NI and Income tax 2006-2007

Basics of the tax system

HM Revenue & Customs collects tax to pay for public services. Each year the Chancellor’s Budget sets out how much it’ll cost to provide these services and how much tax is needed to pay for them. Key taxes that individuals may have to pay include: Income Tax, Capital Gains Tax, Inheritance Tax, Stamp Duty, Value Added Tax and certain other duties.

Income Tax on earnings, pensions and benefits

You pay Income Tax on:

• your wages if you're employed
• the profits from your business if you're self-employed
• your State Pension and any private pensions
• some benefits like Jobseeker's Allowance, Carer's Allowance and Incapacity Benefit

National Insurance

You pay National Insurance contributions (NICs) to build up your entitlement to certain social security benefits, including the State Pension. The type and level of NIC you pay depends on how much you earn and whether you’re employed or self employed. You stop paying NICs when you reach State Pension age.

If you're employed

• if you earn above £97 a week (the 'earnings threshold') and up to £645 per week you pay 11 per cent of this amount as 'Class 1' NICs
• you also pay one per cent of earnings above £645 a week as Class 1 NICs
• you will pay a lower amount as an employee if you are a member of your employer's contracted out pension scheme

What to do if you think you’ve overpaid NICs

The National Insurance Contributions Office usually gets in touch if you’ve paid £42 or more above the annual limit for Class 1 and/or Class 2 NICs.

However, if you think you’ve overpaid but haven’t been notified, write after the end of the tax year (5 April) to: HM Revenue & Customs, National Insurance Contributions Office, Benton Park View, Newcastle upon Tyne, NE98 1ZZ.

Mark the envelope as follows:

• ‘Refunds Group’ - for Class 1 and/or Class 2 NICs paid above the annual limit
• ‘Self Employment Services’ – for wrongly paid Class 2 NICs
• ‘Deferment Services’ – for overpaid Class 4 NICs

In your letter tell them:

• your National Insurance number
• why you’ve think you’ve overpaid
• which tax years you think you overpaid, and which class(es) of NICs

Include evidence, for example:

• a P60 or statement from your employer(s) showing NICs deducted from your wages during the tax year (Class 1)
• your quarterly bill receipt (Class 2)
• your Self Assessment Statement of Account (Class 4)

The section or group you contact will check your details and normally send you an application claim form on which you can apply for a refund if you are due one. This can take anything from seven days to a few weeks – but the more clear evidence you can supply, the quicker they’ll be able to deal with your claim.

Income Tax

Income Tax is your contribution to government spending on things like transport, health and education. How much you pay depends on how much you earn.

HM Revenue & Customs (HMRC) gives you a ‘tax code’, which you’ll see on your payslip. Your employer uses your tax code to work out how much Income Tax to take off your wages through the PAYE system.

At the end of each tax year your employer will give you a form – your P60 - showing your total gross pay for the year and how much tax you’ve paid.

Tax-free allowances

Everyone who is resident in the UK for tax purposes has a ‘personal allowance’, which is an amount of taxable income you are allowed to earn or receive each year tax-free.

This tax year (2006-2007), the basic personal allowance - or tax-free amount - is £5,035. You may be entitled to a higher personal allowance if you are 65 or over.

How much can you earn without paying tax and National Insurance?

Income Tax

Everyone can earn a certain amount each year without paying any Income Tax. This is called your 'personal allowance'. In 2006-2007 the personal allowance is £5,035. Some people can earn a bit more before they start paying tax, if they're over 65, for example.

How you pay Income Tax

If you’re an employee or receive a company pension

If you’re an employee your employer will deduct Income Tax from your wages throughout the year and send it to HMRC. If you receive a pension, your pension provider will deduct tax in the same way. This system of collecting Income Tax is known as Pay As You Earn (PAYE).