Street, Belfast, BT2 7BB 01232 236633


Material for schools

The Inland Revenue Education Service has designed a resource pack called 'Tax for you' to help teachers make young people aware of the tax system and how it will affect them when they go out to work. It can be used in a number of areas of the National Curriculum such as Personal Social Education or Mathematics.

It contains:

information sheets about revenue collection and Government spending, Pay As You Earn, and Inland Revenue forms

activity sheets based on the information given in the information sheets

teachers' notes, including answers to the questions on the activity sheets.

'Right from the start' - This is a 15 minute VHS video which tells the story of two young people who learn about the PAYE system. The video can be used on its own or with the above pack to form a practical introduction to PAYE.

All the material is free and can be kept. To order please contact

The Inland Revenue Education Service

PO Box 10

WETHERBY

West Yorkshire

LS23 7EH

Tel: 01937 840238

Fax: 01937 845381


CWG2
CWG2 - Employer's further guide to Pay As You Earn and National Insurance contributions

This guide gives detailed information for employers on how to operate PAYE and deduct NICs. It covers such circumstances as taking on casual employees, holiday pay, and an employee leaving. It is an essential guide for all employers and has replaced two previous publications - P7 'Employer's further guide to PAYE' and CA28 'Employer's Manual on National Insurance contributions'.


R40 (SP)(M) (1996)
R40 (SP)

This is the shorter version of form R40 which comes with leaflet IR110. TaxCalc contains the longer version, form R40(1996) which you can print out and fill in.


SA/BK3
SA/BK3 - Self Assessment. A guide to keeping records for the self-employed

Under rules introduced in the 1994 Finance Act mean that you now have to keep all appropriate records. This guide gives general advice about what business records you need to keep for tax purposes each year, and how long you need to hold on to them.


SA/BK4
SA/BK4 - Self Assessment. A general guide to keeping records

Everyone who pays tax should receive a record of the tax they have paid. From April 1996 the law requires that you keep these and other records so that you can complete a tax return fully and accurately if you are asked to do so. These records may also be needed if you ever need to make a claim, for example, for tax allowances. This guide gives guidance on the records you may need to keep.


SA/BK6
SA/BK6 - Self Assessment. Penalties for late tax returns

The rules for self assessment require you to send your completed tax return to the Inland Revenue by a fixed date. This booklet tells you about the penalties that are charged for late tax returns.


SA/BK7
SA/BK7 - Self Assessment. Surcharges for late payment of tax

The rules for self assessment require you to pay tax and class 4 National Insurance contributions by fixed dates. This booklet tells you about the surcharges that are charged for certain late payments.


SA/BK8
SA/BK8 - Self Assessment. Your guide

This booklet is a step-by-step guide to the main self assessment forms you can expect to receive and the key dates and events in the tax year. It also includes information on the records you need to keep and some helpful tips to make it easier to follow the new rules.

FULL TEXT


Self Assessment

Title	Number	Year
Self Assessment. A guide to keeping records for the self-employed	SA/BK3	1995
Self Assessment. A general guide to keeping records	SA/BK4	1997
Self Assessment. Penalties for late tax returns	SA/BK6	1997
Self Assessment. Surcharges for late payment of tax	SA/BK7	1997
Self Assessment. Your guide	SA/BK8	1999
Inland Revenue enquiries under Self Assessment	IR160	1997


Self Assessment your guide (SA/BK8)
Self Assessment (SA/BK8)

SA/BK8

Self Assessment - Your guide

We produce a wide range of leaflets, each designed to explain a different aspect of the tax system in plain English. A full list is available from any Tax Office.

Some you might find useful are

SA/BK3	Self Assessment. A guide to keeping records for the self-employed
SA/BK4	Self Assessment. A general guide to keeping records
SA/BK5	Self Assessment. Electronic version of the Tax Return (on disk)
SA/BK6	Self Assessment. Penalties for late Tax Returns
SA/BK7	Self Assessment. Surcharges for late payment of tax

You can get these from your local Tax Office or from the Self Assessment Orderline by

telephoning 0645 000 404. It is open between 8 am and 10 pm, seven days a week. Calls are charged at local rates

faxing 0645 000 604

e-mail on saorderline.ir@gtnet.gov.uk

writing to PO Box 37, St. Austell, Cornwall, PL25 5YN.

We also have a Self Assessment Internet site which includes background information about Self Assessment, who it affects, their record keeping responsibilities, key dates and the Self Assessment Tax Return.

The site can be accessed on www.open.gov.uk/inrev/sa/

Your Guide to Self Assessment

This booklet includes information on

the tax system

the records you need to keep

and is a step-by-step guide through

the main Self Assessment forms you can expect to receive

the key dates and events in the tax year.

It also includes some helpful tips to make it easier to follow the rules.

Tip 1
Don't be afraid to ask for help. If you have a tax adviser, you may want to ask them about Self Assessment. If you do not have a tax adviser, you can contact your Tax Office - whose address and telephone number is on the front of your Tax Return - or you can contact one of our Tax Enquiry Centres. Their addresses are in your local telephone book under 'Inland Revenue'.

Most Tax Offices are open to the public from 8.30 am to 4.30 pm Monday to Friday and some are open outside these hours. When the Tax Office is closed, you can call the Self Assessment Helpline on 0645 000 444 for general advice. The Helpline is open in the evenings and at weekends. Calls are charged at local rate.

Keeping records

By law everyone needs to keep records of their income, gains and expenditure so that they can fill in a Tax Return if they get one. A Tax Return covers one complete tax year, which runs from 6 April one year to 5 April the next.

Tip 2
It is easier to fill in your Tax Return if you have kept good records. Keep all your tax records in one place. It is a good idea to keep the papers for each year in a separate 'tax' file, large envelope or box.

What is Self Assessment?

Self Assessment is a clearer and more straightforward way of working out and paying tax. It is not a new tax and does not affect the amount of tax you pay. The first Self Assessment Tax Returns were issued in April 1997 and covered the 1996-97 tax year which ran from 6 April 1996 to 5 April 1997.

Who does Self Assessment apply to?

It applies to everyone who gets a Tax Return. You need to complete a Tax Return if you are

self-employed

a business partner

a company director

an employee or pensioner with more complex tax affairs

a trustee or personal representative.

Most people don't get a Tax Return and pay their tax through PAYE or other deduction at source arrangement, which carry on as before.

Tip 3
You will find it easier to manage your tax affairs if you keep them up-to-date. If you get behind, you may have to pay interest, surcharges and penalties. If you aren't clear about what you need to do, get in touch with your Tax Office or tax adviser.

The Self Assessment Tax Return

is tailored to your circumstances

has to be filled in with figures for all your income, gains, reliefs and allowances

should be sent back by 30 September if you want the Inland Revenue to work out how much tax you need to pay

should be sent back by 30 September if you want the Inland Revenue to collect your tax (less than £1,000) through PAYE where possible

must be sent back by (usually) 31 January or you have to pay a penalty.

What do you get in the post?

Most Self Assessment taxpayers will get

an eight-page, easy-to-follow Tax Return

the supplementary pages that we think you need, depending on your circumstances

a step-by-step guide on how to fill in your Tax Return - called the Tax Return Guide

a guide on how to calculate your own tax if you want to - called the Tax Calculation Guide.

We send you the parts which we think you need. If you need other parts you must ask us for them.

In April 1998 most Self Assessment taxpayers will receive the standard paper Tax Return (SA100), but the Inland Revenue wish to avoid - wherever possible - sending one to taxpayers who are unlikely to use it.

We will therefore be issuing a Notice to Complete a Tax Return (SA316) instead of a paper return to taxpayers whose agent has sent us their 1996/97 Tax Return using either the Electronic Lodgement Service (ELS) or an approved substitute paper form of the Tax Return.

We will not send a Notice to Complete a Tax Return if we are sending a Tax Return after the main issue in April. In that case, we will always send a paper return.

Sending back your Tax Return

There are two important dates to remember

30 September

31 January

30 September after the end of the tax year

Get your completed Tax Return back to us by 30 September if you want us to

calculate your tax bill for you

collect your tax (less than £1,000) through next year's PAYE code number where possible.

31 January after the end of the tax year

If you want to work out you own tax bill, you have until 31 January to get your return back to us. There is a fixed penalty if we do not receive your return by 31 January.

Tip 4
Don't delay doing your Tax Return. We know it's easy to put off filling it in, but there's really no benefit in doing so. Following these step-by-step instructions might help you make a start:

Six easy steps to filling in your Tax Return

1.	Open your Tax Return and look inside. Decide if you are going to send it back by 30 September.

2.	Check you've got all the supplementary pages you need by filling in page two of your Tax Return. If you need extra pages to fill in, call the Self Assessment Orderline on 0645 000 404. It is open 8 am - 10 pm, seven days a week and calls are charged at local rate.

3.	Get all your tax records together, such as bank and building society statements, business earnings, expenses, or accounts where appropriate. If you're on PAYE you will probably get a P60 and you may also get a copy of form P11D from your employer. If you have changed jobs, you should have a P45 Part 1A.

4.	Fill in your Tax Return by following the guidance in the Tax Return Guide. Make sure you understand them and are sure of the figures you want to enter before putting pen to paper.

5.	Please ask us for any help you need before you send it in. Details of where to get help are shown in Tip 1 above and on your Tax Return.

6.	Check your Tax Return once you've completed it, making sure you haven't forgotten anything, like adding your signature. Finally post it back to us so that we receive it by either 30 September or 31 January.

Remember

the earlier you complete your Tax Return, the more time you'll have to get help from us if you need it

sending in your Tax Return earlier doesn't mean you have to pay tax any earlier

Tip 5
Even if you are working out your tax bill yourself, it's not a good idea to wait until January to send in your Tax Return. This might mean you pay the wrong amount of tax because, if you have made a mistake, we may not have enough time to correct your calculation for you before your payment is due on 31 January.

What happens when you have sent in your Tax Return?

When we receive your Tax Return, we enter your figures into your tax record on our computer. If we spot any obvious mistakes, we correct them and tell you about them. If you do not agree with what we have done, you can ask us to reverse or amend any changes we have made.

Your Tax Calculation

If you ask us to work out your tax bill, we send you a Tax Calculation on form SA302, using your figures. If we have corrected anything, we let you know what we have done.

If you have worked out your tax bill yourself and we need to correct any of your figures, we will send you an amended Tax Calculation.

When you get the Tax Calculation, you need to

check that you agree with any corrections we have made

check that the figures used in the Tax Calculation are correct.

If you want to change anything, let us know straightaway so that we can sort it out quickly. At the very latest you should do it by 31 January after the end of the next tax year.

Statement of account

We open a tax account for everyone who gets a Tax Return. You can expect to get statements

when there are changes to the items on your account

when a payment is about to become due within the next 35 days

every two months where there is an amount due between £32 and £500

every month where there is an amount due that is more than £500

when we have arranged for an amount of unpaid tax to be collected through PAYE

when you have paid more than the total due.

When you get your Statement of Account, check that you agree with the entries. If it shows that you have paid too much, you can either leave the money in your account or claim a repayment.

If it shows you need to pay something, make sure we receive your payment by the due date or you will be charged interest (and perhaps a surcharge).

Link between the Tax Calculation and your Statement of Account

The tax (and National Insurance contributions) shown on the Tax Calculation will appear on your tax account with us.

We will send you a Statement of Account in January with details of how to pay any unpaid tax.

If we don't receive your Tax Return in time to send you a Statement of Account of what to pay in January, we send you a reminder to pay and you need to work out for yourself how much tax is due.

You need to make sure your payment arrives by 31 January after the end of the tax year at the very latest.

Tip 6
Make a note in your diary or calendar so that you pay in good time. You will have to pay interest, and perhaps surcharges, if you pay late.

Tax refunds

If your Statement of Account shows you are due a refund

we will repay it if you have asked us to (you can do this on your Tax Return)

we will credit it to your account, if you are not asking us to repay it.

Paying the tax you owe through Pay As You Earn (PAYE)

If you are an employee, we can usually arrange to collect the tax you owe through the coming year's PAYE code. We should be able to do this if

the tax you owe is less than £1,000 and

you have sent your Tax Return back by 30 September and

you have not ticked the box in your return saying that you do not want any tax you owe collected through PAYE.

If we are collecting the tax you owe through PAYE, you will still get a Tax Calculation showing the tax which is due, but your Statement of Account will confirm that the tax is to be collected through PAYE.

If you have asked us to collect your tax through PAYE, but we cannot do this, we will let you know by sending you a reminder in the middle of January.

Tip 7
In January/February look out for your PAYE Notice of Coding for the coming tax year. Check that we have included the right amount of any unpaid tax. Contact us if you would like anything explained.

Payments on account

Some people - mainly among the self-employed - also make two payments on account for the tax year before the return for that year is due.

Payments on account are due on:

31 January in the tax year and

31 July following the end of the tax year.

Most people do not have to make payments on account. If you are an employee or you pay SC60 tax, you are unlikely to have to do so.

If you send your Tax Return in before 30 September and ask us to calculate your tax for you, we will also let you know what payments on account you will need to make for the tax year following the year of the Tax Return.

If you calculate the tax yourself then your Tax Calculation will show if you have to make payments on account for the tax year following the year of the Tax Return. For example, your Tax Calculation based on your Tax Return for 1996/97 will show if you need to make payments on account for 1997/98. If you do, it will show how much you need to pay.

Checking your Tax Return

We may ask you questions about the entries on your Tax Return. If we do, we will write to you telling you that we are opening an 'enquiry'. This will normally be within one year of the deadline for you to send back your return, but can be later if you send your return in late.

If we do enquire into your return, we will also explain what will happen and what your rights are, by sending you a booklet called 'Code of Practice 11 - Enquiries into Tax Returns by local Tax Offices', or a summary of that booklet.

