Happy 6th of April. The first day of the new tax year here in the UK.
Yes, we really do have strange tax years, from the 6th April. Which as someone native to these strange and hallowed lands, I have always just accepted. But when you come to think about, it’s a rather weird combination. Then I got to thinking, what was the story behind this? We all have an origin story, so what is the humble tax year’s origin?
And, as with lots of strange things in the UK, there is some history to this. Our tax years go way back into our past. In the olden days, pre 1725, the British new tax year begun on the 25th March. This was considered the date of the new year then. So it seems a reasonable choice.
The solar system and catholic church
Britain still followed the Julian calendar (named after Julius Caesar), after refusing to follow the pope and Rome which adopted the Gregorian calendar in 1582. Hence we ended up a bit out of sync and 11 days adrift from the rest of Europe. And we realised that Rome was right, and the Julian calendar did not match the earth’s rotation of the sun. Therefore Britain decided to bite the bullet and get back in sync with the sun. And Europe. So we adopted the Gregorian calendar (with it’s changes to leap days) finally in 1752. So in 1752, the British calendar was synced up with Europe, albeit begrudgingly.
But the British treasury didn’t want a tax year short of revenue, so they moved the tax year 11 days out as well in 1752. Thereafter the new tax year started on the 5th April each year. And the final change to the dates we know today happened in 1800. A pesky leap day was eliminated in 1800, making the year a day short. So obviously the tax year was moved out again to start on the 6th April. And there we have it, the British have a strange new tax year due to our unwillingness to fall in line with Europe and the Treasury’s keenness to collect tax. Some things never change, even hundreds of years later.
It’s almost a Shakespearean tale, seeing new tax years decided based on centuries of power and greed, and a delayed willingness of men* to compromise. I think it’s fascinating how these traditions that we still keep today were formed.
The Feminist Angle
* Yes I said men, as women had no power in those days, with some women only getting the right to vote in 1918 – you can read more details on female suffrage in the UK. But I often think, if women were allowed to participate fully in society, would we have designed a different society?
What this actually means
Our tax year runs across two calendar years, from April 6th 2017 to April 5th 2018. Her Majesty’s Revenue and Customs, HMRC, is the lucky government department charged with collecting all our taxes. But what does this tax year actually mean and relate to? Mainly the personal taxes that HMRC collects from us. Personal taxes are ruled by these not so arbitrary dates. This includes income taxes on salary, savings and dividends and capital gains taxes.
Tax Free Accounts
ISA’s are the best thing since sliced bread in my opinion. A great tax free account, that you can contribute £20k to each tax year. You can read my love for ISA’s here in my Use it or Lose it article.
Tax Deferred Accounts
Another product that it ruled by the tax year is your pension. In the UK these are tax deferred accounts. This means you don’t pay income tax on any funds you add to your pension, up to the £40k limit each tax year. If you need it there is also a 3 year carry forward rule. However when you access the money in your pensions, tax is then due. Also to note, if you have a mega high income, you lose some pension allowances, so make sure you do your research as the rules are complex.
Most people in the UK don’t need to fill in a tax return. If you are employed, your employer will pay you under the PAYE (pay as you earn) tax system, deducting your income tax due at source. However if you are self employed, or have a complex situation, you have to fill in a self assessment return each tax year. And the deadline for returning this is the 31st January the following year. So we get a good chunk of time to get these completed, and the deadline is at least aligned to the end of the month.
As I mentioned above, these tax years are mainly for personal taxes. If you have a company, you are free to choose your own financial year. Companies are not tied to the same tax years as individuals are. And lots do the sensible thing and align the company financial year to the calendar year, and keep it simple. HMRC collects your corporation tax aligned to your companies financial year.
Personal vs Company
One thing that I have noticed, is that the government treats company tax much more favourably than personal tax. Companies are free to choose their own financial years, and can even opt to move them, gaining tax advantages. Individuals are stuck with these strange UK tax years. Not to mention the government will pay you interest if you pay your corporation tax early, but not on personal taxes. A quirk of the system or deliberate policy to encourage incorporation?
All the changes
And the new tax year is when personal tax changes are rolled out. Every year the government enjoys making the tax system a little bit more complicated. And the 6th April is when the next set of changes come in. Whether it’s allowances increased or decreased, or new incentives added, there are always lots of changes. Personally I think they have gone too far, as the HMRC computer can’t cope. And as a result even HMRC got some peoples tax wrong. I was one of the lucky ones, they calculated my bill lower by a few hundred pounds. But it does make me think, when will they stop adding complexity? When will their computer catch up?
If you want more details on the history of UK tax years, you can check out the following:
Over to you
- Do you also think our new tax years are kinda strange?
- What do you think of the history behind them?
- Would women have done something different?