¨Income tax

On earnings, pensions, savings, investment or rental income.

¨National Insurance (NI) contributions

On your income from working or your business. Some National Insurance contributions are used to work out whether you qualify for certain state benefits.

¨Capital gains tax

When you sell or give away something you own, although you are entitled to an annual exemption.

¨Inheritance tax

On your estate after you die, and possibly on some gifts that you make during your life.

¨Council tax (domestic rates in Northern Ireland)

Charged on property by your local authority

¨Value added tax (VAT)

Included in the price of most goods and services, currently at 17.5 per cent (5 per cent for domestic fuel)

¨Stamp duty

Charged on certain documents – for example, when you sell or transfer property, although it has now been abolished in certain areas for properties of £150,000 or less

¨Insurance premium tax

On premiums for general insurance such as household, motor and travel policies.

Q.IS ALL MY INCOME TAXED?

A.Everyone is allowed to earn up to their personal allowance before tax is deducted. This is £4,745 in the 2004-2005 tax year. If You or your husband or wife are aged over 65, you may also be entitled to a higher allowance. In addition, certain expenses necessary for your work can be set against tax, and some payments you make from taxable income qualify for tax relief – for example, contributions to pension schemes or some payments to charity.

If you are self employed, expenses are tax allowable so long as they are "wholly and exclusively" for business use, and if you are employed, the expenses must be "wholly, exclusively and necessarily" for business use. (However, there are certain exceptions in both, such as entertaining expenses which are never allowable.)

Q.HOW DOES THE INLAND REVENUE COLLECT TAX?

A.There are two main ways in which the Revenue collects tax on the income you receive, either via your employer (under the Pay As You Earn scheme) or through your tax return, if you are self employed.

Q.CAN I AVOID PAYING TAX?

A.Tax avoidance is perfectly legal and is where you arrange your financial affairs in such a way as to pay as little tax as possible. Tax evasion, on the other hand – where you conceal income or gains from the Inland Revenue, or fraudulently claim allowances or other deductions – is a criminal offence, and the penalty for it can be a fine or even imprisonment.

Q.IF I MISS A DEADLINE, WILL I HAVE TO PAY A PENALTY?

A.Even if you use a tax adviser or accountant, you are the one responsible for making sure the information on your tax return is accurate and that the Revenue receives the return in time. If we receive all the details and responses we request from you, in a timely manner, and no later than the date we state on the letter, we promise to file your return on time.

There are stiff penalties if you miss the deadlines. If you miss the final return date (for most returns this will be 31 January 2005 for the tax year ending on 5 April 2004), the Revenue will charge you a fixed penalty of £100. If the return is still outstanding six months later, you will be charge another £100. However, these penalties can never exceed the balance of tax due. A further penalty of up to £60 a day can be applied in more serious cases of delay but only where Special Commissioners agree. If this happens, the penalty payable can exceed the balance of tax due. If you’re late paying your tax, you will be charged interest, currently at an annual rate of 6.5 per cent. In addition, a 5per cent surcharge will be applied on any tax not paid by 28 February 2005. This surcharge will be increased by a further 5 per cent and applied to any tax bill still unpaid by 31 July 2005 for the 2003/2004 tax year.

The Revenue can start legal proceedings to enforce collection of overdue tax. However, you can appeal against the penalties and surcharges if you think you have a reasonable case - see Inland Revenue booklets SA/BK6 and SA/BK7 for more information.