“In this world, nothing is certain except death and taxes” Benjamin Franklin
What are the different types of taxes?
Tax is super complicated and there are many different types of taxes, to list a few:
Income tax: tax that you pay on the money you earn
Property tax: This is often called stamp duty and is how much tax you pay when you purchase a property, the amount depends of the sales price and whether it is your primary residence, a second home or rental property.
Capital gains tax: This is a tax applied on the growth you have got from certain assets. For example, if you bought a business for £10,000, grew the business and then sold it for £25,000 you would pay capital gains tax on the £15,000 growth.
Inheritance tax: This is tax paid on a person’s assets that are above the tax-free threshold when they die (£325,000 in the UK). There are ways to minimise this, for example if you are married then your partner can inherit all their assets tax free.
Value Added tax (VAT): A tax applied to almost all goods and services at the point of sale. In the UK the standard rate is 20%, the reduced rate is 5% (for example for a baby car seat) and there is a 0% rate (for example food, children’s clothes)
Corporation tax: This is tax businesses pay on their profits and is currently 19% in the UK.
Council tax: Collected by local government to manage services in your local area, for example social housing, refuse collection and parking.
There are different rates for the different types of tax. There is also often an initial tax-free allowance, for example the first £1,000 of profit you make while self-employed is tax free. How much tax you pay is dependent on your personal circumstances.
What about National Insurance?
Often when individuals talk about tax, they use it to refer to National Insurance too. You will pay this if you are working, and so will your employer.
How much tax and national insurance do I pay on my income?
The tax year follows the financial year, which runs from April 5th to April 6th. The amount of tax and national insurance you pay is marginal. This means you pay progressive rates, and the proportion of income tax you pay relates to specific bands of income.
Almost all individuals have a personal allowance which they don’t pay tax on. For the tax year 2021/22 this is £12,570. If your income is over £125,000 then you do not have a personal allowance.
England, Wales and Northern Ireland have the same tax bands, whereas Scotland sets its own slightly different rates. For England, Wales and Northern Ireland the rates for 2021/22 are:
£0 – 12,570: 0%
£12,571 – 50,270: 20%
£50,271 – 150,000: 40%
£150,001+: 45%
For example, for 2021/22 tax year the first £37,700 above your tax-free personal allowance (£12,570) which is up to an income of £50,270 will be taxed at 20%. Then your income between the next bracket will be taxed at 40%. For example, if you earn £60,000 only the income above £50,270 will be taxed at 40%, so £9,730 will be taxed at 40%.
National insurance is paid based on your weekly earnings.
Employees pay: 12% for earnings between £184-967 per week, and 2% for £968+
Employers pay: 13.8% on earnings £171+ per week
How do I calculate my income tax?
For example, your annual income: £60,000
Take off your tax-free allowance of 12,570
This leaves you with total taxable income of: £47,430 (60,000-12,570)
The income that falls within the 20% tax bracket is between £12,571 – 50,270. This means you pay tax on 20% on the £37,699 (50,270-12,571), which is £7,540.
The income that falls within the 40% tax bracket is between £50,270 – 150,000. This means you pay tax on 40% of £9,730 (60,000 – 50,270), which is £3,888.
Total tax: £11,428
National Insurance: £5,079
Total deductions: £16,507 or 28%
Take home: £43,493 or 72%
Examples
These examples show only tax and national insurance. You may also have your pension contributions deducted from your salary, for example 10% and be paying off your student loan, which is also deducted from your salary at source.
There are useful online calculators that enable you to input your personal circumstances so you can check how much tax and national insurance you should pay. You can use this to check your payslip is correct. If you find inconsistencies you can speak with your employer or write to HMRC to ask for a tax rebate. You have four years to reclaim the tax.
How are taxes collected?
Taxes in the UK are managed by Her Majesty’s Revenue and Customs (HMRC). Each registered individual is given a National Insurance number.
If you are an employee then tax and national insurance is automatically deducted from your income by your employer using Pay As You Earn (PAYE).
If you are self employed then you are responsible for filing your own tax return through the government gateway website using the Self-Assessment tax return. You are responsible for filing on time (by 31st January online) and ensuring it is correct. You will need a unique tax reference (UTR) number.