Most individuals in the United Kingdom will directly or indirectly face various forms of taxation, including taxes on their worldwide income. This can also extend to foreign income for tax purposes, with the added risk of double taxation on rental income. From the widely known Income Tax and VAT to more specific ones such as Air Passenger Duty and Landfill Tax, it’s crucial to understand these taxes and how they apply to you.
This information is crucial, as during the 2011-2012 fiscal year, also known as the tax year, 21 different types of UK tax contributed a significant £437 billion in total tax revenue for the UK Government, including taxes specific to Northern Ireland.
With this comprehensive blog, we aim to elaborate on the various taxes that individuals living in the UK may be liable to pay, so let’s get started.
Why Are Taxes Important in the UK?
Understanding taxes, their calculation and their application isn’t merely about compliance with the law. It allows you to plan your financial affairs effectively, which can lead to significant savings over the long term. Whether you are earning a salary, running a business, investing in property, or even just buying a product or service, taxes will affect you.
Proper knowledge of taxes enables informed financial decisions, consequently increasing financial security and reducing potential stress. From the income tax that most people pay to less known ones, such as the climate change levies, the tax landscape could be complex, but comprehending it is undoubtedly advantageous.
What Are the Types of Tax in the UK?
Presently, there are more than twenty different types of taxes in the UK, each designed for income tax purposes to generate revenue from various sources while also fulfilling specific tax policy objectives. Below, we explore some of these taxes that individuals and businesses typically encounter, examining their purpose, how they are calculated, and current rates wherever applicable.
1. Income Tax
Income Tax, including the Scottish Income Tax administered by the Scottish Parliament, is a direct tax levied on the income or profits earned by individuals. It is applied to various sources of income such as salary, property income, business profits, pensions, and additional income sources, including savings income and dividend income.
However, this tax isn’t calculated on the entirety of an individual’s income, as different rates of income tax apply. The application for income tax starts after a certain amount of income is granted as a personal allowance, and a dividend allowance may also be considered for individuals receiving dividend income. The rate of tax depends on the applicable income tax band.
| Band of Taxable Income (£) | Income Tax Rate (%) |
| 0 – 37,700 | Basic Rate – 20 |
| 37,701 – 125,140 | Higher Rate – 40 |
| Over 125,140 | Additional Rate – 45 |
In Scotland and Wales, different bands apply, indicating regional variations within the UK tax system. Special rates may apply for savings and dividends income, again highlighting the complexity of the UK Income Tax system. Understanding these nuances can aid in better financial planning and decision-making.
2. National Insurance Contributions
It is not strictly a tax, but it is crucial to understand that national insurance contributions (NICs) are also based on a percentage of a person’s employment income and self-employed profits, with the national insurance number (NINO) being essential for identification. While some may argue that NICs function similarly to Income Tax, their purpose is different.
The funds from NICs are used to finance various state benefits, including statutory sick pay, maternity pay, unemployment benefits, and the state pension. For example, in September 2021, the UK government announced a new UK-wide “Health and Social Care Levy,” set to be introduced in April 2022, further diversifying the landscape of National Insurance Contributions.
3. Council Tax
Next is the council tax. Primarily financing local government expenditure, Council Tax is paid by those living in residential properties. Your council tax bill will be determined using the property value, with England having eight bands of Council Tax. Generally, the higher the value of your property, the higher the council tax band will be.
Reviewing your local council’s website to understand better the council tax rates and bands applicable to your location is essential. Ensuring you pay the correct amount is crucial, as incorrect calculations or miss-assessed property bands may lead to problems.
4. Inheritance Tax
Paid on the property, money, and possessions of someone who has passed away, Inheritance Tax (IHT) has a standard inheritance tax rate in the UK. However, this tax doesn’t apply to the entire value of a deceased person’s estate. An amount termed the “Nil Rate Band” exists under which no IHT is charged.
Typically, IHT is only applicable on the part of an estate that exceeds this prescribed band. Understanding the current threshold of the Nil Rate Band and how it might decrease through specific allowances for civil partners could save your estate considerable amounts of tax.