FURTHER POINTS ABOUT SELF ASSESSMENT

What happens if you do the Tax Calculation yourself?

Your Tax Calculation Guide shows you how to do the calculation. After you have sent in your Tax Return we will check your tax calculation against our own. If we think it is wrong, we will send you a revised calculation.

What happens if you send your Tax Return back after 30 September but have not done the Tax Calculation?

We will still do the Tax Calculation and send it to you with a notice of any corrections we have made. But, we cannot guarantee to do this or to send you a Statement of Account in time for you to know how much to pay by 31 January. This would mean that you have to estimate how much to pay. If you pay too little, you will have to pay interest and possibly a surcharge.

Most people in this situation will get a reminder in the middle of January (form SA309A). The reminder includes a payslip and instructions on how to pay.

What happens if you send your Tax Return back after 30 September but want us to collect the tax you owe through PAYE?

If we receive your return after 30 September, we may not be able to do this. However, if we receive your return before the end of November, we will tell you either

that we will be able to collect the tax you owe through PAYE. We tell you this on a Statement of Account, or

that you will need to make a payment on 31 January. We tell you this on a reminder (form SA309A)

We will definitely not be able to arrange to collect the tax you owe through PAYE if we receive your return after the end of November. In this case, you will need to pay any tax due by 31 January. Most people in this situation will get a reminder in January (form SA309A). The reminder includes a payslip and instructions on how to pay.

What happens if you have a tax adviser?

If you have a tax adviser, you have probably signed form 64-8 authorising us to send him or her copies of the forms you receive.

The most common forms which are sent to tax advisers are

Tax Calculation (form SA302)

Penalty for a late Tax Return (form SA326)

Surcharge for late payment of tax (form SA324)

Determination of tax due (form SA323).

Your tax adviser will not receive a copy of your Statement of Account, but will receive summaries of your account with us in February and April. However, if on form 64-8 you have authorised your tax adviser to receive the Statement of Account on your behalf, we will send him or her (and not you) the original paper copy.

Tax advisers registered to use the Electronic Lodgement Service (ELS)

These advisers will get paper copies of the main forms sent to you and an electronic version of the Statement of Account.

What happens if we don't receive your Tax Return on time?

The final deadline for getting your Tax Return back is normally 31 January after the end of the tax year. The deadline is shown on the front of the return.

If you don't send your Tax Return in by the deadline, you will have to pay an automatic fixed penalty of £100.

If the Tax Return is still outstanding six months later, you have to pay another £100.

There can be further penalties for late Tax Returns. For full details ask the Orderline for booklet SA/BK6 'Self Assessment. Penalties for late Tax Returns'.

What happens if you don't pay your tax on time?

The deadline for getting your final payment to us is 31 January after the end of the tax year. This date will be shown on your Statement of Account or any reminder you receive.

If you do not pay your tax by the deadline, you have to pay interest.

In addition to interest, you have to pay a 5% surcharge on any tax which remains unpaid after 28 February.

A further 5% surcharge is imposed on any amounts still unpaid after 31 July.

For full details of surcharges, ask the Orderline for booklet SA/BK7 'Self Assessment. Surcharges for late payment of tax.'

What is a 'Determination of tax due'?

If your Tax Return is late, you are liable to pay penalties. In addition, if we think you have not paid enough tax on time, we may issue you with a 'Determination of tax due' (form SA323). This is our estimate of your tax bill for the year. You have no right of appeal against such a determination. The full amount of tax due that is shown in the determination remains payable and can only be changed when you send in your Tax Return. If you receive a Determination of tax due, any surcharge will be based on the amount of tax shown on it.

What about trusts and partnerships?

For partnerships, things are a little different. One partner is nominated to be responsible for the partnership Tax Return and we will correspond with that partner. But any penalties for sending the partnership return in late will be imposed on each partner. The partnership itself does not pay tax. Partners show their share of the partnership profits on their Tax Returns and pay tax on that share.

If you are the trustee responsible for the tax affairs of a trust, or the personal representative responsible for the tax affairs of someone who has died, the same system applies.

Other changes to the tax system for 1996/97 onwards

Everybody should keep records

Everyone must by law keep records of their income and their capital gains for at least 22 months after the end of the tax year to which they relate, so that they can fill in a Tax Return fully and accurately if they get one.

People who have businesses - such as the self employed and partners and those letting property - must keep their records for at least five years and ten months after the end of the tax year to which they relate

 People who have not received a Tax Return should let us know if they have income or capital gains we don't know about

If we have not sent you a Tax Return and you have received taxable income and capital gains that will not be fully taxed at source, you must let us know by 5 October after the end of the tax year. We will then send you a Tax Return if necessary. If you miss that date, tell us straightaway as the amount of tax which has not been paid at the following 31 January will affect any penalties you may have to pay.

Some important dates

When?	Who is affected?	What happens?
April	People who get a Tax Return each year.	Tax Returns (or Notice to Complete a Tax Return) sent out
31 July	Some people. Your Tax Calculation for the previous year shows if it applies to you.	Second payment on account for the tax year ended on 5 April
30 September	People who want us to calculate their tax. People who want us to collect their tax (below £1,000) through next year's PAYE code if possible.	You need to get your Tax Return to us by this date. You need to get your Tax Return to us by this date.
31 January	Everyone who was sent a Tax Return by the previous 31 October. Some people. Your Tax Calculation for the previous year shows if it applies to you.	This is the deadline for getting your Tax Return and any payment to us for the tax year ended on the previous 5 April. An automatic penalty of £100 will be charged if we have not received your Return by this date. Interest will be charged if we have not received your payment by this date. Date for first payment on account for the tax year ending on the following 5 April.
28 February	Everyone who was due to pay tax on 31 January but where the payment has not been made.	An automatic 5% surcharge will be charged.
31 July	People whose Return was due back by 31 January but where it has not been sent in. Everyone who was due to pay tax on 31 January but where the payment has not been made.	A second automatic penalty of £100 will be charged. A second automatic 5% surcharge will be charged.
Glossary of some terms used in this booklet

Determination	A determination is our estimate of your tax bill for the year (form SA323).
Electronic Lodgement Service (ELS)	The ELS enables agents to submit Tax Return information direct to the Inland Revenue computer via a dedicated secure gateway. The Revenue also electronically send all participating agents copies of all Statements of Accounts sent to their clients.
Electronic Version of the Return (EVR)	The EVR is a software package designed to allow you to complete your Tax Return using a personal computer, print out a paper copy of the return, sign it and send it to your Tax Office. It can be used only if you need only the core Tax Return and Employment supplementary pages.
Expenditure	Expenditure is money that is spent (or 'expended')
Income	Amounts of money earned or received over a given amount of time, e.g. Salary £12,000 p.a. Interest on savings £2,000 p.a. Total income £14,000 p.a.
Payslip	A payslip is a tear-off slip which is attached to another form and which has details of the amount of tax due. This will either have been completed by the Revenue or will need to be completed by the taxpayer. It should accompany your payment.
Penalty	A penalty is an additional sum that may be charged in certain circumstances. For example, if you do not send in your Tax Return by the deadline, if you do not keep adequate records to support your Tax Return, or if your return is incorrect due to fraud or negligence.
Personal representative	A personal representative is the person responsible for settling the affairs of someone who has died. They may also be known as the executor or administrator.
Statement of Account	A statement will be sent to you in January and at various other times showing the current position of your tax.
Surcharge	If tax has not been paid by 28 February you have to pay a surcharge of 5% of the amount outstanding. There is another 5% surcharge if tax is still outstanding by 31 July.
Trustee	A trustee is a person or a company who holds property in trust for the benefit of one or more beneficiaries.
Glossary of Forms

SA100	Tax Return - This is the core Tax Return. You need to complete this and any supplementary pages that are appropriate for you
SA150	Tax Return Guide - This guide has step-by-step instructions to help you fill in your Tax Return.
SA151	Tax Calculation Guide - This guide has step-by-step instructions and a working sheet to help you calculate your tax if you want to.
SA300	Statement of Account  - This is a statement of your tax account
SA302	Tax Calculation - We will send you a Tax Calculation if you have asked us to calculate your tax for you, using your figures. If you have worked out your tax for yourself, we will send you an amended Tax Calculation to show any corrections we may have made.
SA309A	Reminder - We will send you this form in January to remind you that, to avoid penalties, you need to  send in your Tax Return by 31 January if you have not  already done so to pay any tax due by 31 January on time to avoid  interest and surcharges if you have asked us to collect your tax through PAYE,  but we cannot do this. The reminder, which is issued to individuals and trusts, includes a payslip and instructions to pay. (The partnership version, SA309B, does not include a payslip.) If you have sent in your Tax Return and there is a payment due on 31 January we will send you a Statement of Account rather than a reminder.
SA316	Notice to complete a Tax Return - This form will be sent to taxpayers who are unlikely to use the standard paper Tax Return.
SA323	Determination of tax due - This tells you our estimate of the tax you owe for the year. This will be sent to you if your Tax Return is late and if we think that you have not paid enough tax on time.
SA324	Surcharge for late payment of tax - We will send this form to you in March if you have sent in your Tax Return but we have not received all your tax by 28 February. It imposes a surcharge of 5% of the amount of tax outstanding. If you still owe tax six months after it was due, a further surcharge of 5% will be imposed.
SA326	Penalty for a late Tax Return - We will send this form to you in February if you have not sent in your Tax Return in time (usually by 31 January). It imposes a penalty of £100. If you have still not sent in your return six months later a further penalty of £100 will be imposed on each of the partners.
SA800	Partnership Tax Return - This is the core Tax Return for partnerships. It should be completed by the partner nominated to be responsible for the return. Some partnerships will need to complete supplementary pages and they should request these from the Self Assessment Orderline.
SA850	How to fill in the Partnership Tax Return - This guide has step-by-step instructions to help you fill in the Partnership Tax Return.
SA900	Trusts Tax Return - This is the core Tax Return for completion by the trustee responsible for the affairs of the trust and by the personal representative for the tax affairs of someone who has died.
64-8	Authorisation to send copies of forms and notices to an agent.
P2	PAYE Notice of Coding - This will be sent to you in January or February. If you have asked us to collect the tax due through PAYE.
P45	PAYE Particulars of employee leaving - This form is handed to you by your employer when you leave a job.
P11D	Return of expenses payments and benefits - If you received expenses or benefits from your employer, they will usually give you a copy (by 6 July) of the details they provide to the Inland Revenue on form P11D.
P60	PAYE Certificate of pay and tax deducted - If you are in employment on 5 April, this certificate is given to you by your employer (by 31 May). It shows your total amount of pay for income tax purposes for your current employment and how much has been paid in tax and National Insurance.
SC60	Construction Industry deduction certificate - This form is given to a sub-contractor by the contractor when a payment is made after deduction of tax. An SC60 can cover a series of payments if the contractor and sub-contractor agree.
The Taxpayer's Charter

You are entitled to expect the Inland Revenue

To be fair

By settling your tax affairs impartially

By expecting you to pay only what is due under the law

By treating everyone with equal fairness

To help you

To get your tax affairs right

To understand your rights and obligations

By providing clear leaflets and forms

By giving you information and assistance at enquiry offices

By being courteous at all times

To provide an efficient service

By settling your tax affairs promptly and accurately

By keeping your private affairs strictly confidential

By using the information you give only as allowed by law

By keeping to a minimum your costs of complying with the law

By keeping its own costs down

To be accountable for what we do

By setting standards for ourselves and publishing how well we live up to them

If you are not satisfied

We will tell you exactly how to complain

You can ask for your tax affairs to be looked at again

You can appeal to an independent tribunal

Your MP can refer your complaint to the Ombudsman

In return, we need you

To be honest

To give us accurate information

To pay your tax on time

This booklet gives general advice and does not cover all possibilities. It is for guidance only and reflects the tax position at the time of writing. It does not affect any right of appeal.

Issued by the External Communications Unit of the Inland Revenue

April 1999

Reproduced by permission of the Board of Inland Revenue

© Crown Copyright 1999


Tax and gifts

Title	Number	Year
What to do about tax when someone dies	IR45	1997
Giving to charity. How businesses can get tax relief	IR64	1993
Giving to charity. How individuals can get tax relief	IR65	1993
Gift Aid. A guide for donors and charities	IR113	1994
Millennium Gift Aid	IR163	1998


Tax in later years

Title	Number	Year
Income tax and pensioners	IR121	1999


Working for an employer

Title	Number	Year
Share acquisitions by directors and employees. Explanatory notes	IR16	1997
Income tax and school leavers	IR33	1992
PAYE. Pay as You Earn	IR34	1996
Lay-offs and short-time work	IR42	1992
Approved profit sharing schemes. An outline for employees	IR95	1996
Approved profit sharing schemes. An outline for employees	IR97	1996
Approved company share option plans. An outline for employees	IR101	1996
Using your own car for work	IR125	1996
Income tax and company cars from 6 April 1994. A guide for employees	IR133	1993
Income tax and relocation packages	IR134	1997
Income tax and company vans.	IR136	1994
Low interest loans provided by employers	IR145	1997
Tax exemption for sickness or unemployment insurance payments	IR153	1997
Tax relief for employees' business travel	IR161	1998
Expenses and benefits. A tax guide	480(1998)	1998


Working for yourself

Title	Number	Year
Starting your own business?	CWL1	1999
National Insurance contributions for self-employed people. Class 2 and Class 4	CWL2	1999
Employed or self-employed? A guide for tax and National Insurance	IR56/NI39	1999
Expenses payments and benefits in kind. How to save yourself work	IR69	1996
Corporation tax pay and file. Company leaflet	IR128	1993
The Enterprise Investment Scheme	IR137	1994


IR120 - You and the Inland Revenue
You and the Inland Revenue (IR120)

Personal Taxpayer Series IR120

You and the Inland Revenue

Tax, Collection and Accounts Offices

Our service commitment to you

We want to provide you with good service. 'Our service commitment to you' opposite summarises in broad terms what we aim to deliver. More details are available in our Charters and in service standards leaflets.

