Tax Definition
Although the UK system is complex, its unavoidable and the country depends on the services it pays for.
The most well-known UK taxes include income tax, property tax, capital gains tax, and Value Added Tax (VAT). Most of these taxes are calculated based on an individual’s ability to pay. The more you earn, the higher the rate of tax you pay.
The UK tax system applies throughout the UK, although Scotland has a few difference as a result of their unique legal system). All individuals are subject to the same tax rate irrespective of their residency status. Although, residency status does determine what sources of income are to be included in your taxes.
The UK tax year dates are set from 6th April of one calendar year to 5th April of the subsequent year.
>> You may also be interested in our Revenue definition article.
Where does tax-payers money go?
UK tax tends to be paid to either central government (Her Majesty's Revenue and Customs) or local government.
In the fiscal year 2017–18, total government revenue was £756.2 billion, with 94.2% being collected by central government and just 5.8% by local authorities.
In the same fiscal year, total UK public spending was £800.4 billion.
Source: ukpublicspending.co.uk
What taxes are paid to central government?
This is not an exhaustive list taxes but here is a brief overview of some of the most common types of taxes applicable to UK residents.
Income tax
Income tax is paid on the money you earn and is a form of progressive tax. The standard Personal Allowance is £11,850*, which is the amount you can earn before you pay tax. The amount of income tax you pay depends on how much you make above your Personal Allowance and how much of your income is within each tax band (see below).
Band
Taxable income*
Tax rate*
Personal Allowance
Up to £11,850
0%
Basic rate
£11,851 - £46,350
20%
Higher rate
£46,351 - £150,000
40%
Additional rate
Over £150,000
45%
A Personal Allowance doesn’t apply on taxable income over £123,700\*.
National Insurance contributions
You pay National Insurance contributions to qualify for certain benefits such as job seekers and maternity allowance, and the State Pension. This is another form of progressive taxation.
If you’re aged 16 or over you pay National Insurance if:
- You’re an employee earning more than £162 a week; or
- You’re self-employed and making a profit of £6,205 or more a year
There type, or class, of National Insurance you pay, depends on your employment status and how much you earn.
Value Added Tax (VAT)
VAT (also referred to as commercial or sales tax) applies to almost all goods and services.
The current VAT tax rates are:
Rate
% of VAT
What the rate applies to
Standard
20%
Most goods and services
Reduced rate
5%
Some goods and services, e.g. safety equipment
Zero
0%
Zero-rated goods and services, e.g. prescriptions
If you’re a business owner, then you must register for VAT with the HMRC when your business reaches a certain threshold. This threshold is currently set at a VAT taxable turnover more than £85,000\*.
From your date of registration, you must charge VAT on all your relevant sales, reclaim VAT where you have been charged it on your purchases, pay any VAT due to HMRC and submit VAT returns.
You can decide to register voluntarily even if your business doesn’t reach the threshold unless everything you sell is exempt.
Corporation tax
Corporation tax is paid by limited companies on the taxable profits they’ve made.
Corporation tax is the equivalent of income tax for companies without the Personal Allowance. This means that as soon as your business starts making a profit, it needs to start paying corporation tax.
The corporation tax rate for company profits is 19%* which is a standardised rate for all businesses. This has changed from how the tax was previously calculated based on how much profit was made.
The level of corporation tax is expected to reduce in future years as the current Government have committed to keeping corporation tax low.
Stamp Duty Land Tax (SDLT)
When you buy a property over a certain threshold in England and Northern Ireland (Wales and Scotland apply a similar tax) you must pay a Stamp Duty Land Tax (SDLT). The current threshold is £125,000* for residential properties and £150,000* for non-residential properties.
The amount you pay depends on your circumstances, and you may be able to claim relief. So, if you’re a first-time buyer or purchasing more than one property, you may be able to reduce the amount of tax you pay.
You must send your SDLT return to HMRC and pay the tax within 30 days of completing your property sale.
Capital gains tax
Capital gains tax is a tax on the profit you make when you sell something. You pay tax on the profit made when selling assets (over £6,000 excluding your car) such as a business, shares, an heirloom or a property, rather than on the money you receive.
Capital gains tax is combined with your other taxable income. The total of all your income from a variety of sources establishes which tax band applies for the tax year. If your gains all come under your tax-free allowance, then capital gains tax does not apply. The current capital gains tax-free allowance is £11,700*.
Some assets are exempt from capital gains tax. These include gains from ISAs or PEPs, Premium Bonds and betting or lottery winnings. Any gifts bought for your husband, wife or civil partner and charity donations tend to be free from capital gains tax too.
Inheritance tax
This is a one-off payment paid on the value of a deceased’s estate if above a set threshold, which is currently £325,000*. Any amount higher than this is taxed at 40%.
There are ways that you can reduce your inheritance tax liability. You can:
- Leave more than 10% of your inheritance to charity. This lowers the rate of tax from 40% to 36%.
- Leave your entire estate to your husband, wife or civil partner.
- Leave your estate to your children or grandchildren which increases the threshold from £325,000 to £450,000.
You can also choose to gift your assets to your partner before you die. If you make the gift more than seven years before you die, they will not have to pay inheritance tax on the money, properties or possessions you have left them.
Fuel duty
Fuel duty is included in the price you pay for your fuel. Whether it’s petrol, diesel or any other type of fuel, the rate of duty will depend on the type of fuel and how it intends to be used.
What taxes are paid to local government?
Council tax and business rates make up local authorities' most significant source of income. Central government has a considerable amount of control over both council tax and business rates in England and Wales and establishes the policy framework in which both operate.
Council tax
A council tax is set by each local authority and provides funding to support their budget.
Council tax is charged on residential properties, which are categorised into valuation bands to determine the level of tax charged. You’ll need to pay council tax if you’re over the age of 18 and own or rent a home.
As a full council tax bill is based on two adults living together, you can claim for a 25% discount if you live on your own or are the only adult in your home.
Some individuals are not considered an adult from a council tax perspective. These include those in full-time education, people on certain apprenticeship schemes, individuals with a severe mental impairment and live-in carers.
If you own a property and rent it out, you can apply for a 50% discount if no one living there is classed as an adult, e.g. a student let. Your council can decide to apply a discount if the property is empty too.
Business rates
Business rates are calculated based on the ‘rateable value’ of a property. This is its market rental value as estimated by the Valuation Office Agency (VOA). This is the same national body that provides the property valuations for council tax too.
Once the ‘rateable value’ has been decided upon, you can work out your business rates by multiplying this amount by a ‘multiplier’. The ‘multiplier’ is set by central government which is different depending on whether your ‘rateable value’ is above or below £51,000*.
Properties with a rateable value of £12,000 or less are exempt from business rates and those up to £15,000 are eligible for small business rates relief. There are other tax deductions and exemptions, including an 80% discount for properties used by charities.
* All figures are based on the tax year 6th April 2018 to 5th April 2019.