5. Capital Gains Tax
Derived from the sale of an asset that has increased in value since it was purchased, capital gains are profits subject to taxes known as capital gains tax (CGT). Assets that can attract CGT include shares, buy-to-let properties, second homes, or other investments. Notably, individuals who sell their permanent homes, including higher or additional rate taxpayers, are generally not subjected to capital gains tax, subject to specific rules enforced by HM Revenue and Customs (HMRC). This may, though, involve different rules based on the circumstances.
Moreover, gaining from selling a trade or shares in a trading company could qualify for Business Asset Disposal relief, potentially reducing your CGT outlay.
- For Individuals in 2024/25
- Exemption: £3,000
- Standard rate: 10%
- Higher rate: 20%
6. Corporation Tax
As a form of direct tax but applicable to companies, Corporation Tax is paid out of the corporate profits. While individuals have a Personal tax to exempt them from Income Tax up to a certain level, no such allowance exists for corporations.
Every pound of profit is taxable, and the amount of tax paid can vary depending on the tax rate and possible reliefs available, which can vary depending on the size of the profits and the company’s structure. This highlights how different aspects of the UK’s comprehensive tax system interact and how understanding one tax can often help in understanding another.
7. Value Added Tax (VAT)
An indirect tax influenced by consumption, Value Added Tax (VAT), applies to the purchase price of certain goods and services sold within the UK. The most commonly known rate is the standard rate, currently at 20%. However, reduced rates (5%) and zero-rating also exist for certain types of supplies.
Check the table below to get an idea of VAT rate:
| Categories | VAT Rate (%) |
| Standard Rate Products | 20 |
| Reduced Rate Products | 5 |
| Zero-Rated Products | 0 |
Whether you’re a business owner needing to comply with VAT rules or a consumer trying to plan your spending, understanding how VAT works and the rates applied to different products can enhance your financial planning.
8. Business Rates
Much like Council Tax for residential properties, commercial or non-domestic properties are liable to Business Rates. Local authorities collect these rates, helping finance local services. The valuation of the property determines the amount payable, with revaluations conducted periodically.
If you operate a business from a commercial property, familiarising yourself with your current rateable value and when your next revaluation occurs can be crucial in financial planning and management.
9. National Insurance Contributions for employers
Beyond the National Insurance Contributions (NICs) made by individuals, employers must also make additional contributions on behalf of their employees to maintain an accurate national insurance record. Known as “Secondary Class 1 contributions”, these payments are essential to the National Insurance system.
If you’re an employer, ensuring that you correctly calculate and pay your employer NICs should be a key part of your payroll processing. Doing so helps provide for state benefits and contributes to your employees’ entitlements.
If you’re an employer seeking help with payroll processing and management, you must connect with Direct Payroll. We provide the expertise and support you need to streamline your payroll operations. Get in touch with us today for reliable and efficient assistance, and ensure compliance with ease!
10. Excise Duties
Excise Duties are indirect taxes intended to discourage the consumption of certain products. These product types mainly include:
| Type of Product | Excise Duty |
| Alcohol | Yes |
| Tobacco | Yes |
| Gambling | Yes |
| Hydrocarbon Fuels | Yes |
Consumers often pay these duties as part of the retail price when purchasing such goods, thus contributing indirectly to public revenue.
11. Tobacco Duties
Alcohol isn’t the only vice subject to excise duties in the UK. Tobacco Duties apply to all tobacco products sold within the region, including cigarettes, cigars, and rolling tobacco.
Each product type attracts a different rate of duty. Anyone purchasing or importing these products will contribute toward these duties, indirectly funding public coffers.
12. Betting & Gaming Duties
The betting and gaming industry is another significant contributor to tax revenue through Betting & Gaming Duties.
Whether it’s sports betting, casino games, lotteries, or bingo, each form of gaming attracts its specific duty rate, attracting additional government revenue from these leisure activities.
13. Stamp Duty Land Tax
Applicable to real property purchases, Stamp Duty Land Tax is payable when a property or land exceeds a particular cost, which may include additional tax considerations. Depending on the value of the purchase and whether you are a first-time buyer or already own properties, the amount payable can significantly vary.
Ensuring that you have accurately worked out your potential Stamp Duty bill can be significant when budgeting for a property purchase.
14. Air Passenger Duty
Another lesser-known UK tax, Air Passenger Duty, is charged on commercial passenger flights taking off from UK airports. The rates vary based on the destination’s distance and the travel class.