This leaflet focuses, in particular, on:

who to contact for help and information

who to complain to if you think we have handled your tax or National Insurance affairs badly

how to make general comments and suggestions on how to improve our service.

Some specialist Inland Revenue offices produce their own versions of this leaflet. These are available from the individual offices concerned.

Where to get help and information

Your enquiries can usually be sorted out more quickly if you contact the Inland Revenue or Inland Revenue (NI Contributions) office you have been dealing with. But any Inland Revenue office can help. You can telephone us, write to us, or visit us.

Telephone numbers and addresses are in your telephone book under 'Inland Revenue' or, at present, for National Insurance Contributions (NICs) enquiries 'Contributions Agency' (in Northern Ireland, 'Social Security Agency').

Most of our offices are open from 8.30am to 4.30pm Monday to Friday and some are also open outside these hours. Our switchboards are generally open from at least 9.00am to 4.30pm Monday to Friday.

Our leaflet 'How to contact the Inland Revenue' gives more details of how you can contact us and, in particular, of the range of specialist helplines you can call.

We also have a wide range of free leaflets which explain various aspects of the tax or National Insurance system, and Codes of Practice which back up our Charter commitments. Details of some you might find most useful are at the back of this leaflet.

Inland Revenue Enquiry Centres and local Inland Revenue offices have most of our leaflets in stock or, if not, can obtain them for you. Benefits Agency offices can also supply some leaflets, and your local library or Citizens' Advice Bureau may also have copies available.

How you can help us

If you want to discuss your tax or National Insurance affairs with us, it helps if you can give us your National Insurance number, and tax reference number if appropriate. And, if you are employed, it helps if you can tell us the name and address of your employer.

Our aim is to get your tax or National Insurance right first time, on time, every time.

If you have a complaint

Problems can usually be settled most quickly and easily by the office you have been dealing with. You will always be given a contact name or number in any correspondence we send you. This may be the person who has been dealing with your case, or the officer in charge of the office or unit concerned.

If you cannot settle a matter with the office you have been dealing with, you can write to:

the Director with overall responsibility for that office, or unit, or

if the problem concerns the service you have been given by an Accounts Office, the Director of that Office.

The Director will look into your case and quickly let you know the outcome.

Directors' names and addresses are given at the end of this leaflet. If you do not know which Director to write to please ask your own office.

If you are still not happy

If the Director has not been able to settle your complaint to your satisfaction, you can ask the Adjudicator to look into it and recommend appropriate action. The Adjudicator is an impartial referee whose recommendations are independent. The address is

The Adjudicator's Office

Haymarket House

28 Haymarket

London SW1Y 4SP

Tel. 0171 930 2292

Fax. 0171 930 2298

The Adjudicator's leaflet AO1 (also obtainable from Inland Revenue offices) gives information about complaining to the Adjudicator.

Finally, you can ask your MP to refer your case to the independent Parliamentary Commissioner for Administration (usually known as the Ombudsman). The Ombudsman will accept referral from any MP, but you should approach your own MP first. Further information is available from

The Parliamentary Commissioner for Administration

Millbank Tower

Millbank

London SW1P 4QP

Tel. 0171 217 4163

Fax. 0171 217 4160

How to help us improve our overall service

We welcome any general comments you have on how to improve our service to all our customers. You can give these to us:

in writing - to the Customer Service Manager of your own Inland Revenue office (or your local office, if you prefer)

in person - by calling in at a local Inland Revenue Enquiry Office and asking to speak to the Customer Service Manager

by telephone.

We would also like to hear from you if you think you have received particularly good service. Again, we will use your comments to improve our overall service.

Directors of Executive Offices

Martin Hodgson

Inland Revenue East

Churchgate

New Road

Peterborough PE1 1TD

John Carling

Inland Revenue London

New Court

Carey Street

London WC2A 2JE

Richard Cooke

Inland Revenue North

Ground Floor

Regent House

10 Commercial Street

Darlington DL 6TN

Geoff Lunn

Inland Revenue North West

The Triad

Stanley Road

Bootle

Merseyside L75 2DD

Tony Sleeman

Inland Revenue South East

Dukes Court

Duke Street

Woking GU21 5XR

Roger Hurcombe

Inland Revenue South West

Longbrook House

New North Road

Exeter EX4 4UA

Mary Hay

Inland Revenue South Yorkshire

Concept House

5 Young Street

Sheffield S1 4LF

David Hinstridge

Inland Revenue Northern Ireland

Dorchester House

52-58 Great Victoria Street

Belfast BT2 7QE

Ian Gerrie

Inland Revenue Scotland

Clarendon House

114-116 George Street

Edinburgh EH2 4LH

Malcolm Kirk

Inland Revenue Wales and Midlands

Ty Rhodfa

Ty Glas Avenue

Llanishen

Cardiff CF4 5TS

Marjorie Williams

Inland Revenue Large Business Office

6th Floor, North West Wing

Bush House

London WC2B 4PP

Andrew Geddes

Inland Revenue Accounts Office

St Mungo's Road

Cumbernauld

Glasgow G70 5TR

Jack Warner

Inland Revenue Accounts Office

Victoria Street

Shipley

West Yorkshire BD98 8AA

Issued by the Inland Revenue

April 1999

© Crown Copyright 1999

This leaflet is reproduced by kind permission of the Board of Inland Revenue


You and your family

Title	Number	Year
Income tax and married couples	IR80	1999
A guide for widows and widowers	IR91	1995
A guide for one-parent families	IR92	1995
Separation, divorce and maintenance payments	IR93	1999
Tax and childcare	IR115	1992


Your savings and investments

Title	Number	Year
Personal pensions. A guide for tax	IR78	1991
Personal Equity Plans (PEPs). A guide for potential investors	IR89	1998
A guide for people with savings	IR110	1999
TESSA. Tax free interest for taxpayers	IR114	1998
Occupational pension schemes. An introduction	IR129	1995


CIS FACT 5

CIS FACT 5 - The new Construction Industry Scheme. A handy guide

The new Construction Industry Scheme starts on 1 August 1999. All contractors and subcontractors will be affected, whether they are companies, partnerships or self-employed individuals. This is a short guide to the new scheme.


IR14/15CIS

IR14/15 (CIS) - Construction Industry Scheme

This booklet explains the new arrangements for the taxation of certain payments made by 'contractors' to 'subcontractors' in the construction industry from 1 August 1999. It deals with the duties of both contractors and subcontractors under these arrangements.


IR40(CIS)

IR40 (CIS) - Construction Industry Scheme. Conditions for getting a subcontractor's tax certificate

If you work in the construction industry you may want to apply for a subcontractor's tax certificate. This leaflet sets out the conditions you have to meet before you can get a subcontractor's tax certificate from 1 August 1999.


IR163

IR163 - Millennium Gift Aid

In his 1998 Budget, the Chancellor of the Exchequer announced that a new relief, Millennium gift Aid, would be introduced to advance education and relieve poverty in the world's poorest countries. This leaflet explains what Millennium gift Aid is and how it works.


IR161 - Tax relief for employees' business travel
Tax relief for employees' business travel - IR161

Personal Taxpayer Series IR161

Tax relief for employees' business travel

A short guide for employees about the tax treatment of their travel expenses from 6 April 1998.

Why does my business travel affect my tax?

Generally you are taxed on expenses of travel which your employer pays or provides for you.  This is because the law says they are part of your income.  However, you can claim tax relief for the cost of business journeys in the course of your job or to get you from home to a place where you have to be for your work (but there is no tax relief for the cost of travel from your home to your permanent workplace).

Does this mean that there is always tax to pay on what my employer pays for my business travel ?

No.  Very often the amount your employer pays is balanced by the amount you can claim.  But the amounts will not necessarily be the same.  Your employer may pay for things which are not business travel - in which case you will pay tax on the difference, unless you can claim tax relief under different rules.  Or you may pay out more for business travel than your employer pays for - in which case your claim can reduce the tax you pay on income from the same employment.

What sort of expenses payments are we talking about?

The common expenses which employers pay - to you or to someone else for you - are

mileage allowances if you use your own car*

payments to you in advance, or afterwards, for train and air tickets

payments direct  to airlines and hotels for your travel and accommodation

payments to a credit card company for travel expenses  you have paid by using a credit card in your employer's name

an allowance (often called a round sum) paid to you for travel expenses.

* If you receive mileage allowances, we recommend that you read leaflet IR125 'Using your own car for work' which you can get from any Tax Office.

How do I know what my employer has paid?

Unless your expenses payments are covered by a dispensation (see page 00) or you receive mileage payments under a 'Fixed Profit Car  Scheme' (see below), your employer has to tell the Tax Office the total amount of your expenses payments during the tax year, and will tell you too. Details of expense payments are usually given on form P11D and you should receive your details by 6 July after the end of the tax year.

Mileage payments under a Fixed Profit Car Scheme

If your employer pays you a mileage allowance for using your own car for business, the payments may be dealt with under something called a 'Fixed Profit Car Scheme'.  This is an administrative arrangement which employers can use to report any profit on the mileage allowances they pay to employees who use their own cars for business travel.  The employer compares the rates of mileage allowances paid for the whole of the tax year with the Inland Revenue's authorised mileage rates and reports the difference.  If there is tax to pay it is collected through an adjustment to employees' tax codes.  Your employer will be able to tell you whether your mileage payments are being dealt with in this way.

Whether or not there is a Fixed Profit Car Scheme in operation, you can use the Inland Revenue's authorised mileage rates to work out the cost of your business journeys and to compare it with the amount of mileage payments you have received from your employer.  Alternatively, you can calculate the actual costs of your business motoring, but that means keeping more records.  Leaflet IR125 'Using your own car for work' explains how to calculate the cost of business motoring on either basis.

What records should I keep?

You need to keep records so you can

check your PAYE code

complete a tax return fully and accurately, if you get one

claim tax relief for travel expenses

answer any enquiries from your Tax Office.

You need to keep records of

what your employer has paid for your travel, and

the expenses for which you want to claim tax relief.

Records of your employer's expenses payments

The records can include

details of mileage allowances paid to you under a Fixed Profit Car Scheme

slips your employer gives you when paying you your expenses

a copy of the details on form P11D, which you will receive by 6 July after the end of the tax year.

Records to support your claim for tax relief

These could include

mileage details  - for example a log showing dates, trips made and business miles travelled - and details of motoring costs

records to prove what you have paid out - such as receipts, credit card statements, ticket stubs.

Sometimes you may not get a bill or receipt for expenses, especially where the amounts are small.  If this happens, you should make a brief note as soon as you can of the amount you spent, when you spent it and what it was for.

If you do get a receipt or other evidence, you may have to give it to your employer when you put in your claim for reimbursement.  You should keep a copy or a note of the broad details of these expenses.

DISPENSATIONS

What happens if my employer has a 'dispensation'?

If the expenses your employer pays are fully covered by your tax relief, the Tax Office may issue your employer with a 'dispensation'.  A dispensation saves the employer having to report the details of your expenses payments to the Tax Office.

What difference does a dispensation make to me?

Your employer will be able to tell you whether or not your travel expenses payments are included in a dispensation.  If they are

you get tax relief automatically on those payments

your PAYE tax code will not show either those expense payments or your matching tax relief

you should not include those payments in your tax return, if you get one

you must restrict any claim for relief for travel expenses to the costs which you have paid out of your own pocket and for which you have not been reimbursed.

If your employer pays you mileage allowances which are covered by a dispensation, we recommend that you read leaflet IR125 'Using your own car for work'.

How am I taxed on the expenses my employer pays?

People who have to pay tax on their expenses  usually  pay it through their PAYE tax code.  If you do not get a tax return, your Tax Office will check after the end of the tax year to see if you have paid the right amount of tax.  If you get a tax return, you enter on it the amount of the expenses your employer has paid for your travel.

How do I get tax relief for the costs of my business travel?

You may need to claim it.  If you get a tax return, you make the claim on the return.  If you do not get a tax return your Tax Office may send you form P87 'Expenses claim'.  Or you can ask for form P87 or claim by letter to your Tax Office.  Usually your Tax Office will give the relief by adjusting your PAYE tax code.

You will not need to claim your tax relief

if all the expenses you receive are covered by a dispensation (see page 00), and you have not met any other expenses out of your own pocket

for mileage allowances paid to you under a Fixed Profit Car Scheme (see page 00), unless you wish to claim at the Inland Revenue authorised mileage rates or for your actual business motoring costs.  ( See booklet IR 125 'Using your own car for work').

How much tax relief can I get for my business travel?

If you have to travel on business you can get tax relief for the full costs of your business journey

Examples

The examples below show how the rules work in some typical situations.  The figures used are purely illustrative.

Example 1

Bill normally works at his employer's regional office in Swindon.  Occasionally he has to attend a management meeting at the head office in London.  Bill's employer pays a travel allowance sufficient to cover the cost of a standard class rail ticket for the journey.  The employer has a dispensation covering this payment

Bill buys a first class ticket.  He can claim the difference between the allowance he received for the standard class ticket (covered by his employer's dispensation) and the cost of the first class ticket.

Example 2

Chris usually works at his employer's main office in London, travelling each day in his car from his home in Oxford.

One day he has to work at a branch office in Birmingham instead.  He travels directly to and from his home.  The cost of the return journey is £43.

Chris is entitled to tax relief for the full cost of his business journey, £43.

Example 3

Frances works at different sites and has no permanent workplace.  She travels in her own 1,600cc car to and from the sites where she is working.  Over the whole of the tax year  she travels 8,000 miles on business to and from the different sites.  She is entitled to tax relief for the cost of this travel.

