Did you know that on average, around a third of our earnings are frittered away on tax? Around 20% is taken via direct taxes such as income and National Insurance, and the rest is paid without even being noticed so much; with VAT built into the price of many goods and services we use. On top of that there are even indirect taxes to be paid, such as council tax and gains tax. Confused? The following guide will give you a basic breakdown of all the common types of tax we're faced with.
Income is paid on anything which generates revenue for you. This will include, but is not exclusive to, earnings, pensions, investments, and rent. Your taxable income will be less than the overall income you receive, as the first portion is tax free, depending on your 'personal allowance'.
You may be charged tax on employee 'perks' you receive, such as a company vehicle or private medical insurance.
National insurance is deducted from your income based on your salary or business profits. Paying National Insurance should mean that you will later qualify for state benefits such as the state pension, unemployment support and bereavement benefits.
Rates & Thresholds: Currently National Insurance contributions for employees (class 1) are 12% of earnings between £155 - £815 a week (£8,060 - £42,385 per year), and then a 2% rate is applied above this amount.
Self-employed: Class 2 contributions of £2.80 per week are due if annual profits exceed £5,965. Below this you can opt out of paying, but will not be credited with qualifying years for their entitlement to state pensions.
Additionally, class 4 contributions of 9% are due on profits between £8,060 - £42,385 are due, with a further 2% applied to profits above that.
VAT (Value Added Tax)
VAT is currently paid at a standard rate of 20% on most goods and services. This tax is built into the price so you often won't even notice it unless you have a bill or invoice which details a breakdown. However, currently no VAT is applied to books, and children's clothes/food. Fuel and power are taxed at a reduced rate of 5%.
If you’re buying a residential property of over £125,000, you will have to pay stamp duty. The basic rate is 2%, but it's actually tiered depending on the value of the property. The highest rate applicable is 12%, but that doesn't apply until a property reaches over £1.5m in value.
Excise duty is what is paid on petrol, tobacco, alcohol and air travel. The rate of the tax varies by category.
When you inherit money or assets, you may have to pay inheritance tax. This will depend on the value of the estate you've inherited, and how much of the personal tax allowance was used by the deceased. For more detailed information please refer to our dedicated guides to inheritance tax.
Capital Gains Tax
If you make a profit on any assets or investments you may be liable for capital gains tax. For standard rate taxpayers, capital gains are taxed at a standard rate of 18%. If you're on the 40% rate of income tax, the rate for capital gains rises to 28%. For more information see our guides to Capital Gains Tax.
Your council tax is banded and applied according to your property value. You pay council tax regardless of being a tenant or property owner, although you may be exempt if you are on a low income.
Insurance Premium Tax
Excluding life insurance policies, insurance premium tax is normally paid on insurance policies. There are two rates which might be applicable; 5% is the most common, but there may be a 17.5% rate applied in cases where insurance is sold with holidays and consumer goods.