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A Quick Guide to UK Taxes: Everything You Need to Know

Whether receiving your monthly pay check, shopping at the supermarket, or purchasing a new house, you will be required to pay tax. This is a standard percentage of money determined by the UK government.

So, what is it, why are we paying it, and where exactly does our hard-earned money go? In this blog, we’re going to share everything you need to know about paying tax in the UK.

Find out more below!

What Are UK Taxes and Why Are We Paying Them?

Taxes are a mandatory percentage of money that must be paid, whether from our income or otherwise, to the government. Parliament then decides how best to spend this money in a way that is most beneficial to the country.

Therefore, your taxes cover a wide range of services, including:

  • Healthcare (NHS)
  • Social care
  • Defence and security
  • Schools and universities
  • Transport systems

Who Is Responsible for Collecting Tax in the UK?

Her Majesty’s Revenue and Customs (HMRC) is a department within the UK government responsible for collecting taxes. They work to ensure taxes are paid correctly by alerting any errors and confronting those who deliberately cheat the system.

5 Types of Tax in the UK

1. Income Tax

Most workers in the UK are liable for paying income tax. If you work for an employer, this is made possible via the Paye As You Earn (PAYE) system. Essentially, tax will be automatically deducted from your monthly pay and sent directly to the taxman. You needn’t lift a finger which slightly lessens the blow of paying these taxes, since the percentage you owe never actually enters your bank.

However, in paying income tax, it means your yearly salary is actually significantly less. For example, if you earn £20,000 per year, you can expect to receive roughly £17,000 after tax and national insurance, which we’ll explore later.

Is Everyone Responsible for Paying Income Tax?

Depending on your yearly income, you will fall into a different “tax bracket”. However, most workers are entitled to a Personal Allowance. This covers the first £12,570 of your total income and is 100% tax free. This benefit doesn’t apply to individuals earning a yearly salary in the surplus of £125,140.

The UK tax brackets are‌:

  • Basic Rate
    20% tax for income between £12,571–£50,270
  • Higher Rate
    40% tax for income between £50,271–£150,000
  • Additional Rate
    45% tax for income over £150,000

Are There Any Exclusions Regarding Income Tax?

According to the UK government, there’s an exclusive list of income types whereby you’re not required to pay tax. Below are a few examples:

  • National lottery wins
  • The first £1000 of self-employment income
  • Rent from a lodger paying less than the Rent a Room Scheme limit

Can You Claim Income Tax Relief?

There are several ways to get tax relief, whether automatically or via application. Find some common examples below:

  • Individuals working on a ship outside the UK
  • Pre-arranged charity donations
  • Pension contributions

2. National Insurance Contributions

National Insurance is similar to Income Tax, but the money is distributed a little differently. For example, depending on your National Insurance class, your contribution may go towards a state pension, jobseeker’s allowance, maternity allowance, bereavement support payments and more.

This type of tax applies to individuals over the age of 16, earning more than £190 per week.

3. Stamp Duty Land Tax (SDLT)

If you’re looking to buy a property in the UK, you will need to pay Stamp Duty Land Tax. This is essentially a charge to cover the transaction. However, this depends on when you buy your property and how much for. Properties under £125,000 do not require SDLT payment.

Claiming Stamp Duty Relief

In some cases, you can claim a reduction on the amount of Stamp Duty you pay. For example, if you’re purchasing your first property, you do not have to pay SDLT up to £300,000. Anything over this amount, up to £500,000, will require just 5% payment.

Additional SDLT

If you already own a house and are looking to expand your property portfolio, you’re required to pay an extra 3% SDLT. This only applies to properties over £40,000.

4. Council Tax

As the name suggests, council tax is a type of tax collected by your local authority. The money they receive helps to pay for local services such as road maintenance, street lighting, cleaning, and rubbish collection.

Every property in the UK must pay council tax. However, this entirely depends on the valuation band of your home and how much your local council charges for each band.

Council Tax Reduction

Those that earn a low income, are on benefits, or live with a large family can claim a reduced rate of council tax. According to the government, up to 100% of the fee can be deducted.

5. Value Added Tax (VAT)

Value Added Tax, more commonly referred to as VAT, is an additional 20% charge for most goods and services within the UK. Unlike other countries such as the USA’s sales tax, this charge is included in the price you see on the shelf.

Items with Reduced VAT

For selected goods and services, there is a reduced VAT rate, meaning you only pay 5%. This typically applies to items such as mobility aids, children’s car seats, nicotine patches and more.

Other items may have 0% VAT. These goods and services are taxable, but they do not currently have a charge.

Are There Any VAT Exclusions?

It is possible for goods and services to be completely exempt from VAT. This means they do not fall within the characteristics of VAT items and so a charge is not applied. Lottery tickets, sports activities, health services, and funeral plans all fall into this category.

In this blog, we’ve explored 5 main tax types UK citizens are required to pay. However, there are many other forms of tax, including but not limited to:

  • Corporation Tax
  • Inheritance Tax
  • Excise Tax
  • Tobacco Duty
  • Motoring Tax
  • HGV Road Tax

Trying to get your head around the UK tax system? Save this handy blog post to refer to in the future!