Frances's employer pays her 50p a mile for her business travel.  This is more than the Inland Revenue authorised mileage rates for a 1,501 - 2,000cc car.  For the particular tax year the authorised rates are 45p for each of the first 4,000 business miles and 25p for each mile over 4,000.  Frances gets a tax return.

Frances's employer does not operate a Fixed Profit Car Scheme.  So her P11D shows the full mileage allowances of £4,000 she has been paid (50p x 8,000 miles) for the tax year .

As explained in IR125 'Using your own car for work', Frances can choose to calculate the tax relief for her business travel by:

using the Inland Revenue's authorised mileage rates. The cost of 8,000 business miles using these  rates is £2,800 (the first 4,000 miles at 45p = £1,800, plus the next 4,000 miles at 25p = £1,000); or

 using her actual costs of business motoring. Frances has kept full records of her actual travel costs and these show that her business travel in her own car has cost £2,935. The relief due for the 8,000 business miles by using her actual costs is therefore £2,935.

What travel qualifies for relief ?

Broadly, relief is available for any journeys you have to make in order to carry out the duties of your employment except travel which is 'ordinary commuting or private travel'.

What is 'ordinary commuting or private travel'?

In general terms, ordinary commuting is  travel between your home , or any other place you attend for personal reasons such as the home of a friend or relative, and your 'permanent workplace'.  Private travel is any travel where the purpose is private rather than business.  No tax relief is available for the cost of these types of travel.

What is a 'permanent workplace'?

Broadly, a 'permanent workplace' is a workplace you attend or expect to attend regularly for

more than 24 months , or

less than 24 months if that is the whole period of your employment.

Not every employee will have a permanent workplace and some may have more than one.

Occasional attendance at a second workplace is unlikely to mean that you have two permanent workplaces.  If you are in doubt your Tax Office will be able to give you advice.

What about subsistence costs ?

Subsistence costs include meals and accommodation. Your subsistence costs while travelling or staying away on business are expenses of travel.  Relief is available for the full cost of travel including subsistence.

What about other associated costs ?

The fact that you may incur costs as a result of your business travel does not automatically mean that tax relief is available.  For example, you should not include in your claim for business travel such things as child-minding costs, laundry, or telephone calls home. Certain expenses of this type may qualify for tax relief under different rules if they are reimbursed by your employer.  If you are not sure whether tax relief is available for a particular item you should check with your Tax Office.

What about foreign travel ?

There are special rules for foreign travel, which in certain circumstances may give greater relief than the rules outlined above.  Your Tax Office can give you advice.

Where to go for more information

This leaflet does not cover all the issues that may arise in deciding how much relief you can get.

We produce a range of publications, designed to explain different aspects of the tax system in plain English, and to assist in the completion of tax returns.  Most of them are free.

You can get help and further information about our publications from any Tax Enquiry Centre or Tax Office.  Addresses are in your local phone book under 'Inland Revenue'.  Most offices are open to the public from 8.30am to 4.30pm, Monday to Friday, and some are also open outside these hours.

When our offices are closed, you can get general advice by calling our Helpline in the evening or at weekends on 0645 000444.  Calls are charged at local rates.

Your local library or Citizens' Advice Bureau may also have copies of our leaflets.

Many of our leaflets are also available on the Internet at http:/www.open.gov.uk./inrev/irleaf.htm

Many employers have a copy of our Booklet 490 'Employee Travel - A Tax and NICs Guide for Employers' and may be willing to help you with your questions.

These notes are for guidance only and reflect the tax position at 6 April 1998.  They do not affect any right of appeal.

Issued by the External Communications Unit of the Inland Revenue

January 1998

(c)  Crown Copyright 1998


490(1998)

480 (1998) - Employee travel. A tax and NICs guide for employers

This guide describes the tax and National Insurance contributions (NICs) treatment of business travel by employees. It covers business journeys made on or after 6 April 1998. The rules which apply before that date are set out in the 1998 edition of booklet 480.


IR141

IR141 - Open Government

In April 1994 the Government introduced the 'Code of Practice on Access to Government Information'. This leaflet explains how the Inland Revenue is complying with the Code.


IR153

IR153 - Tax exemption for sickness or unemployment insurance payments

This leaflet tells you about a special tax exemption for payments made under some insurance policies in times of unemployment, sickness, disability, infirmity, or when there is a need for long-term care.


IR156

IR156 - Our heritage. Your right to see tax exempt works of art

Privately owned works of art and other objects which are broadly part of our national heritage may obtain exemption from taxes on capital, including inheritance tax. You have a right to see these exempt works of art and other objects. This leaflet tells you more about that right, what you can see, and how.


IR122

IR122 - Volunteer drivers

This leaflet is for volunteer drivers who offer their services to an organised volunteer car scheme. It tells you how to work out whether tax is due on any mileage or other allowances you receive towards the cost of running your car.


IR145 - Low interest loans provided by employers
Low interest loans provided by employers (IR145)

Personal Taxpayer Series IR 145

Low interest loans provided by employers. A guide for employees

We produce a wide range of free leaflets and booklets each designed to explain a different aspect of the tax system in plain English. Most are free.

Our IR List 'Catalogue of leaflets and booklets' gives further information about our publications, most of which you can get from any Tax Enquiry Centre or Tax Office. Their addresses are in your local phone book under 'Inland Revenue'. Most offices are open to the public from 9.30a.m. to 5p.m., Monday to Friday, and some are also open outside these hours.

Your local library or Citizens' Advice Bureau may also have copies of our leaflets.

Introduction

This leaflet is for people who receive a low  interest loan because of their job. It outlines the tax position from 6 April 1994. As different rules applied before 6 April 1994, ask at your local Tax Enquiry Centre or Tax Office if you need details of them.

Who is taxable?

You may have to pay tax if you

get a low interest loan because of your job, and

earn £8,500 or more a year (including the value of benefits and expenses) or are a director.

What loans are taxable?

In general, you are taxable on any low interest loan given to you or a relative by your employer or someone connected with your employer. A low interest loan which your employer guarantees, or finances, or helps with in other ways is also taxable.

Are any loans exempt?

Loans are exempt if the total amount outstanding stays below £5000. Loans on commercial terms are often exempt. Further details are on page 00.

What counts as a 'loan'?

Any form of credit counts as a loan for the purposes of the rules explained in this leaflet.

What is a 'low interest' loan?

A loan is a 'low interest loan' if the interest you pay on it is less than the 'official rate' of interest at that time.

What are the 'official rates' of interest?

The 'official rates' of interest are set by the Treasury. The rates vary from time to time and broadly

follow the mortgage rates offered by banks and building societies. See below for details of the rates.

What is a 'relative'?

A relative means either your spouse, your or your spouse's parents, grandparents, brothers and sisters, children and grandchildren, and the spouses of any of these people.

What information will my employer give me?

For 1996-97 onwards your employer will give you the details of any cheap or interest-free loans provided. You should receive the information from your employer by 6 July after the tax year ends on 5 April. Your employer gives the same information to the Inland Revenue.

What is the tax charge?

The tax charge is based on the difference between

the interest you actually paid (if any), and

the interest you would have paid at the appropriate 'official rate' of interest.

How is the charge calculated?

There are two alternative ways of calculating the amount of the benefit, a normal method and a precise method.

Normal method

The normal method uses

the average of the loan, and

the 'average official rate'

for the tax year (or part-year if the loan was not outstanding for the whole tax year).

You find the average loan by adding the maximum amount outstanding on the day before the start of the year and that on the last day of the year and dividing the total by two. If the loan was not outstanding for the whole year, you use the maximum amounts outstanding on the opening and/or closing days.

The 'average official rate' is the average of the various official rates that were effective during the year. The tax year starts on 6 April and ends on 5 April the following year. Details of the rates are below.

This method gives a reasonably accurate result where the loan is repaid in regular sums or where the amount of the loan remains broadly unchanged over the tax year. See Example 1 on page 7.

Precise method

This method applies the appropriate 'official rate' to the balance of the loan on a daily basis throughout the period involved. It is more complex, but is precise. See Example 2 below.

Who decides which method to use?

Generally the normal method is used unless you choose or the Inspector of Taxes chooses to use the precise method of calculation.

When your employer tells us, and you, about the value of your loan benefit at the end of the tax year, he will always use the 'normal' method, but you can subsequently choose to use the 'precise' method if you think that gives a fairer result. We can also choose to use the precise method.

Suppose I had more than one loan?

For tax years up to 5 April 1996, if you had more than one cheap or interest-free loan from the same lender you had to add them together if

the interest (either the interest you actually paid or, if you paid no interest, the interest which you would have paid)  did not qualify in whole or in part for tax relief, and

the loans were in the same currency.

From 6 April 1996, this adding together ended, except for certain situations involving directors of close companies. Your Tax Enquiry Centre or Tax Office can tell you about this.

Example 1

On 1 October 1995, an employer lends an employee, Mr Jones, £10,000 at 3% per annum. The interest is payable quarterly on 31 December, 31 March, 30 June and 30 September. Mr Jones repaid £2,000 on 1 January 1996, but then borrowed a further £4,000 on 1 July 1996. On 1 April 1997 he repays £1,000 of the second loan. None of the interest qualifies for tax relief so if the loan of £4,000 had existed in 1995-96 it would have had to have been added to the other loan. The two loans are kept separate for 1996-97.

The interest actually paid by Mr Jones to his employer in the two tax years was -

1995-96	31 December 1995	£75
	31 March 1996	£60
	Total	£135
1996-97	30 June 1996	£60
	30 September 1996                       (£60+£30)	£90
	31 December 1996                       (£60+£30)	£90
	31 March 1997                       (£60+£30)	£90
	Total              (£240+£90)	£330

For the purposes of this example the 'official rate' of interest throughout both 1995-96 and 1996-97 is taken as 7.5%, and the 'average official rate' is also 7.5%.

Using the normal method the calculations are as follows.

1995-96 (Loan in existence for six complete months only)

Maximum balance outstanding on date loan was made	£10,000
Maximum balance outstanding on 5 April 1996	£8,000
Total	£18,000
Average balance: £18,000/2=	£9,000
Interest at the 'official rate' for six complete months £9,000 x 6/12 x 7.5%=	£337
Less interest actually paid by Mr Jones in 1995-96	£135
Taxable benefit for 1995-96	£202

1996-97 First loan (in existence for 12 complete months)

Maximum balance outstanding on 5 April 1996	£8,000
Maximum balance outstanding on 5 April 1997	£8,000
Total	£16,000
Average balance: £16,000/2=	£8,000
Interest at the 'average official rate' of 7.5% for 12 months £8,000 x 12/12 x 7.5%=	£600
Less interest actually paid on this loan by Mr Jones in 1996-97	£240
Taxable benefit	£360

1996-97 Second loan (in existence for nine complete months)

Maximum balance outstanding on date loan was made	£4,000
Maximum balance outstanding on 5 April 1997	£3,000
Total	£7,000
Average balance: £7,000/2=	£3.500
Interest at the 'official rate' for nine complete months £3,500 x 9/12 x 7.5%=	£196
Less interest actually paid on this loan by Mr Jones for 1996-97	£90
Taxable benefit	£106

So the total taxable benefit for 1996-97 is £466(£360+£106)

If Mr Jones is a basic rate taxpayer, the tax due will be £466 x 24% = £111.84

Example 2

The facts are the same as in Example 1.

Using the precise method the calculations are as follows.

1995-96

Interest on loan at the 'official rate'

£10,000 for 92 days at 7.5%	£189.04
£8,000 for 96 days at 7.5%	£157.80
Total	£346.84
less interest actually paid by Mr Jones for 1995-96	£135.00
Taxable benefit for 1995-96	£211.00

1996-97

Interest on first loan at the 'official rate'

£8,000 for 365 days at 7.5%	£600
less interest actually paid by Mr Jones for 1996-97	£240.00
Taxable benefit for 1996-97	£360.00

Interest on second loan at the 'official rate'

£4,000 for 279 days at 7.5%	£229.31
£3,000 for 4 days at 7.5%	£2.46
Total	£231.77
less interest actually paid by Mr Jones for 1996-97	£90.00
Taxable amount	£141.00

So the total taxable amount for 1996-97 is £501(£360+£141)

Again, if Mr Jones is a basic rate taxpayer, the tax due will be £501 x 24% = £120.24.

In these circumstances the normal method of calculating the taxable amount is more favourable to Mr Jones in both years (£111.84 compared with £120.24).

What happens if I pay interest on the loan after the end of the tax year?

If you paid the interest late you may ask your Inspector to take the late payment into account. Provided you claim within five years, ten months of the end of the year concerned, we will repay any tax overpaid.

Do I get any tax relief on the interest?

Yes, you can have tax relief for loan interest, but only if the loan is for a qualifying purpose. For example, mortgage interest relief may be available for the interest you pay on a loan to buy your own home. For 1996-97, mortgage interest relief is given at the rate of 15 per cent on the interest on the first £30,000 of a home loan. Relief on the assessable benefit does not depend on the loan being in or our of MIRAS. Contact your Tax Office for further information on which loans qualify for relief.

How do I get tax relief?

You get any tax relief due both on

the interest you actually paid, and

the benefit assessable.

This means you get the same tax relief as other borrowers.

Example 3

Mrs Smith has a £30,000 home loan at 2% provided by her employer. She is a higher rate taxpayer and has no other home loans. In 1996-97, the balance on the loan remained constant at £30,000 and she paid interest of £600. The 'official rate' is assumed to be 7.5% for 1996-97.

Stage 1 - calculate the taxable benefit

Interest on the loan at the 'official rate' £30,000 x 7.5%=	2,250
less interest actually paid by Mrs Smith	£600
Taxable benefit for 1996-97	£1,650

Stage 2 - Tax relief

Interest actually paid by Mrs Smith £30,000 @ 2%	£600
Taxable benefit	£1,650
Total	£2,250
Tax due on the benefit: £1,650 x 40% (higher rate)	£660
Less mortgage interest relief on £2,250 at 15%	£337.50
Net tax payable	£322.50

The above will apply whether or not the loan is in MIRAS.