Whilst commonly included in the airfare and thus often overlooked, understanding this duty gives a clearer picture of how unusual aspects of your everyday life contribute to the country’s public revenue.
15. Fuel Duty
Fuel Duty is an excise tax levied on fuel purchases in the UK. Petrol, diesel, biodiesel, and bioethanol have a set fuel duty rate; however, there are different rates for other fuel types.
While this duty often forms a substantial part of the price you pay at the pump, it also contributes to a significant portion of the government’s revenue.
16. Bank Payroll Tax
A one-off tax, Bank Payroll Tax, was applied to banks on the new compensation awards they made to their staff. This tab functioned between December 2009 and April 2010.
Although no longer in force, this tax is an excellent example of the government’s ability to introduce new duties when necessary.
17. Petroleum Revenue Tax
Oil and gas production companies operating on the UK’s continental shelf are subject to the Petroleum Revenue Tax. This tax is charged on the profits from the sale of oil and similarly derived substances.
Thus, energy industry majors significantly contribute to UK tax revenues through such specialised taxes.
18. Landfill Tax
Introduced as an environmental tax, Landfill Tax is charged based on the weight of waste disposed of in landfill sites. Both the nature of the waste and its weight contribute to shaping the taxation rate.
Although not directly paid by most individuals, its cost is often factored into the disposal costs charged by waste management providers.
19. Climate Change Levy
Introduced in 2001, the Climate Change Levy is an environmental tax levied on energy used by businesses. The idea behind this levy is to encourage energy efficiency and reduce greenhouse gas emissions.
Energy-intensive businesses can agree to meet targets for energy efficiency or carbon savings to have their levy partially or entirely lifted.
20. Aggregates Tax
Aggregates Levy, another environmental tax, intends to reduce the extraction of fresh aggregate – sand, gravel and rock usually crushed for use as building materials.
By factoring in the environmental costs connected to quarrying operations, it aims to encourage recycling and reduce the overall extraction of these raw materials.
21. Insurance Premium Tax
When you pay insurance premiums on most insurance policies, you also pay a further tax known as the Insurance Premium Tax (IPT).
This indirect tax is added to your base premium, and the insurance provider then passes this amount on to HM Revenue & Customs.
Conclusion
With more than 20 distinct taxes in the UK, navigating the complex web of names, rates, and rules can feel overwhelming. This guide aims to simplify the process by highlighting key taxes like Income Tax, Capital Gains Tax, especially the lower rate, and VAT, and how they directly impact your financial situation, especially in light of the rising cost of living.
From direct taxes that affect most earners to less visible ones like Fuel Duty, our goal is to help you understand these levies, their implications, and how to make informed financial decisions. Mastering tax strategy isn’t just for the experts—it’s essential for better financial health.
Frequently Asked Questions
How are taxes calculated for UK residents?
Taxes for UK residents are calculated based on income and can also be determined by the nature of goods and services. Direct taxes such as Income Tax are levied on income or assets, while indirect taxes like VAT are applied to goods and services sold, depending on the applicable tax regime.
What is a tax code, and how does it affect my taxable income?
Employers or pension providers use a tax code in the UK to determine the starting rate of Income Tax to deduct from your income or pension. There are various types of tax codes UK, and these codes reflect your tax-free allowance and can factor in other circumstances affecting this allowance.
How can I claim tax relief for work-related expenses?
You can claim tax relief if your job forces you to incur certain costs not reimbursed by your employer, which is especially important when considering your savings allowance. This can be done by either adjusting your tax code to reduce the Income Tax you pay directly or by submitting a claim to HMRC.
What is the difference between tax evasion and tax avoidance?
Tax evasion involves illegal methods to avoid paying due tax, while tax avoidance involves legally using the tax system to reduce the amount of payable tax. However, be aware of aggressive tax avoidance schemes that bend the law, which HMRC actively challenges.
Are there any online tools for calculating my UK taxes?
Numerous free online calculators can help you estimate your tax liabilities, including Income Tax, VAT, and Council Tax, as well as your tax return. HMRC also provides calculators for specific tax-related calculations. However, remember these are only estimates and consulting a tax professional is advised for accurate results.
