Introduction to Tax
If you hate paying tax, you're not alone! As if it weren't enough that the Government taxes us in many ways throughout our lives, it also taxes us when we die...
However, without taxes the Government couldn't provide pensions, healthcare, education, defence and the many other services required to run the country. Because of this,
taxes will never go away, but with a bit of effort you could reduce the amount of tax you pay.
Taxes are collected by Her Majesty's Revenue & Customs (HMRC), formerly called the Inland Revenue.
The tax year
In the UK tax and government spending operates on what's called a 'fiscal' year, often referred to as tax year. This runs from 6 April to 5 April the following year.
| Current Tax Year | Runs Between |
|---|
| 2023/24 | 6 April 2023 and 5 April 2024 |
Types of tax
Income tax
As the name suggests, this is a tax on the income we receive from employment savings and investments. We each have an income 'Personal Allowance' up to which no tax is payable, but beyond that tax must be paid.
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National Insurance
Is paid by both employers and employees on weekly earnings, while the self-employed must pay based on their profits. The tax is used to fund unemployment, maternity, disability and retirement benefits, notably the State Pension.
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Value Added Tax (VAT)
VAT is a type of sales tax, meaning it is added to many of the items we buy. The standard rate of VAT in the UK is currently 20.0%.
Businesses (including the self-employed) only need to charge VAT if their turnover exceeds a specific limit, currently £85,000, requiring them to become VAT registered.
This means they must add VAT to the goods/services they sell. However, they can offset VAT they might have to pay in order to provide those goods/services, which effectively prevents double-charging.
There are three different rates of VAT that apply to different goods and services:
| Figures show current UK VAT bands & rates |
| VAT Band |
Rate |
Notes |
| Zero Rate |
0% |
Items include books, newspapers, magazines, children's clothing and footwear, residential property and most foods (excluding chocolate, crisps and ice-cream!). |
| Reduced Rate |
5.0% |
Items include electricity and gas for residential use, home energy saving materials, children's car seats and sanitary towels |
| Standard Rate |
20.0% |
Rate covers pretty much everything else. |
Corporation Tax
Is the equivalent of income tax for companies and is paid on the profits they make. Corporation tax rates vary depending on the size of a company's profits, becoming higher as profits grow.
Excise Duties
These are additional taxes that the Government levies on some items, usually those that you either enjoy or can't do without! Examples include duties on tobacco, alcohol, gambling and air travel.
These duties are in addition to VAT, which is why petrol, alcohol and cigarettes are so expensive in the UK compared to countries that have lower or even no duties.
When you travel abroad and buy items 'duty-free' the prices do not include UK excise duty or VAT, so they should be far lower than usual.
| Figures show current UK excise duties |
| Item |
Duty |
Notes |
| Beer |
£0.43 |
per pint 4% ABV |
| Wine |
£2.23 |
per 75cl bottle 5.5% - 15% ABV |
| Spirits |
£7.54 |
per 70cl bottle 37.5% ABV |
| Champagne |
£2.86 |
per 75cl bottle 8.5% - 15% ABV |
| Cider |
£0.23 |
per pint 1.2% - 5.5% ABV |
| Alcopops |
£0.43 |
per 275ml bottle 5% ABV |
| Cigarettes |
£8.59 |
per pack of 20, selling at £10 |
| Petrol |
£0.58 |
per litre |
| Diesel |
£0.58 |
per litre |
| LPG |
£0.32 |
per litre |
Council Tax
Is a local tax collected by local authorities to help fund their spending on services such as waste collection, policing and education. The level of tax depends on the
'band' your property is deemed to be in, based on it's value as at 1 April 1991.
Council tax varies widely between local authorities, with some charging significantly more than others. If you live alone you can apply for a 25% discount.
The council tax bands, based a property's assessed value on 1 April 1991, are shown below. If you believe your home is in too high a band (either you feel it was
incorrectly valued in the first place or its value relative to others in the area has fallen since 1991, e.g. a new bypass passes your front door) you can challenge this
with your local authority.
However, you need to be careful when making a challenge, as the local authority could decide that your band is too low and actually increase your council tax bill.
| Figures show Council Tax Bands |
| Band |
England 1991 Property Value |
Scotland 1991 Property Value |
| A |
Under £40,000 |
Under £27,000 |
| B |
£40,001 to £52,000 |
£27,001 to £35,000 |
| C |
£52,001 to £68,000 |
£35,001 to £45,000 |
| D |
£68,001 to £88,000 |
£45,001 to £58,000 |
| E |
£88,001 to £120,000 |
£58,001 to £80,000 |
| F |
£120,001 to £160,000 |
£80,001 to £106,000 |
| G |
£160,001 to £320,000 |
£106,001 to £212,000 |
| H |
over £320,000 |
over £212,000 |
Capital gains tax
Capital gains tax is charged on profits made from investments, e.g. shares, property (other than your main home), art, antiques and cars. There is an annual allowance, currently £6,000, below which gains are not taxed.
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Inheritance Tax
Is a tax on all your possessions, referred to as your 'estate', when you die. There is an allowance (called a 'nil rate band') below which no tax is payable, but soaring house prices have pushed many over this allowance.
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Stamp Duty
Originally introduced as a tax on documents that required an official 'stamp' to become valid. While a physical stamp is no longer required, the tax remains on buying property and shares.
When you buy shares (including unit trusts and options to buy shares) stamp duty is charged at a rate of 0.5% based on the amount you
pay for them.
Shares purchased via a paperless transaction (most are) will have the tax added to the price paid for the shares and sent directly to HMRC. If you buy a unit trust the
stamp duty will be included in the price you pay for units.
