Exploding tax myths

Calculating your tax can be a minefield at the best of times – but a profusion of common tax myths is doing nothing to demystify the complicated tax system according to the Institute of Chartered Accountants in England & Wales (ICAEW). Recognising that myths can quickly take on a reality of their own and become convincing enough to leave tax payers vulnerable to miscalculations, the ICAEW has set out some advice, to help set the story straight.

The advice from the ICAEW comes as millions are preparing their tax returns in order to meet the 30 September 2005 deadline; the last opportunity for sending tax returns back to the Inland Revenue in order for them to calculate your tax on your behalf, or to collect underpaid tax through PAYE codes.

Anita Monteith, Technical Manager at the ICAEW Tax Faculty, said: "There are some basic untruths which have become woven into the fabric of peoples' understanding of tax calculations. It is important that these are unpicked so that people can have a more precise knowledge of their tax position in the run up to the September 30 deadline."

The ICAEW cites the following 'myths':

• Money kept overseas is not taxable

Actually, 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.

Children are not taxable

It doesn't matter how old you are, even babies are taxable if they have income. For most children, there won't be any tax to pay since the personal allowance of £4,745 for 2004/05, or £4,895 for 2005/06, allows each person this much income before they start paying tax.

Students are not taxable in their first year at university

Just like children, students who earn more than the personal allowance will have to pay tax. Employers will usually ask student employees to sign a form P38S so they can pay their wages gross.

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 benefits that you get from your employer have been valued correctly (look at the Form P11D given to you before 6 July this summer). 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 the personal allowance mentioned above.

If you have overpaid tax you can always rely on the Revenue 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 is always worth checking the tax you have paid at the end of the year.

If you let a room to a lodger income is not taxable

All income from letting is taxable, but to encourage people to let a room in their home, income of up to £4,250 is exempt.

State pension is not taxable

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

No one need pay tax if they have a good accountant

Certainly you are likely to pay less tax than if you try to do it yourself. This is because the system is peppered with reliefs and deductions which need to be claimed. It takes years of practice to have recall of these and, in any case, the Chancellor changes the rules every year in the Budget.

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

HM Revenue & Customs devote significant resources to tracking money in the black economy and even the little guys are interesting to them. It is 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.