Taxation and the different types of taxes in the UK

The UK has had the longest tax code in the world since 2009 so you’d be forgiven for presuming it’s highly complex, but in fact, the system is relatively straightforward. One aspect that makes UK tax especially interesting is that spouses are treated as separate entities and are therefore taxed as individuals, although there are a few exceptions.

When you pay your taxes in the UK, it can potentially involve making payments to at least three different levels of government: the central government (Her Majesty’s Revenue and Customs), devolved governments, and the local government.

The tax year is also sometimes referred to as the Fiscal Year and runs from April 6th until April 5th in the subsequent year.

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Here are the main types of taxes in the UK

There are six main types of taxes in the UK, which are:

Income Tax

This is the tax levied directly on personal income. The amount of income tax you pay depends on two things:

  • How much of your income is above your Personal Allowance
  • How much of your income falls within each tax band

Your taxable income is not the same as your total income since tax payers are allowed to earn a certain amount before they start to be taxed. This is known as a Personal Allowance, which stands at £11,500, meaning you only need to begin paying taxes once your income exceeds this amount. This table shows how much income tax you’re expected to pay depending on how much you earn.

You may be able to claim income tax reliefs, which mean you pay less income tax. The GOV.UK website has more information on claiming income tax reliefs.

National Insurance contributions

You pay this in order to qualify for certain benefits and State Pension. Anyone over 16, earning £157 or more each week, or is self-employed and has a profit of more than £6,025 a year is expected to pay National Insurance. There are different National Insurance classes meaning not everyone pays the same amount; your employment status and your earnings play a decisive role, as well as if you have any gaps in your National Insurance record.

Value Added Tax (VAT)

VAT is a consumption tax and is the third-largest source of government revenue after income tax and National Insurance. It is found on most goods and services, with the standard VAT rate being 20% since 4th January 2011 (previously 17.5%). In this category, you’ll find goods such as alcoholic drinks, chocolate, prams and pushchairs, and taxi fares. There’s a reduced rate of 5% levied on children’s car seats, electricity, gas, heating oil and solid fuel, and mobility aids for the elderly, among other things. The zero rated products include books, meat and poultry, fruit and vegetables, and household water, etc. There are other goods and services that are exempt from VAT or are outside the system.

Excise Duties

These are charged on things such as alcohol, tobacco, betting, and vehicles as well as the producer of these goods being charged. Excise duties are usually imposed in addition to an indirect tax such as VAT and in the UK, a separate tax form from the VAT one must be filled in. The excise tax is included in the final sale price of the product, meaning that the consumer pays indirectly.

Excise is used as a deterrent towards three broad categories of harm:

  • Health risks from abusing toxic substances e.g. tobacco or alcohol
  • Environmental damage e.g. fossil fuels
  • Socially damaging/morally objectionable activity e.g. gambling or soliciting

Corporation Tax

This is tax on company profit so you’ll have to pay if you’re doing business as:

  • A limited company
  • A foreign company with a UK branch or office
  • A club, co-operation, or other unincorporated association e.g. a sports club

From 1st April 2017, the normal rate of corporation tax is 19%, but this may fall to 17% in the next few years. Prior to this, corporation tax depended on the size of the business’ profits. This tax can be confusing as it must be paid before you file your company tax return, which leaves many businesses with two accounting periods, making it harder to keep an overview.

Stamp Duty

The Stamp Duty Land Tax (SDLT) has to be paid if you buy a property or land over a certain price in England, Wales, and Northern Ireland. Currently, the SDLT threshold is £125,000 for residential properties and £150,000 for non-residential land and properties. If you’re purchasing your first home, you could be entitled to a discount or even pay no tax at all if:

  • You complete your purchase on or after 22nd November 2017
  • The purchase price is £500,000 or less
  • You, or anyone you’re buying with, is a first-time buyer

For those in Scotland, the SDLT no longer applies. In its place in the Land and Building Transaction Tax, which you pay when purchasing a property.

What happens if you don’t file your taxes correctly?

HMRC doesn’t need to know about income that you’ve already paid tax on, but if you earned other taxable income, you have to declare it in a Self Assessment tax return. This income may come from selling property, renting out property, or any work you’ve done for yourself such as selling goods online. If it exceeds your Personal Allowance amount, you must pay tax on it.

If you receive a Tax Return, you must return it otherwise you will be fined and the HMRC may end up issuing you with an estimated tax bill ('determination'). This bill will stand until you send in the completed Tax Return. Late filing will result in a penalty even if no tax is owed. In exceptional circumstances, a higher penalty could end up being the same amount as the tax you owe.

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