If the loan is in MIRAS, Mrs Smith will get £90 of this relief through the MIRAS scheme by making reduced payments of interest on the loan provided by her employer. The relief obtained under the MIRAS scheme is calculated:

Interest paid £30,000 @ 2%=	£600
MIRAS=15% x £600=	£90

Mrs Smith will be able to claim the balance of this part of the relief (£247.50), on her Self Assessment form.

Are there any exemptions for small loans?

You do not pay tax on the benefit from your loans if the total of all your cheap or interest-free loans does not exceed £5,000 at any point in the tax year.

However, you should exclude from that total those loans on which the interest qualifies for tax relief, as you do have to pay tax on them.

Example 4

Mr Brown has a £30,000 home loan at 2% provided by his employer. He also had an interest-free season ticket loan of £2,540 at 6 April 1996, which he repaid throughout the tax year, and an interest-free personal loan of £2,000 which remained constant throughout 1996-97.

The season ticket loan of £2,540 and the personal loan of £2,000 are not loans where the interest qualifies for tax relief. When added together they do not come to more than £5,000 at any point in the tax year. So they are exempt from the benefit charge.

Interest on the home loan of £30,000 qualifies for tax relief. The loan is not exempt. The tax is calculated as in the example for Mrs Smith.

Is there any exemption for a commercial loan?

There is a separate exemption for certain 'commercial loans'. It applies to loans made before 1996-97 and to new loans made in 1996-97 or later. The exemption applies only if all the following conditions are met.

The loan is made by an employer whose business includes the lending of money (for example, a bank, a building society or a finance house).

The loans to employees are made on the same terms and conditions as loans made to members of the public.

A substantial proportion of loans on those terms are made to public customers.

My loan is in a foreign currency. Does this affect the calculation of the benefit?

Lower 'official rates' of interest apply for certain loans in foreign currencies. This is because interest rates in some overseas countries are significantly lower than interest rates in the UK.

Which foreign currencies have lower 'official rates'?

The details of the currencies which have a lower 'official rate' are given below

Are there any conditions I must meet to qualify for the lower 'official rate'?

To qualify for the lower 'official rate' you must

have a loan in another country's currency

normally live in that country, and

have actually lived there at some point in the tax year or in the previous five tax years.

How do I pay the tax on a cheap or interest-free loan?

Your employer will give your Tax Office details of these loans. Once the Tax Office knows you are receiving a cheap or interest-free loan, the tax will normally be collected through PAYE. The Tax Office does this by making an adjustment to your PAYE tax code for the estimated taxable benefit you are expected to receive in the year.

What happens if the estimate is wrong?

This depends on whether or not you get a tax return. If you do not get a tax return we check the adjustment to your code against the details your employer sends us after the end of the tax year. If we find that you have overpaid tax we will refund the excess. If, on the other hand, there is additional tax due because our estimate was too small, we will collect it through your PAYE code for next year.

An underpayment is most likely to occur for the first year in which you receive the loan. This is because it is unlikely that we will know about the loan in time to calculate the benefit and collect the right amount of tax. You can help keep any such underpayment to a minimum by telling your Tax Office about the loan as soon as possible.

Suppose I do get a tax return?

Using this leaflet you can decide which method (normal or precise) you want to use to work out the amount of the benefit of any cheap or interest-free loan. For 1996-97 onwards, if you get a tax return, you should enter the amount of the benefit in box 1.19 of its employment pages.

You have to do this even though we will have made an adjustment to your tax code to correct an estimate of the tax due.

What will appear on my PAYE Coding Notice (Form P2)?

If the loan does not qualify for tax relief we make an adjustment to your PAYE code number. This is described as EMPLOYERS LOAN BENEFIT and is our estimate of the difference between interest at the official rate and any interest you will actually pay.

Example 5

If the loan is £50,000 and you pay 4% interest which does not qualify for relief, the taxable amount is calculated as follows.

£50,000 at official rate 7.5%	= £3,750
less interest you pay at 4%	= £2,000
Taxable amount	£1,750

Your PAYE Coding Notice will show as a deduction:

EMPLOYERS LOAN BENEFIT 1750

If the loan qualifies for tax relief there may be two further adjustments to your code. One adjustment gives an allowance for the relief due and the second is a deduction, where appropriate, to restrict the interest relief to the appropriate rate (15% for the year 1996/97). The first adjustment is described as BENEFICIAL LOAN INTEREST and the second as LOAN INTEREST RESTRICTION.

BENEFICIAL LOAN INTEREST is the amount of notional interest that qualifies for tax relief. If your home loans exceed £30,000 the relief is restricted to notional interest on this figure. So, in the example above, if the loan is a home loan the amount of relief on the beneficial loan will look like this:

£30,000/£50,000 x £1,750 = £1,050

LOAN INTEREST RESTRICTION. This adjustment has the effect of restricting the interest relief to 15% for 1996-97.

The calculation of this restriction varies; it is determined by the highest rate at which you pay PAYE tax. In the example above, the amount we will recover is the excessive relief given on £1,050.

If you pay tax at 20% the calculation is

£1,050 at 5% (20% - 15%) =  £52.50.

A restriction of 262 is needed to collect this amount (£262 at 20% =   £52.40)

If you pay tax at 24% the calculation is:

£1,050 at 9% (24% - 15%) =  £94.50

This needs a restriction of 393 to collect the extra tax (£393 at 24% = £94.32).

If you pay tax at 40% the calculation is

£1,050 at 25% (40% - 15%) = £262.50

The restriction will be 656 (£656 at 40% = £262.40)

So the PAYE Coding Notice will show as a deduction LOAN INTEREST RESTRICTION either 262, 393 or 656 as appropriate.

'OFFICIAL RATE' OF INTEREST

Table of actual official rates.

From	To	Rate
6.11.94	5.10.95	8.0%
6.10.95	5.2.96	7.75%
6.2.96	5.5.96	7.25%
6.6.96	5.11.96	7.00%

Table of average official rates.

Year	Rate
1995-96	7.79%

Lower official rates for certain foreign currency loans.

	From	To	Rate
Japanese Yen	6.6.94	-	3.9%
Swiss Franc	6.7.94	-	5.5%

Average official rate for qualifying Japanese Yen loans for 1995-96 is 3.9%.

Average official rate for qualifying Swiss Franc loans for 1995-96 is 5.5%.

You can get details of any later changes in official rates from your Tax Enquiry Centre or Tax Office.

What can I do if I want to comment on how my tax affairs have been dealt with?

We always value any comments on the service you have received from your Tax Enquiry Centre or Tax Office. We welcome any suggestions that could improve the service we provide for you.

If you have a complaint which the Officer in Charge of your own Tax Office cannot settle, you should contact the Inland Revenue Controller responsible for the area dealing with your tax affairs. Our leaflet IR120 'You and the Inland Revenue' tells you how to do that. It is available from any Tax Enquiry Centre or Tax Office.

If the Controller does not settle your complaint to your satisfaction you can ask the Adjudicator to look into it and recommend appropriate action. The Adjudicator, whose services are free, is an impartial referee whose recommendations are independent. The address is:

The Adjudicator's Office

Haymarket House

28 Haymarket

London

SW1Y 4SP

Tel: 0171 930 2292

Fax: 0171 930 2298

Finally, you can ask a Member of Parliament to refer a complaint to the independent Parliamentary Commissioner for Administration, commonly known as the 'Ombudsman', whose address is

The Parliamentary Commissioner for Administration

Church House

Great Smith Street

London

SW1P 3BW

Tel: 0171 276 2130/3000.

These notes are for guidance only and reflect the tax position at the time of writing. They do not affect any right of appeal.

Issued by the Corporate Communications Office of the Inland Revenue

January 1997

(c) Crown Copyright 1997


Not available

Not available in TaxCalc. Please call your local Tax OIffice or Inland Revenue Enquiry Centre for a hard copy of this leaflet.


CGT1 - Capital gains tax. An introduction

This booklet sets out the basic rules of capital gains tax (CGT) for individuals.

This is a general guide for people who need information about CGT. It will also be useful if you have disposed of assets and need to know whether to report any gains or losses to your Tax Office. It does not cover the more complex situations. If you need more information you can ask for the relevant Help sheet, or look at the Inland Revenue guidance manual on CGT at your Inland Revenue Enquiry Centre or Tax Office.

The booklet is divided into seven sections, as follows

Section 1: An Introduction to CGT. This gives a broad outline of what the tax is about and whom it affects.

Section 2: Chargeable gains. This explains when a chargeable gain arises, what a disposal is and which assets may give rise to a charge.

Section 3: Allowable losses. This explains when a loss may arise, when it has to be claimed and how it is allowed.

Section 4: Calculating chargeable gains and allowable losses. This tells you how to calculate your chargeable gains and allowable losses and what expenditure you can deduct in doing so.

Section 5: Reliefs (other than taper relief). This explains various reliefs which are available to reduce or defer chargeable gains.

Section 6: Taper relief. This explains how gains may be reduced to take account of the length of time the asset has been held.

Section 7: Calculating the tax due. This sets out the basic rules for calculating the final amount on which CGT is due, and the tax payable.

Section 1   An Introduction To CGT

A charge to CGT may arise when you dispose of an asset which is worth more than it was worth when you acquired it. You are liable to pay tax on the total gains which arise on disposals you make (after various reliefs have been given) in any one tax year. A tax year is the year beginning on 6 April in one calendar year and ending on 5 April in the next. A gain is based on the difference between the cost of acquisition, and the amount received on disposal.

Tax is not due on the price received for the asset, but may be due on any increase in its value while you have owned it.

Who pays CGT?

You are liable to pay CGT on your gains if you are 'resident' or 'ordinarily resident', and 'domiciled' in the UK (these terms are explained in our guide IR20 'Residents and non-residents'. If you are not sure about them, ask your tax adviser or Inland Revenue Enquiry Centre or Tax Office for help).

If you are neither resident nor ordinarily resident in the UK, you are liable to tax on gains made from

assets of any branch or agency in the UK through which you are trading or carrying on a profession or vocation;

assets acquired while you were resident or ordinarily resident in the UK and disposed of during a period of temporary residence abroad - a period abroad of less than five full tax years. These gains are deemed to be gains of the tax year in which you resume residence in the UK.

If you are resident or ordinarily resident but not domiciled in the UK, and the asset which you have disposed of is situated outside the UK, you pay tax on that gain only when it is remitted to the UK.

Reporting gains or losses

If you make 'net gains' in a tax year which exceed the 'annual exempt amount' you must inform your Tax Office. Your 'net gains' are the total of your 'chargeable gains' (computed after deducting any relief for inflation due up to April 1998 - the 'indexation allowance') less - any 'allowable losses' and any 'taper relief'. Please note that losses arising for 1996-97 and later years are not 'allowable' unless you claim them (see below). If you have not received a tax return, you must report the net gains within six months from the end of the year in which the gains arose, otherwise you may become liable to interest and penalties.

If you receive a tax return, you must complete the section dealing with capital gains and give further details of the gains or losses on the capital gains pages where directed to do so. The tax return must be returned to your Tax Office by the date indicated on it.

You do not have to report a capital loss unless you wish to claim relief for the loss so that it can be set off against capital gains of the year in which you made the loss or a later year (see Section 3 'Allowable losses'). You can claim a capital loss in two ways

on the capital gains pages of your tax return if you otherwise need to make one, or

by sending your Tax Office a separate notice of the amount of the loss.

Annual exempt amount

Every individual may make a certain amount of gains each year before any tax is due. This is called the 'annual exempt amount'. For 1998-99 the annual exempt amount is £6,800. Each member of a married couple is entitled to a separate annual exempt amount. The annual exempt amount is allowed against the amount of 'net gains' which results from deducting any losses and taper relief. If your net gains of the year, are less than the annual exempt amount for that year, you will not have to pay any tax. If they are more, the excess will be charged to tax. More detailed guidance on how to work out the amount on which you must pay CGT is given in Section 7.

 Section 2   Chargeable gains

A 'chargeable gain' is made when something you own (an asset) is wholly or partly disposed of (or treated as disposed of), and

its value has increased since you acquired it, or since 31 March 1982 if that is later, or

the proceeds from the disposal are greater than the amount for which you are deemed to have acquired the asset.

You may also be treated as making a chargeable gain in other circumstances. The commonest examples are explained later in this booklet.

A sum of money or an asset that is taken into account as part of your taxable income for income tax purposes will not also be taken into account for CGT.

Assets

Any form of property may be an asset for CGT purposes. Common assets include

stocks and shares

land and buildings

business assets, such as goodwill.

Exempt assets

The disposal of some assets, and/or the receipt of some amounts of money, are exempt from CGT, for example

private cars

personal effects and goods worth £6,000 or less when disposed of - see Help Sheet IR293: Chattels and Capital Gains Tax

Savings Certificates, Premium Bonds and British Savings Bonds

gains made within a Personal Equity Plan (PEP) or Individual Savings Account (ISA)

bonuses from tax exempt special savings accounts (TESSAs)

UK Government stocks (gilts)

personal injury compensation

foreign currency for your or your family's personal use

life assurance policies and deferred annuity contracts, unless purchased from a third party

betting, lottery or pools winnings

Save As You Earn (SAYE) terminal bonuses

compensation for mis-sold personal pensions taken out as a result of disadvantageous advice given between 29 April 1988 and 30 June 1994.

In most cases tax is not due on any gain made when you dispose of your home. See the notes on page 17 dealing with the disposal of your home.

Disposals

A disposal occurs when you

sell, or

give away, or

exchange an asset, or

receive a capital sum from ownership of an asset (a capital sum is a sum that does not form part of your taxable income).