Stamp duty on land and property (called Stamp Duty Land Tax - 'SDLT') is based on the amount you pay for the land/property. Buyers are responsible for ensuring HMRC
receives the tax, although in practice it's usually handled by a solicitor/conveyancer.
| Figures show current rates of UK Stamp Duty Land Tax |
| Property Price |
Stamp Duty |
| the first £250,000 |
0% |
| amount between £250,001 to £925,000 |
5% |
| amount between £925,001 to £1,500,000 |
10% |
| amount above £1,500,000 |
12% |
How is tax collected?
With the exception of sales type taxes such as VAT and stamp/excise duties, and ad-hoc taxes such as inheritance tax, tax is collected on an ongoing basis as follows:
Pay As You Earn (PAYE)Self Assessment
If you are an employee then income tax and national insurance will be automatically deducted from your wages by your employer via a scheme called 'Pay As You Earn'
(PAYE).
If you are self-employed, and/or receive untaxed income from other sources (not covered by PAYE) such as freelance work or property rental income, then you must
declare and pay tax yourself via a system called 'Self Assessment'.
Under self assessment you normally need to complete an annual tax return, declaring all your income and calculating how much tax you owe.
HMRC must receive paper tax returns by 31 October following the end of the tax year (i.e. 5 April) that the return covers. HMRC will then, if you wish, carry out the
tax calculations for you.
Alternatively you can complete your tax return online, which which automatically calculate your bill. You must complete your online return by 31 January in the year
following the end of the tax year that the return covers.
If you fail to submit a completed tax return on time you'll be slapped with a £100 fine plus interest on any tax owed.
If you're self-employed, you normally pay your tax in three stages:
- a first payment on account by 31 January during the tax year - this is normally half your previous year's tax bill
- a second payment on account - which is the same amount as the first instalment - by 31 July after the end of the tax year
- a final balancing payment (or repayment) by the next 31 January - this is the bill calculated on the actual income returned for the tax year less the payments you
have made on account
Do I need to complete a tax return?
If you are an employee, have no other sources of income and pay tax through PAYE then probably not. If you fall into one or more of the categories below then very
likely yes:
- Self employed
- Company director
- Minister of religion
- Receipt of rental income from land or property
- Receipt of untaxed income which cannot be handled via PAYE
- Receipt of foreign taxable income
- Receipt of income from a trust
- Annual income of £100,000 or more
- Annual gross income from savings/investments of £10,000 or more
- Claim against tax for expenses or professional subscriptions of £2,500 or more
- Owe tax at the end of the tax year that cannot be collected via PAYE the following year
- Selling shares or other investments at a profit
You can find out more on the HMRC website.
Tax Jargon
Here's some of the more common tax jargon you might come across:
| Accumulation and Maintenance Trust | A special type of discretionary trust designed specifically for children and grandchildren. Often used to pay for education costs. |
| Age-Related Allowance | An increased personal allowance available to those aged 65 and over. Increases again at 75. |
| Annual Allowance | The amount of gains you can make each tax year before tax is due. |
| Basic Rate Tax | The tax rate payable on income above the personal allowance but below the higher rate tax threshold. |
| Blind Person's Allowance | An additional personal allowance for those suffering from blindness. |
| Class 1 | Compulsory National Insurance contributions paid by employees and employers. |
| Class 2 | Complusory National Insurance contributions paid by the self-employed at a flat weekly rate. |
| Class 3 | Voluntary National Insurance contributions paid by those with gaps in their contribution history. |
| Class 4 | Compulsory National Insurance contributions paid by the sef-employed on their profits. |
| Discretionary Trusts | A trust that allows the people who look after the assets (trustees) to pick and choose how to allocate income to beneficiaries. |
| Double Taxation Treaty | Agreement between HMRC and an overseas equivalent to avoid you paying income tax twice on overseas earnings. |
| Higher Rate Tax | The tax rate payable on income above the higher rate tax threshold. |
| Income Tax | A tax on most types of income you might receive. |
| Indexation Allowance | An allowance that lets you increase the purchase cost of an asset by inflation. Indexation stopped in April 1998 and has not applied to the sale of assets since April 2008. |
| Interest In Possession Trust | A trust that allows assets to pass to dependants while paying an income to someone else. |
| Intestate | The name given to dying without making a Will. Can complicate and delay the subsequent passing of your estate to beneficiaries. |
| National Insurance | A type of tax that is intended to fund social benefits, primarily the state pension and unemployment benefit. |
| Nil Rate Band | An allowance, offset against the value of your estate when you die, below which no inheritance tax is payable. |
| Non-Taxable Benefits | Non-cash benefits received from your employer that are not subject to tax, e.g. childcare vouchers. |
| P11D | The form your employer uses to inform HMRC of any taxable benefits you receive. |
| Paying Stamp | A phrase used by some people that refers to paying National Insurance (prior to PAYE it was necessary to purchase 'stamps'). |
| Personal Allowance | The amount of income you can receive each tax year before you must pay income tax. |
| Potentially Exempt Transfer | A PET is a gift that remains subject to inheritance tax if you die within seven years. |
| Probate | The process where inheritance tax is deducted from an estate before it's distributed to the beneficiaries. |
| Taper Relief | A reducing scale of inheritance tax that applies to potentially exempt transfers over seven years after the gift is made. |
| Tax Year | The financial year over which UK taxes and associated allowances are calculated and paid. Runs from 6 April to 5 April the following year. |
| Taxable Benefits | Non-cash benefits received from your employer that are subject to tax, e.g. company car. |