Taxes

taxes

Taxes are both complicated and ever-present. Fortunately, concise information and instructions allows most Brits to file their own taxes without the costly addition of a tax expert.

Income tax

tax form As the name suggests, income tax is a tax on a person’s income. You are only taxed on income that is above a certain threshold, known as the personal allowance. If your income is below the personal allowance, you do not have to pay any income tax, but when your income surpasses this amount, your income is taxed according to how much above the personal allowance your income falls.

For 2018-2018 the personal allowance is as follows:

Born after 5 April 1948: £9,440.
Born between 6 April 1938 and 5 April 1948: £10,500.
Born before 6 April 1938: £10,660.

(These amounts reduce by £1 for every £2 of taxable income above £100,000)

What income is taxable?

Forms of taxable income include:

Employment earnings.
Self-employment earnings.
A majority of pension income.
Interest yielded from savings.
Dividend earnings.
Rental income.
Income derived from a trust.

What income is non-taxable?

Forms of non-taxable income include:

Benefits.
Income generated from tax exempt accounts.
The working tax credit (WTC).
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How much income tax should you pay?

Taxable Income	Rate of Tax
0 – £2,790	10% (starting rate for savings only)
0 – £32,010	20%
£32,011 – £150,000	40%
Over £150,000	45%

How income tax is paid

The majority of Brits pay income tax through the Pay As You Earn (PAYE) system. Your employer or pension provider automatically uses PAYE to take out income tax contributions before they pay your wage or into your pension. If you are self employed or have a high income, you can pay income tax by filling a tax return annually through the self assessment system. If you receive any savings and investment interest, income tax is typically automatically deducted.

For income that hasn’t been taxed, you should contact the HMRC for more information.

Capital gains tax

The capital gains tax is a tax on the profit or gain you derive from the sale or disposal of an asset. This includes: sales, gifts, transfers, exchanges, and compensation received from the activity of an asset, e.g. insurance payouts for the destruction of your asset.

What Assets Are Subject to the Capital Gains Tax?

The majority of assets are subject to the capital gains tax. For more detailed information, view the HMRC capital gains tax page.

Annual Tax-Free Allowance

Similar to the income tax personal allowance, if your overall gains for the tax year are above the annual exempt amount, you pay capital gains tax on the excess amount. If your overall gains are below, you do not pay capital gains tax. The annual exempt amount for 2018-2018 is as follows:

£10,900 for individuals.
£5,300 for most trustees.

Capital Gains Rate

For 2018-14, the following capital gains tax rates apply:

18% or 28% for individuals (depending on income level).
28% for trustees.
10% for gains qualifying for Entrepreneur’s Relief.

National insurance tax

You pay national insurance contributions to be entitled to certain state benefits, including the state pension.

You are required to pay national insurance if you meet the following conditions:

16 years of age or older.
Earning a salary above £149 a week.
Earnings a salary over £5,725 a year through self-employment.

Employees and employers pay contributions according to a complex classification system based on employment type and income. For further information, view the HMRC national insurance page.

Other taxes

While the income tax, capital gains tax, and national insurance tax constitute a large component of aggregate tax expenditure, there are other important taxes: the value added tax, the inheritance tax, and the council tax.

Value Added Tax (VAT)

The VAT is a tax on consumer expenditure that is charged on the majority of business transactions. Certain items qualify for the standard rate of 20%, while other items are only charged a 5% VAT rate or a zero-rate. Examples of items that may have their VAT reduced are:
- Domestic fuel and power.
- Children’s car seats.
Examples of items that may have a zero rate VAT:
- Food (meals in restaurants do not apply).
- Children’s clothing.
Inheritance Tax

Inheritance tax is a tax that is paid on an estate when somebody dies. It can sometimes also be levied on trusts or gifts made during a person’s lifetime. Often, inheritance tax is waived for estates that fall below the threshold, which is £325,000 in 2018-2018. The standard tax rate is 40% on the amount over the threshold. There is also a reduced rate of 36% charged to estates that have given a charitable donation.

For more detailed information on the inheritance tax, view the HMRC inheritance tax page.
Council Tax

The council tax is a taxation scheme in England, Scotland, and Wales that funds services provided by the local government. The tax is based on the value of your residential property.

For more detailed information on calculating your specific council tax, view the Gov.UK council tax page.