What about transfers to spouses?

If you dispose of an asset to your husband or wife you do not pay CGT if you are living together. The asset is treated as having been disposed of for an amount that is enough to ensure that you make neither a gain nor a loss. Your husband or wife will pay tax on any gain he or she makes when disposing of the asset to a third party. In such a case, the asset will normally be treated as having been acquired for the original cost to the transferring partner, plus any 'indexation allowance' up to April 1998 - see Appendix 2. For 'taper relief' purposes you add together both spouses' periods of ownership after 5 April 1998. See Section 5 'Transfers to spouses'. Ask for Help Sheet IR281: Husband and wife, divorce and separation, if you want more information.

Small receipts

In some cases, an amount received in respect of an asset, which would otherwise be treated as a part disposal of the asset, may not be treated as a disposal if the amount is small compared to the value of the asset.

Your Inland Revenue Enquiry Centre or Tax Office will be able to provide you with further details of the circumstances in which this treatment is accepted by the Inland Revenue.

Payments by building societies or insurance companies when they become limited companies

If you receive a cash payment when a building society or insurance company converts from a mutual body into a public limited company or when it is taken over by such a company there may be a liability to CGT.

If you receive shares, there may be no chargeable gain on receipt of the shares,

but in that case the shares will have no allowable acquisition cost on any later sale.

If you need more help, ask your Inland Revenue Enquiry Centre, Tax Office or tax adviser.

Other disposals

In some circumstances, tax may be due on gains made by a company or a trust in which you have an interest. This includes gains made by

certain types of company not resident in the UK and in which you are a participator

a trust not resident in the UK, the gains of which are attributed to you because you have received capital payments

a trust not resident in the UK of which you are a settlor (a person who puts property into the trust) and from which you, or certain persons close to you, can benefit

a trust resident in the UK of which you are a settlor and from which you or your spouse can benefit.

Any disposal made by your nominee, or by a person who is a bare trustee in relation to assets to which you are absolutely entitled, will be treated as your disposal.

You may be treated as making a disposal if you claim that an asset you own has become of negligible value. This may create a loss that can be set against other gains.

Some events do not result in a charge to CGT. For example, there is no charge when somebody dies and his or her assets pass to personal representatives.

There may also be no charge when shares are exchanged for other shares on a company takeover or in a company reconstruction or amalgamation. (See Help Sheet IR 285: Share reorganisations, company takeovers and Capital Gains Tax).

 Section 3   Allowable losses

Relief may be available when you dispose of something which has fallen in value since you acquired it. Losses which arise in this way may be set against any gains on which you would otherwise be liable to pay tax. The position is different if the loss arises on a disposal to a connected person (see 'Who are connected persons?' in Section 4). If the disposal is to a company other restrictions may apply. Ask your Tax Office for help.

If a gain on the disposal of an asset would be exempt from CGT, any loss made on that asset will not be an allowable loss.

Do losses have to be claimed?

A loss made in 1996-97 or a later year must be claimed. These losses are not 'allowable losses' until notice of the amount of the loss has been given to your Tax Inspector.

Losses for 1995-96 and earlier years cannot be formally agreed until there are gains against which those losses can be set.

There is no time limit within which losses of any year must be used.

Is there a time limit for claiming losses?

Allowable losses for 1996-97 and later years have to be claimed within five years and ten months of the end of the tax year in which they were made.

This applies whether the losses are used in that period or not.

How is a loss allowed?

The total allowable losses of a tax year are deducted, first, from the total chargeable gains (before taper relief, see Section 6) for the same year. If the allowable losses for the year are greater than the untapered chargeable gains for the year, the excess may be carried forward to be set against gains made in future years.

You must use up allowable losses of the year against untapered chargeable gains of the same year even if this reduces the total gains to below the level of the annual exempt amount.

Losses brought forward from 1996-97 or later must be used before losses brought forward from earlier years. When losses brought forward are set against chargeable gains of a later year, you use only enough losses to reduce the chargeable gains (i.e. the gains before taper relief) to the level of the annual exempt amount.

Example 1

In 1998-99 you have untapered chargeable gains of £12,000 and allowable losses of the year of £10,000.

The annual exempt amount is £6,800.

As the losses reduce the gains below the level of the annual exempt amount, you have no CGT to pay for that year. There are no losses to be carried forward.

Example 2

In 1998-99 you have untapered chargeable gains of £12,000 and allowable losses of the year of £15,000.

The annual exempt amount is £6,800

As the losses extinguish all gains for the year you have no CGT to pay.

Losses of £3,000 may be carried forward to use in later years.

Example 3

In the year 1998-99 you have untapered chargeable gains of £12,000, allowable losses of the year of £3,000, and losses of £8,000 brought forward from 1996-97.

The annual exempt amount is £6,800.

The losses of the year reduce the gains to £9,000. You then use £2,200 of the losses brought forward to reduce the gains down to the level of the annual exempt amount. You have no CGT to pay for that year and losses of £5,800 (£8,000 less £2,200) may be carried forward to use in later years.

See Section 7 for an explanation of how CGT is computed where losses are not sufficient to reduce untapered gains below the level of the annual exempt amount.

Carry back of losses

When a person has died, personal representatives can claim for any losses arising in the tax year (that is, from the preceding 6 April) up to the date of death to be carried back and set against chargeable gains of the three preceding tax years. Losses carried back in this way are allowed in exactly the same way as losses carried forward from one year to another. See Help Sheet IR282: Death, personal representatives and legatees.

Can losses be set against income?

With one exception, losses arising on the disposal of assets chargeable to CGT are only allowable against gains on such assets and may not be deducted from income. The one exception is where the loss arises on shares you have subscribed for (that is, newly issued shares) in an unlisted trading company. The circumstances in which such relief is available are explained in Help Sheet IR286: Income tax losses for shares you have subscribed for in unlisted trading companies, and for Enterprise Investment Scheme companies, in booklet IR137: The Enterprise Investment Scheme.

Are there any gains against which you cannot set capital losses?

You cannot set your personal allowable losses against gains which are 'attributed' to you as the settlor of a UK trust or as the settlor or beneficiary of a non-resident trust. This is because the gains will be attributed to you after taper relief has been given. Losses may be set only against untapered gains. Different computational rules therefore apply where attributed gains are involved. Ask your Inland Revenue Enquiry Centre, Tax Office or tax adviser for help.

 Section 4   Calculating Chargeable Gains And Allowable Losses

How do you compute the gain or loss?

To calculate the 'chargeable gain' or the 'allowable loss' made on the disposal of an asset, you deduct

the allowable costs, and

the indexation allowance up to April 1998 where the asset was acquired before that month (see Appendix 2)

from the disposal proceeds.

However, it should be noted that the indexation allowance cannot be used to create or increase a loss (see Appendix 2 on page 32).

Chargeable gains may also be reduced further by taper relief. This section explains the computation of the gain before taper relief.

A simple calculation

At its simplest, a calculation of a chargeable gain will use the format below. The terms used will be explained in the following pages.

What are disposal proceeds?

In most cases, these are the total amount of proceeds received, including

cash payable now or in the future

the value of any asset received in exchange for the asset disposed of

the value of a right to receive future payments.

In some cases, however, the amount received is replaced by the 'market value' of the asset disposed of (see 'What is meant by market value?' on page 14). Market value applies where the disposal is, for example

to a 'connected person' (see page 15,) or

otherwise than by a bargain made at arm's length, for example gifts or sales where the price is intentionally below market value, or

wholly or partly for a consideration that cannot be valued.

A disposal which is 'otherwise than by a bargain made at arm's length' is a disposal in which one of the parties intends to give a free benefit to the other.

Example 4

You sell land worth £40,000 to a friend for £25,000 as a token of friendship. The disposal proceeds for CGT are £40,000.

What costs can be deducted?

In working out a gain, four types of expenses can be deducted. These are

acquisition costs

enhancement costs

incidental costs of acquisition and disposal

expenditure on defending or establishing a right over the asset.

Expenses deducted must be expenditure on the asset disposed of. These must not be expenses which can be claimed against income. The cost of normal maintenance and repairs, or payments of interest, cannot be claimed.

The expenses allowable may be reduced if the asset sold is a 'wasting asset'. See 'What is a wasting asset?' on page 15.

If only part of an asset is disposed of, only part of the expenditure on that asset can be deducted. See 'What are part disposals?' on page 16 for more details.

What are acquisition costs?

These are costs wholly and exclusively incurred in acquiring the asset. In some circumstances, for example where the asset is acquired by way of a gift, the costs incurred may be replaced by the market value of the asset when it was acquired.

If the asset is one that you created yourself (for example, a copyright or the goodwill of a business), any capital expenditure incurred wholly and exclusively in creating the asset can be deducted.

If the asset was held at 31 March 1982, 'rebasing' will apply and the calculation is based on the value at 31 March 1982, unless the comparison calculation described in the section headed 'What is rebasing?' applies.

If you

inherit an asset, or

have become absolutely entitled to settled property

you are treated as acquiring it at its market value at the date of death (or exceptionally the date on which the personal representative of the deceased acquired it) or the date on which you became absolutely entitled, and not on the date on which you actually acquired it.

What is the acquisition cost of shares?

Generally this will be the amount you paid for the actual shares or securities.

However, special rules apply where shares or securities of the same class in the same company have been acquired on separate occasions. These rules also apply to units in a unit trust. They are needed to tell you which shares or units you have sold (if you have not sold them all) and what acquisition costs to take into account in computing chargeable gains or allowable losses. Shares acquired on more than one occasion before 6 April 1998 will normally need to be 'pooled' and an average acquisition cost used. The 'identification' rules, and 'pooling' rules, together with the rules for computing any indexation allowance, are explained more fully in Help Sheet IR284 Shares and Capital Gains Tax.

Where shares of the same type have been acquired on separate occasions you cannot choose for yourself which shares have been sold for CGT purposes. You have to follow the identification rules set out below.

You have to match disposals with acquisitions in the following order

acquisitions on the same day as the disposal

acquisitions within 30 days immediately following the day of disposal

previous acquisitions after 5 April 1998, identifying the most recent acquisitions first

any shares acquired between 6 April 1982 and 5 April 1998 (these acquisitions are 'pooled' and an average acquisition cost used)

any shares acquired after 6 April 1965 and held at 5 April 1982 (the cost price of these shares may be rebased to their value at 31 March 1982)

any shares held on 6 April 1965 (the cost price of these shares may be rebased to their value at 31 March 1982).

The general rule is to work backwards, matching disposals with later acquisitions before earlier ones, except where shares are 'pooled'. However, you should note the requirement to match disposals with acquisitions made in the 30 days following the day of disposal in priority to acquisitions made before the day of disposal. This rule is there to prevent a practice which commonly became known as 'bed and breakfasting' (i.e. selling shares one day and buying them back shortly afterwards, in order to create a gain or loss for CGT purposes while effectively continuing to hold the shares).

Example 5

You have bought and sold ordinary shares in the same company over a period as follows

1,000 shares acquired on 1 May 1998 at £5 per share.

1,000 shares acquired on 1 September 1998 at £6 per share.

1,000 shares acquired on 1 December 1998 at £5.50 per share.

1,500 shares sold on 1 June 1999 at £8 per share.

For CGT purposes, following the rule that the latest acquisitions are sold first, the cost of the 1,500 shares sold on 1 June 1999 is 1,000 at £5.50 per share and 500 at £6 per share.)

Example 6

You have bought and sold ordinary shares in the same company over a period as follows

1,000 shares acquired on 15 June 1996 at £2 per share.

1,000 shares acquired on 1 May 1998 at £5 per share.

1,000 shares sold on 1 September 1999 at £7 per share.

1,000 shares acquired on 2 September 1999 at £7.05 per share.

1,500 shares sold 1 September 2002 at £10 per share

For CGT purposes the acquisition cost of the 1,000 shares sold on 1 September 1999 is £7.05 per share. The shares sold are matched with those acquired on 2 September 1999 (within 30 days following the disposal). This disposal gives rise to a loss of £50 for CGT.

The acquisition cost of the 1500 shares sold on 1 September 2002 is 1,000 shares at £5 per share (the shares acquired on 1 May 1998) and 500 shares at £2 per share (the shares acquired on 15 June 1996), being the most recent acquisitions of shares which have not already been matched with other shares sold. This disposal gives rise to a gain of £9,000 before any indexation allowance or taper relief.

If you have obtained shares in connection with your employment, you might also want to look at Help Sheet IR287: Employee Share Schemes and Capital Gains Tax.

What are enhancement costs?

These are costs wholly and exclusively incurred for the purpose of enhancing the value of the asset, as long as that expenditure is still reflected in the state or nature of the asset at the date of sale.

What are incidental costs?

These are costs incurred wholly and exclusively on the acquisition or disposal of the asset, and which are either

fees, commission or remuneration paid for professional advice, or

the costs of transfer or conveyance.

Advertising costs to find a buyer or a seller can be deducted, as can the costs of any valuations or apportionments needed to work out the gain or loss on a disposal.

You cannot deduct any costs you incur in resolving any disagreement about your valuations with the Inland Revenue.

What is meant by market value?

In some cases the price paid when the asset was obtained, or the price received when it was disposed of, is replaced by the market value of the asset in working out any gain or loss. The market value is the price an asset might reasonably have been expected to fetch on the open market at the date of its acquisition or disposal.

If the asset disposed of was held at 31 March 1982, 'rebasing' will apply. If so, the price paid for the asset may be replaced in the calculation by the market value of the asset at 31 March 1982.

Valuations

If you use a valuation to work out any of your gains or losses, you can ask the Inland Revenue to check it for you. Appendix 1 on page 29 explains how.

Who are 'connected persons'?

If an asset is disposed of to a connected person, or an asset is acquired on a disposal by a connected person, the price paid or received is replaced by the market value of the asset in working out any gain or loss.

