20 million British workers do not know the basics when it comes to the amount of tax they pay, according to a new report compiled by cloud based accountant Boox. This year, 10.9 million people will be expected to complete self-assessment tax returns – more than ever before.
However, Boox has revealed that 36% of UK workers in full or part-time employment don’t have an understanding of the current VAT rate, 59% do not know the salary level at which the 20% tax rate is payable and only 1 in 10 know that when it comes to National Insurance Contributions (NICs) it’s 12% of their salary that goes towards NICs for those in class one.
With the 31st January self-assessment tax deadline looming, the pressure is on for people to file their self-assessment tax returns correctly, and on time. Overall, HMRC dished out fines to 850,000 people who failed to file their self-assessment tax returns on time in 2012, incurring £85million in penalties. This year with an anticipated 10.9million Brits expected to complete returns, it seems like British workers are in need of a ‘tax and financial admin 101’.
Tax is taxing
Over 1.2 million of the UK’s 4.2million freelancers are making errors, missing deadlines and as a result, having to pay fines when filling in their tax returns according to the new Boox Report.
Despite bearing greater responsibility for managing their tax obligations, freelancers are no better informed when it comes to tax matters than the average UK employee. More than nine in ten do not know the percentage rate of Class 4 NICs payable on taxable profit, and 33% are not aware of the current VAT rate, with women faring worse than men as 37% of them compared to 28% of men are clueless about the current rate of VAT.
Nearly two thirds (64%) either don’t know or incorrectly guessed the salary level at which the 20% tax rate is payable. However, age does play a part, as twice as many freelancers aged 65+ compared to those aged 18-34 are likely to know the correct salary level at which 20% tax is payable.
29% of freelancers who have made an error in their tax return or missed a deadline have had to pay a penalty or fine, and 46% of them are in the 18-34 year old age bracket, suggesting a lack of experience or knowledge is hampering their efforts to complete their tax returns correctly.
“With this year’s Boox Report we set out to understand the level of understanding British workers, freelancers and the self-employed have when it comes to tax affairs and we’ve uncovered some pretty glaring gaps in knowledge and poor basic practices,” said Phillip Venn, Commercial Director at Boox, who conducted the report. “With more people than ever before required to complete self-assessment and the freelancer market looking buoyant in 2014, it’s vital that we help people understand their tax obligations, and make managing personal finances as straightforward as possible.”
Managing finances
In general, half of all freelancers prudently reserve money from each invoice to meet their tax obligations, while one third wait to find the money until their tax bill is due, although one third still admit to making bookkeeping errors. Freelancers are improving however, as compared to 2012, errors made in 2013 are down.
18-34 year olds are actually ahead of their older peers in some areas. When it comes to setting money aside to settle future tax obligations this age group (65%) is most likely to put money aside for tax obligations compared to just 45% of the over 65s.
£432 million borrowed from business accounts
When it comes to the division of personal and business affairs, freelancers who operate as a limited company are legally obliged to have a separate business account to their personal account, so for the remaining freelancers, just under half (44%) keep separate bank accounts for personal and work purposes. However, that doesn’t mean they remain separate, as 37% of freelance workers admitted to borrowing money from their business account for private use, amounting to a staggering £432 million* borrowed.
Within this group, it emerges that men borrowed considerably more (almost double) in the last month than women, at an average of £362 and £191 respectively. Moreover, almost a quarter of men (24%) said that they had borrowed over £500 in the last month.
However, despite being the most likely to set money aside to settle future tax obligations, those most likely to borrow from their business accounts are 18-34 year-olds, with 67% saying they have done so at some point in the past. Only 20% of 55-64 year-olds admitted to doing the same.
“We can see from our research how tempting it is for freelancers to use their business accounts when they are short of cash, but that means it’s going to be harder for them to pay their tax bills when the time comes. We’re keen to help them get into good financial management habits and understand the ins and outs of tax in a simple manner,” commented Venn.
There are also regional differences between how much freelancers are borrowing from their business accounts, with those in the South East borrowing over twice as much as those based in Wales.
* 4.2 million UK freelancers / self-employed workers x 37% (said they borrowed from their business account) x £278 (the average amount borrowed by these workers) = £432 million
