The Different Types Of Tax In The UK

There are lots of different types of tax in the UK. Here we’ve listed some of the most common types of tax, covering everything from income tax, to council tax.

1. Income Tax: 

Income Tax is a type of tax you have to pay on your income. You pay income tax on:

• The money you earn from employment
• Profits you make if you’re self-employed
• Some state benefits and grants
• Your pension – state, personal, and company pensions
• The money you’ve earned from a rental income 
• And any interest on savings that are over the personal savings allowance

The amount of Income Tax you pay depends on a couple of factors. Like how much of your income is above your personal allowance and how much of your income falls within each tax band. In most cases, your personal allowance is £12,500. This means you do not pay tax on the first £12,500 you earn. 

If you earn more than £12,500 but less than £50,000 a year, you’ll pay 20% of the amount over £12,500 to income tax. If you earn more than £50,000 but less than £150,000, you’ll pay 40% tax on everything over £50,000. And anything earned above £150,000 will be taxed 45%.

Your Income Tax is then collected through PAYE – if you’re employed you’ll see that Income Tax is automatically deducted from your pay each month. 

Your tax code is the best way to identify how much tax you’re supposed to pay – make sure this is correct so you don’t find yourself being over or under-taxed. 

2. Capital Gains Tax: 

Capital Gains tax is a tax you pay on any profit you’ve made from selling, or “disposing” of something.

You’d pay capital gains tax on most personal possessions that you sell over £6,000, as well as any property you sell that’s not your main home (like buy-to-let properties). 

As an example of how Capital Gains Tax works, imagine you buy a piece of jewellery for £5,000 and then sell it for £25,000. You’d have to pay Capital Gains Tax on the £20,000 profit you’ve made. 

The amount you pay for capital gains tax will vary depending on whether you pay a basic rate income tax or a higher rate of income tax. If you’re on a higher rate tax band then you’ll pay the taxman 28% on your gains from a residential property and 20% on other personal possessions. 

If the profit you’ve made is under your tax-free allowance of £12,300, you don’t have to worry about Capital Gains tax.  You also don’t need to pay Capital Gains tax if instead of selling an item, you “dispose” of it by giving it to your husband, wife, civil partner, or charity. (Although, if they later sell that item, they may have to pay tax on any profits or gains.)

3. National Insurance:

National Insurance is another type of tax. You’ll have to pay NI if you’re over 16 and earning more than £183 a week, or are self-employed and have made more than £6,475 profit a year. 

To make sure your National Insurance contributions are correctly filed against your name, everyone is given a National Insurance number. If you don’t have a NI number you can apply for one here.

The amount of National Insurance Tax you pay will depend on how much you earn. You’ll pay 12% of your earnings above £183 per week and up to £962 a week, and then a further 2% of your earnings over £962 per week.

For example, if you earn £1,000 a week, you pay:

• nothing on the first £183
• 12% (£93.48) on the next £779
• 2% (£0.76) on the next £38.

Your National Insurance contributions then allow you to qualify for select benefits and the state pension. (That’s why you can stop paying National Insurance once you reach the state pension age)

4. VAT:

VAT, or Value Added Tax, is the tax you have to pay when you buy goods and services. 

For the majority of products, VAT is 20%. There are, however, some products that have a reduced VAT rate of 15%, or a Zero rate of 0%. Items like food and children’s clothing are two of the main examples of items that don’t have VAT added on. 

It’s easy to forget that VAT is a type of tax we pay, because more often than not this tax has already been added to the prices you see in shops. 

5. Corporation Tax:

If you’re a limited company, a foreign company with a UK office, or an unincorporated association (like a sports club) then you’ll have to pay corporation tax on any money you’ve made. That could be profit from doing business, investing, or from selling business assets. 

At the end of the financial year, you’ll have to complete a Tax Return and work out how much corporation tax you owe – the figure is not worked out for you like some of the other taxes we’ve just mentioned. 

6. Inheritance Tax:

When someone dies they might choose to leave you their home, money, and possessions.

If you’re not their spouse, civil partner, a charity, or an amateur sports club you’ll then need to pay inheritance tax on this. Unless the amount left to you is below the £325,000 threshold, or £500,000 threshold for children and grandchildren.

If the value of the assets that have been left to you are over these thresholds, you’ll have to pay 40% in Inheritance Tax.

For example, say the assets you’ve inherited have a value of £500,000 and your tax-free allowance is £325,000, you’ll pay 40% of £175,000 in inheritance tax. 

This whole process is managed by whoever deals with your will. They’ll calculate how much inheritance tax you need to pay and make sure it’s received by HMRC. 

7. Stamp Duty:

If you buy a property or piece of land over a certain value in the UK you’ll have to pay stamp duty tax. 

The current threshold is £500,000, which means you won’t have to pay any stamp duty if your main home costs less than this amount. This applies to first time buyers, and people that have previously bought a property. 

At the time of writing this article, there are plans to reduce the threshold after the 1st of April 2021. After this date, you will have to pay stamp duty on properties costing over £125,000 – unless you’re a first-time buyer. First-time buyers won’t have to pay stamp duty on properties costing up to £300,000. 

We love this calculator from The Money Advice Service that helps you understand how much you might have to pay in stamp duty.

8. Council Tax:

Last on our list of different types of tax in the UK is council tax. Council tax is a type of tax that’s collected by your local authority instead of HMRC. 

It doesn’t matter if you rent, or own a property, you’ll still be required to pay council tax. The only people that generally do not have to pay council tax are full time students, anyone under the age of 18, people on Government training schemes and those with disabilities. 

The amount you pay in council tax depends on where you live and what “band” your house is. Normally, the bigger and newer your house, the more you’ll pay in council tax. Each year your local council will set a rate of tax for each band – this means the cost of council tax can vary wildly by location. You can check what council tax band you’re in by entering your postcode into this link. 

Summary: 

We hope this summary has helped you understand the different types of tax in the UK. We’ll be posting more articles in the coming weeks about tax, so make sure you keep your eyes peeled! 

---