Examples of connected persons are

your relatives or your husband's or wife's relatives

your business partners, their husbands and wives and other relatives, except for genuine commercial acquisitions or disposals of partnership assets

any company that you control, either by yourself or with any of the persons listed above

the trustees of a settlement of which you are, or an individual who is still alive and who is connected with you is, a settlor.

A loss on the disposal of an asset to a connected person can be set only against gains made on disposals to that same person.

What is a wasting asset?

A wasting asset is one that had a predictable life of 50 years or less when it was acquired. All plant and machinery is treated as a wasting asset. If a wasting asset is disposed of, the allowable expenses are reduced to take account of the remaining predictable life of the asset.

See Help Sheet IR293: Chattels and Capital Gains Tax.

What is rebasing?

Rebasing ensures that only the amount of any gain or loss made since

31 March 1982 is charged to CGT. To achieve this, you can

elect to have gains and losses on all assets you held at 31 March 1982 calculated by reference to their value at that time instead of by reference to their original cost. Such an election has to be made within two years of the first disposal of any asset held at 31 March 1982 and is irrevocable; or

compare the calculation of the gain or loss on each asset by reference to its value at 31 March 1982 with the calculation based on its original cost, and if there is a gain on both calculations the smaller gain is taxable,  if there is a loss on both calculations the smaller loss is allowable, or if one calculation produces a loss, while the other produces a gain, the result will be treated as neither a gain nor a loss.

See Help Sheet IR280: Rebasing assets held at 31 March 1982.

What are 'part disposals'?

Where part of an asset has been disposed of, and part retained (or an interest in the asset retained), there are rules to allocate expenditure between the part sold and the part retained. These are

expenditure which relates wholly to the part disposed of is deductible in full

expenditure which relates wholly to the part retained is not deductible

a proportion of expenditure which partly relates to the part sold is deductible (the proportion relating to the part retained is not).

The deductible proportion is calculated using the following fraction

  Disposal proceeds

Disposal proceeds + Value of part retained.

If you use a valuation to work out any gain or loss on a part disposal you can ask the Inland Revenue to check it for you. Appendix 1 on page 29 explains how to use this service.

Indexation allowance

Indexation allowance is an allowance which adjusts gains for the effects of inflation. Finance Act 1998 froze the allowance at 5 April 1998. It is therefore only available for periods to April 1998. For assets acquired before 1 April 1998 the frozen allowance is deducted in arriving at the amount of the chargeable gains which make up the taxable amount on which taper relief may be due. Indexation allowance is explained in Appendix 2.

Indexation allowance does not apply to periods after 5 April 1998. You do not have to calculate any indexation allowance for assets acquired after 31 March 1998.

 Section 5   Reliefs (other than taper relief)

Reliefs from CGT are given in different ways to meet different purposes. Some reliefs are given automatically and so do not require a claim, others are given only if claimed. Some reduce the amount of chargeable gain before taper relief is applied; others simply defer the charge to a later date. The most common reliefs are introduced briefly below, and are dealt with more fully in our Help Sheets.

Taper relief, which reduces the taxable amount after other reliefs and deductions have been given, is explained separately in Section 6.

Your home

In most cases you will not pay tax on any gain you make when you dispose of your only home. Similarly, if there is a loss on the disposal the loss will not be allowable. However, tax may be due if, for example

the garden or grounds of your home including the site of the house exceed half a hectare (one and a quarter acres) and some or all of that excess does not qualify

part or all of your home has at some time not been used as your home; for example, if it has been let or used for business.

Relief may also be given on the disposal of a home which was provided to a dependent relative and which was occupied by the relative as his or her sole residence before 6 April 1988.

See Help Sheet IR283: Private residence relief.

Other reliefs

Roll-over relief allows gains on the disposal of business assets to be deferred if replacement assets are acquired. See Help Sheet IR290: Business asset roll-over relief.

Retirement relief relieves gains made by an individual aged 50 or over, or who retired before that age due to ill-health, on the disposal of his or her business or shares in a personal trading company. A claim must be made for ill-health retirement relief. The relief is being phased out by a gradual reduction of the thresholds for the relief, over the period from 1999-2000 to 2002-03. It will cease to apply to gains arising after 5 April 2003. See Help Sheet IR289: Retirement relief and Capital Gains Tax.

Gifts hold-over relief allows gains to be deferred when certain assets are given away or are sold 'otherwise than by a bargain made at arm's length'. See Help Sheet IR295: Relief for gifts and similar transactions.

Halving relief relieves half of a gain arising from a gain deferred from before April 1988. See Help Sheet IR280: Rebasing assets held at March 1982.

Enterprise Investment Scheme (EIS). EIS deferral relief allows gains to be deferred when you subscribe for shares in qualifying companies. Capital gains arising on the disposal of the shares on which you have received EIS income tax relief are exempt if you meet the qualifying conditions. (See booklet IR137: The Enterprise Investment Scheme).

Venture Capital Trusts (VCTs). VCT deferral relief allows gains to be deferred when you subscribe for shares in a VCT and receive income tax relief. Capital gains arising on the disposal of your VCT shares are exempt if you meet the qualifying conditions. (See Help Sheet IR298: Venture Capital Trusts and Capital Gains Tax).

Business transfer relief defers a gain made when a business is transferred to a company in exchange for shares. This relief is given automatically.

Unremittable gains. If an asset situated outside the UK is disposed of and the gains cannot be transferred to the UK because of exchange controls or a shortage of foreign currency in the overseas country, a claim can be made that the unremittable gain should not be taxable, until the exchange controls are lifted.

 Section 6   Taper relief

Taper relief was introduced in the Finance Act 1998 to replace indexation allowance for periods after 5 April 1998.

Taper relief reduces the amount of gain chargeable to tax, according to the number of whole years the asset has been held after 5 April 1998. The greater the number of years you have held the asset the smaller the percentage of gain which is chargeable to tax. The amount of the reduction depends on whether the asset is a business asset or a non-business asset.

The percentage of gain that remains chargeable for business and non-business assets, according to the length of the 'qualifying holding period', is set out in the following table

What is meant by 'qualifying holding period'?

This is the time from 6 April 1998 or the date you first acquired the asset to the date that you disposed of it. For assets acquired before 6 April 1998 you only count the holding period from that date.

What is a whole year for taper relief?

A whole year is any continuous period of 12 months. Fractions of a year are ignored. An asset which is disposed of on the anniversary of its acquisition is accepted as having been held for a whole year. A whole year does not have to coincide with a tax year, although it will do so for assets acquired prior to 6 April 1998, because only the holding period from that date is counted.

Example 7

You acquire a business asset on 1 June 1998 and sell it on 1 July 2004.

The ownership period is 6 years 31 days.

There are six whole years in the qualifying holding period.

The percentage of gain chargeable for a business asset held for 6 whole years is 55%.

Example 8

You acquire some shares as a non-business asset on 15 November 1998.

You sell them on 1 December 2000.

The ownership period is 2 years 17 days.

There are 2 whole years in the qualifying holding period.

No taper relief is available in this case.

Bonus year for assets acquired before 17 March 1998

Assets which were acquired before 17 March 1998 (the date of the 1998 Budget) and still held at 6 April 1998 qualify for an additional one year. So for these assets you add one year to the period for which they were actually held after 5 April 1998 to establish their qualifying holding period for taper relief purposes.

Example 9

A non-business asset acquired on 6 April 1996 is sold on 5 May 2000.

As the asset was acquired before 17 March 1998 and was still held at 6 April 1998 the bonus year will be available.

The actual period of ownership after 5 April 1998 is 2 years

30 days.

There are 3 whole years in the qualifying holding period (2 years plus bonus year).

The percentage of gain chargeable for a non-business asset held for 3 whole years is 95%.

What is the date of disposal or acquisition?

If the disposal (or acquisition) is under a contract, the date of disposal (or acquisition) is usually the date of the contract. In some cases a contract may be conditional, that is, it contains one or more conditions which have to be met before it becomes binding. If so, the date of disposal (or acquisition) is the date on which the last of the conditions is met.

There are exceptions, for example, where a capital sum is received from ownership of an asset. There the date of disposal is the date on which the capital sum is received. In other cases, such as gifts, the date of disposal (or acquisition) is the date on which the transaction took effect.

How is enhancement expenditure treated for taper purposes?

Where expenditure is made to enhance the value of an asset, the date of the enhancement expenditure is not relevant for the purposes of taper relief. Taper relief is given on the whole gain by reference to the period from the day the asset was acquired, or from 6 April 1998 if later.

How are rights issues, bonus issues and scrip dividends treated for taper purposes?

Further shares or securities in a company may be issued to existing shareholders under a rights or bonus issue. Under a rights issue shareholders have to pay for the new shares. Under a bonus issue (sometimes described as a scrip or capitalisation issue) the new shares or securities are issued free. For CGT purposes both these types of issues are treated as a reorganisation of a company's share capital and not a new acquisition of shares. The qualifying period for taper relief purposes therefore commences on the date of acquisition of the original shares or securities to which the rights or bonus issue relates and not the date that the new shares were issued. Where the original shares or securities have been acquired on different dates the new shares will need to be apportioned to the respective acquisitions on

a pro rata basis.

A scrip dividend (sometimes described as a stock dividend) is a dividend paid by a company in the form of additional shares as an alternative to a cash dividend. Shares or securities acquired in this way after 5 April 1998 are treated as a new acquisition. The qualifying period for taper relief purposes therefore commences on the date the scrip dividend shares or securities are acquired.

Transfers to spouses

Where an asset which has been transferred from one spouse to the other is later sold, the qualifying holding period for taper relief purposes is the combined period of ownership of both spouses after 5 April 1998. The bonus year may be added where the asset was acquired by either spouse before 17 March 1998.

Example 10

You acquired a non-business asset on 1 March 1998.

You transferred the asset to your spouse on 31 March 1999.

Your spouse sells the asset on 16 June 2001.

There are 4 whole years in the qualifying holding period, being the combined period of 3 whole years for which you and your spouse held the asset after 5 April 1998 plus the bonus year.

What is a business asset?

A business asset is

an asset (other than shares) which is used for the purpose of a trade, profession or vocation carried on by you (either alone or in partnership) or by your qualifying company

an asset held for the purpose of a qualifying office or employment with a trading employer to which you are required to devote substantially the whole of your time

shares in a qualifying company held by you.

A qualifying company is a trading company (or the holding company of a trading group) in which you hold shares which entitle you to exercise at least 25% of the voting rights in that company, or 5% of the voting rights if you are also a full-time working officer or employee of that company (or group).

Business asset taper relief may also be available in certain circumstances where the business asset is owned by trustees of a settlement or a deceased individual's personal representatives.

For more detailed information on business asset taper relief, see Help Sheet IR279: Taper Relief.

What if an asset has been used only partly as a business asset or for only part of the time as a business asset?

Where an asset has been used partly as a business asset and partly as a non-business asset throughout its period of ownership after 5 April 1998, or during the last ten years of its period of ownership, whichever is the shorter, the gain on the disposal of the asset will be apportioned pro rata. Part of the gain will qualify for the business asset taper over the whole period of ownership and the other part for the non-business taper over the whole period of ownership. See Help Sheet IR 279: Taper Relief.

How is taper relief allowed?

Taper relief is applied to the net chargeable gains after the deduction of any losses or other reliefs and before the deduction of the annual exempt amount (see Section 7).

 Section 7   Calculating the tax due

The first step you need to take is to compute your chargeable gains and allowable losses for the tax year, taking account of any indexation allowance for periods up to 5 April 1998, as explained in Section 4.

What you do next depends whether you have any allowable losses for the year or brought forward from earlier years (see Section 3).

If you do not have any allowable losses

You simply reduce the amount of each chargeable gain made in the tax year by applying the relevant taper percentage to each gain and deducting the annual exempt amount 1 from the total tapered gains. This will tell you the amount on which you are liable to pay CGT.

Example 11

You acquire a non-business asset on 1 June 1999 for £15,000. You sell the asset on 1 July 2005 for £25,000.

Your untapered chargeable gain is therefore £10,000.

You have no other chargeable gains or allowable losses in the tax year

2005-06.

There are 6 whole years in your qualifying holding period for taper relief purposes.

The taper percentage of gain chargeable for a non-business asset held for

6 years is 80%.

The amount liable to CGT is computed as follows

Chargeable gain £10,000 x 80%  £8,000

Less annual exempt amount 	£6,800

Amount liable to CGT	£1,200

Example 12

You acquired a business asset on 10 July 1985 for £10,000 (including incidental costs).

You sell the asset on 8 September 2002 for £100,000.

The asset has been a business asset throughout the whole period of ownership.

The chargeable gain (after indexation allowance of £7,070 for the period to April 1998) is £82,930.

There are 5 whole years in your qualifying holding period for taper relief purposes (4 whole years plus the bonus year).

The taper relief percentage of gain chargeable for a business asset held for

5 years is 62.5%.

The amount liable to CGT is computed as follows

Chargeable gain £82,930 x 62.5%	= £51,831

Less annual exempt amount	     £6,800

Amount liable to CGT	   £45,031

Example 13

You make the following untapered chargeable gains in a tax year, as follows

Asset 1: Chargeable gain £3,400. There are 5 whole years in the qualifying holding period and the asset was held as a non-business asset throughout. The taper percentage of gain chargeable for a non-business asset held for 5 years is 85%.

Asset 2: Chargeable gain £4,100. There are 8 whole years in the qualifying holding period and the asset was held as a non-business asset throughout. The taper percentage of gain chargeable for a non-business asset held for 8 years is 70%.

The amount liable to CGT is computed as follows

Asset 1: Chargeable gain £3,400 x 85%	= £2,890

Asset 2: Chargeable gain £4,100 x 70%	= £2,870

Total tapered chargeable gains	   £5,760

Less annual exempt amount	   £6,800

Amount liable to CGT	         NIL

After taper relief there is no CGT to pay.

