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.
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 2015-2018 the personal allowance is as follows:
(These amounts reduce by £1 for every £2 of taxable income above £100,000)
Forms of taxable income include:
Forms of non-taxable income include:
|Taxable Income||Rate of Tax|
|0 – £2,790||10% (starting rate for savings only)|
|0 – £32,010||20%|
|£32,011 – £150,000||40%|
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.
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.
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:
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.
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).
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 2015-2018. 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.
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.