Tax Myths

Money kept overseas is not taxable

For most people living in the UK, it is taxable. It doesn’t matter if you leave the money in Jersey, for example, and never touch it, you must still pay income tax on any interest. However, if you are not both resident and domiciled in the UK the position may be different and you may need to seek further professional advice. HMRC is looking much more closely at overseas bank accounts, so don’t overlook the interest – it won’t!

Give money to your children and escape tax on the interest it earns

If a parent gives money to a child and the interest earned exceeds £100, it is treated as being the parent’s income and not the child’s. Interestingly though, a grandparent can give away money without the same problem occurring. Watch out for inheritance tax (IHT) though; some gifts will be exempt, but larger amounts may create an IHT problem.

The Inland Revenue always get your tax code right

Certainly not. Even assuming that information you have given is correct it can be easily lost amongst the millions of other PAYE codes. Make sure that any employment benefits that you give yourself have been valued correctly (look at the Form P11D given out by your employer before 6 July 2006). Check that the suffix (the letter after your numerical code number) is right for your circumstances (look at the leaflet which came with it); the letters BR for someone who only has one job should ring alarm bells since this may mean that you are paying basic rate tax (22 per cent) on all of your income and that you aren’t getting any benefit for your personal allowances. We have had a number of clients whose PAYE codes have been incorrectly issued earlier this year.

If you have overpaid tax you can always rely on HMRC to pay it back

This can’t happen by magic. If you have overpaid tax under the PAYE system and have no other income, then it should happen automatically. Often though the position will be more complicated and you will have to ask for the tax back, either by completing a Tax Return or by completing a Repayment Form (R40). Investment income is taxed at a different rate to earnings, so it’s always worth checking the tax you have paid at the end of the year.

State pension is not taxable

The State pension is taxable, but is always paid gross. If someone has no income apart from the State pension, then since for a single person it is below the level of the personal allowance, no tax is due. If they do have other income, such as an occupational pension, then you will probably find that the tax code has been adjusted for the state pension - if not, they may not have paid the correct amount of tax.

If you only ever work for cash you don’t need to pay tax

HMRC devote significant resources to tracking money in the black economy and even small one-person businesses are interesting to them. It’s your responsibility to keep records of your financial affairs and to declare your income. There are penalties for cheating and you may even go to prison. If you have made a mistake then you should seek proper professional advice to minimise the effects of the consequences.

If you want more information or help with any of the issues mentioned above contact Sarah Nickols on 02476 554310 or Jan Hornby on 0121 711 2468.

For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.

Prime Chartered Accountants
Fact sheet published November 2007