If you have allowable losses

The general rules for allowing losses of the year and carrying forward losses to set against gains in future years are explained in Section 3 under 'How is a loss allowed?'. You must follow these rules first.

If, having deducted any allowable losses of the year and losses brought forward from earlier years, the total of net untapered chargeable gains for the year is at or below the level of the annual exempt amount for that year, you do not have any CGT to pay and there is no taper relief to be calculated. If it exceeds the annual exempt amount you then compute the amount of taper relief. You do this by deducting the losses from individual chargeable gains in turn, starting with those where there is no taper relief, and going on to those with the next lowest amount of taper relief (that is to say, the gains with the highest taper percentage of gain chargeable), and so on. You then apply the appropriate taper percentage to each chargeable gain after the deduction of losses. This process enables you to make maximum use of taper relief on the gains that remain chargeable. You then deduct the annual exempt amount from the amount of net tapered gains to arrive at the amount on which you are liable to pay CGT.

Example 14 - one gain, one loss

You make an untapered chargeable gain on a non-business asset of £10,000.

There are 6 whole years in your qualifying holding period for taper relief purposes. The taper percentage of gain chargeable for a non-business asset held for 6 years is 80%.

In the same tax year you have an allowable loss of £1,000 (it is irrelevant whether the loss arises on a business or non-business asset or how long the asset has been held).

You set your allowable loss against your untapered chargeable gain as follows

Chargeable gain	£10,000

Less allowable loss	£1,000

Net chargeable gain	£9,000

As £9,000 exceeds the annual exempt amount of £6,800 you then compute the amount of taper relief and your CGT liability as follows

Apply taper relief reduction £9,000 x 80% 	= £7,200

Less annual exempt amount	    £6,800

Amount liable to CGT	      £400

Example 15 - more than one gain, loss fully used against one gain.

You make untapered chargeable gains on two assets and a loss on a third

asset in the same year, as follows

Asset 1: Untapered chargeable gain £10,000. There are 4 whole years in the qualifying holding period. The asset was held as a business asset throughout. The taper relief percentage applicable is 70%.

Asset 2: Untapered chargeable gain of £8,000. There are 7 whole years in the qualifying holding period. The asset has been held as a non-business asset throughout. The taper relief percentage applicable is 75%.

Asset 3: Loss of £5,000.

You first establish whether you have to compute any taper relief by setting your losses against your untapered chargeable gains as follows

Total chargeable gains 	=  £18,000

Less allowable losses	    £5,000

Net untapered gains	   £13,000

As £13,000 exceeds the annual exempt amount of £6,800 you then compute the amount of taper relief by setting the allowable loss against chargeable gains in the most favourable way. In this case you set the loss of £5,000 wholly against your untapered chargeable gain of £8,000 on asset 2 since this qualifies for a taper reduction to only 75% of the gain compared to 70% for asset 1.

So you then compute your taper relief and CGT liability as follows

Asset 1 £10,000 x 70%	= £7,000

Asset 2 Balance of gain £3,000

(£8,000 minus £5,000) x 75%	= £2,250

Total net tapered gains	   £9,250

Less annual exempt amount	   £6,800

Amount liable to CGT	   £2,450

Example 16 - multiple gains, multiple losses

You make untapered chargeable gains in the tax year and have allowable losses, as follows

Asset 1: Untapered chargeable gain £10,500. There are 8 whole years in the qualifying holding period. The asset has been owned as a non-business asset throughout. The taper relief percentage applicable is 70%.

Asset 2: Untapered chargeable gain £8,800. There are 7 whole years in the qualifying holding period. The asset has been used as a business asset throughout. The taper relief percentage applicable is 47.5%.

Asset 3: Untapered chargeable gain £3,300. There are 2 whole years in the qualifying holding period. The asset has been owned as a non-business asset throughout. No taper reduction is available because the asset has been held for less than 3 whole years.

Asset 4: Allowable loss £8,000.

You also have losses brought forward from earlier years of £3,000.

You first establish whether you have to compute any taper relief by setting your losses against your untapered gains as follows

Total chargeable gains (before taper)	=  £22,600

Deduct: allowable losses

(£8,000 plus £3,000)	     £11,000

Net untapered gains	     £11,600

As £11,600 exceeds the annual exempt amount of £6,800, you then compute the amount of taper relief by setting the allowable losses against chargeable gains in the most favourable way, as follows

£3,300 of the allowable losses is set against the gain on asset 3 (no taper

relief available).

The remaining £7,700 is set against the gain on asset 1.

Finally you compute your taper relief and CGT liability as follows

Asset 1: balance of gain, £2,800

(10,500 minus £7,700) x 70%	= £1,960

Asset 2: £8,800 x 47.5%	= £4,180

Asset 3: - gain eliminated by losses.	NIL

Total net tapered gains	 	    £6,140

Less annual exempt amount	    £6,800

Amount liable to CGT	NIL

Taper relief has brought the net gains down below the level of the annual exempt amount and there is no CGT to pay. There are no losses to carry forward.

Calculation of the tax due

The net gains (after deducting the annual exempt amount) are treated as the 'top slice' of income and charged to CGT, as part of your self assessment, at income tax rates.

Unused income tax reliefs and allowances cannot be set against chargeable gains.

Example 17

Tax year 1998-99: threshold for higher rate tax 	£27,100

Individual's taxable income

(after reliefs and allowances)	£22,000

Chargeable gains (after annual exempt amount)   	£10,000

The CGT is worked out as follows

£5,100 x 23%

(unused basic rate band, i.e. £27,100 less £22,000)	£1,173

£4,900 x 40%

(higher rate, i.e. balance of gains not charged at

the basic rate, £10,000 less £5,100)	£1,960

CGT	£3,133

These rules are modified if you have no income charged at the basic rate.

Ask your Inland Revenue Enquiry Centre or Tax Office for details.

Credit for foreign tax

If gains chargeable to CGT have also been charged to tax in another country, relief may be claimed by way of credit for the foreign tax paid ('tax credit relief'). Tax credit relief is deducted from that part of the CGT liability that relates to the gain on which the foreign tax has been paid. Ask your tax adviser, Inland Revenue Enquiry Centre or Tax Office for further details.

 Appendix 1  Post-transaction valuation checks for capital gains tax

Introduction

When working out your CGT liability, you sometimes have to value assets. If you use such valuations, there is a free service from the Inland Revenue to help you complete your Self Assessment tax return. You may ask your Tax Office to check valuations after you have made the disposal but before you make your return.

If we agree your valuations we will not challenge your use of those valuations in your tax return unless there are any important facts affecting the valuations that you have not told us about. Agreement to your valuations does not necessarily mean that we agree the gain or loss. We will not consider the other figures you have used until you make your return.

If we cannot agree your valuations we will suggest alternatives. We use specialist valuers to value some assets, mainly shares, land, goodwill and works of art. You will also be able to discuss your valuations with our valuers. You must file your tax return by the filing date printed on the tax return even if we have not been able to agree your valuations or to suggest alternatives. You must also tell us in your return about any valuations that we have checked but been unable to agree.

If we cannot reach agreement after discussion on any valuations you use in your tax return, you will be able to appeal to an independent tribunal.

How do you get your valuations checked?

If you want us to check your valuations, ask your Tax Office or any Tax Enquiry Centre for one copy of Form CG34 for each valuation you want us to check. Return the completed form to your Tax Office together with the information and documents requested on the form. You can also attach any other information that will help us understand your valuations.

If you do not provide all of the information requested on the form, your Tax Office may be unable to check your valuations. If you have difficulty getting all of this information, or you are not sure how to prepare a CGT computation, ask your Tax Office for help.

How long will it take?

Your Tax Office, or our specialist valuers, will contact you as soon as possible after you make your application. Valuation is an exercise of judgement that can be a difficult and lengthy process, particularly if discussion is necessary.

We are more likely to be able to reach agreement with you before you need to make your return if you contact us as soon as possible after you have made a disposal.

We expect that it will take a minimum of 56 days to agree your valuations or to provide you with an alternative. In more complex cases it may take longer. In a few very complex cases we may not be able to provide you with any alternative valuation before the filing date for your return. If you want to use this service you should send any Forms CG34 to your Tax Office at least 2 months before you need to make your return.

Further information

Further information about the operation of this scheme can be obtained from your Tax Office or from your nearest Inland Revenue Enquiry Centre.

 Appendix 2  Indexation Allowance

Indexation allowance

Indexation allowance is an allowance which adjusts gains for the effects of inflation up to April 1998. It does this by giving an allowance equal to the amount by which the cost of the asset would have risen on a monthly basis if its value had kept pace with inflation, as measured by the increase in the Retail Prices Index (RPI), since the asset was acquired. No allowance is due for periods after April 1998. So assets acquired on or after 1 April 1998 do not qualify for indexation allowance.

This is a complex area. If you have difficulty, you can ask your Inland Revenue Enquiry Centre or Tax Office for help. You may also ask to see a copy of the Inland Revenue Capital Gains Manual, which explains the rules for indexation allowance in detail.

How is indexation allowance calculated?

Indexation allowance is based on the increase in the RPI between

the month in which the asset was acquired or, for subsequent expenditure, the month in which the expenditure on the asset was incurred, or 31 March 1982 if that is later, and

the month in which the asset was disposed of, or April 1998, if that is earlier.

This booklet only explains the position for assets disposed of after 5 April 1998. For assets disposed of before that date please ask your Inland Revenue Enquiry Centre or Tax Office for help.

In order to work out your indexation allowance, you need to look at the table at the end of this Appendix. This gives details of the 'indexation factor' to be used in calculating the rise in the RPI between the month in which you incurred the expenditure on the asset and April 1998. The table shows a figure next to every month between March 1982, when indexation allowance was introduced, and March 1998. Take the indexation factor next to the month in which you incurred the expenditure and multiply this by the expenditure. This gives the amount of the indexation allowance which can be deducted in computing the chargeable gain.

Example 18

You bought an asset in March 1992 for £1,000, and sold it in June 1999 for £5,000. The indexation factor to be used for an asset acquired in March 1992 is 0.189. Multiplying this by £1,000 gives an indexation allowance of £189. The indexation allowance is then added to the acquisition cost of £1,000, giving an allowable figure of £1,189. This is then deducted from the proceeds of £5,000 to produce a chargeable gain of £3,811.

Remember that taper relief may also be available for the holding period after 5 April 1998 (see Section 6).

What about losses?

Indexation allowance can reduce or eliminate gains which are chargeable to tax, but for disposals on or after 30 November 1993, you cannot use indexation allowance to turn a gain into a loss or to increase your loss.

Example 19

You sell an asset in May 1999 for £20,000. It cost you £30,000 in November 1993. You have made a loss of £10,000. You cannot deduct any indexation allowance because the allowance cannot be used to increase the amount of a loss.

Which costs attract indexation allowance?

You can deduct indexation allowance from your gain if you have any of the following types of expenditure

the cost of an asset

the incidental cost of acquiring an asset

the cost of creating an asset if it was not acquired.

Any of these types of expenditure is treated as having been made when the asset was acquired or created.

Example 20

You acquire an asset under a contract made in March 1993.

Payment does not have to be made until June 1993. When you calculate your indexation allowance you should treat the expenditure as if it had been made in March 1993.

You can also deduct indexation allowance if you have either of the following types of expenditure

expenditure on enhancing the asset, or

expenditure on establishing, preserving or defending your title to the asset.

Either of these types of expenditure is treated as having been made when that expenditure became due and payable.

Example 21

In May 1988 you entered into a contract with a builder to add an extension to a property you own. The cost was due and payable when the work was completed in September 1988. When you calculate the indexation allowance you should treat the expenditure as incurred in September 1988.

What about part disposals?

If you make a disposal of part of an asset you own, you will only be able to deduct part of the costs of that asset in working out your gain or loss. See 'What are part disposals' in Section 4 'Calculating chargeable gains and allowable losses'.

Your indexation factor is multiplied by the part of the cost that can be deducted - not by the whole of the cost of the asset.

What about assets held at 31 March 1982?

If you

owned an asset at 31 March 1982, or

you acquired an asset from your spouse in a no gain/no loss transfer after that date, and your spouse held the asset at 31 March 1982

the rules are modified for that asset.

Your indexation allowance is calculated on the greater of

the total cost you or your spouse incurred up to 31 March 1982 on that asset (including its initial acquisition price), or

the value of that asset at 31 March 1982 unless

you, or your spouse, have made an election for rebasing to 31 March 1982 to apply to all your disposals. If you have made a rebasing election, indexation allowance is calculated on the value of the asset at 31 March 1982. In both cases the indexation allowance is calculated by reference to inflation since March 1982.

You calculate separately indexation allowances on any relevant expenditure incurred after 31 March 1982 that is allowable in working out your gains.

You can find out about rebasing to 31 March 1982 in Help Sheet IR280: Rebasing assets held at 31 March 1982.

Example 22

You bought an asset in 1979 for £20,000. At 31 March 1982 it was worth £15,000. You should calculate your indexation allowance by multiplying £20,000 by the indexation factor unless you have made a rebasing election; in which case you should multiply £15,000 by the indexation factor.

What about disposals of pooled shares or securities?

Shares of the same class in the same company acquired before 6 April 1998 are treated as a single asset, the share pool.

The rules for indexation allowance are modified to cope with share pooling. See Help Sheet IR284: Shares and Capital Gains Tax.

Indexation allowance for disposals after 31 March 1998

You work out the indexation allowance by multiplying the amount you spent by the indexation factor. All of the indexation factors you will need are included in the table below.

For example. If you incurred expenditure in June 1989, look across the Month columns to find June and then look down the column until you find the row for 1989. Your indexation factor for June 1989 will be 0.409.