Taxes in the UK are an essential part of the country’s economy. They are used to fund public services such as healthcare, education, and infrastructure. Understanding taxes in the UK is crucial for individuals and businesses to ensure they comply with the law and pay the correct amount of tax.
Types of Taxes in the UK
There are several types of taxes in the UK, including:
Income tax is a tax on an individual’s earnings. It is calculated based on the amount of money earned in a tax year (6 April to 5 April the following year). The amount of income tax paid depends on the individual’s income and tax code.
- The basic rate of income tax is 20% for earnings between £12,571 and £50,270.
- The higher rate of income tax is 40% for earnings between £50,271 and £150,000.
- The additional rate of income tax is 45% for earnings over £150,000.
National Insurance Contributions
National Insurance contributions (NICs) are paid by employees and employers to fund state benefits such as the state pension and unemployment benefits. The amount of NICs paid depends on the individual’s earnings.
- Employees pay Class 1 NICs at a rate of 12% on earnings between £9,568 and £50,270, and 2% on earnings over £50,270.
- Employers pay Class 1 NICs at a rate of 13.8% on earnings over £170 per week.
Value Added Tax
Value Added Tax (VAT) is a tax on goods and services. It is charged at different rates depending on the type of goods or services being sold.
- The standard rate of VAT is 20%.
- Some goods and services are exempt from VAT, such as most food and children’s clothing.
- Some goods and services are zero-rated for VAT, such as books and newspapers.
Corporation tax is a tax on the profits of limited companies and other organisations. The current rate of corporation tax is 19%.
When and How to Pay Taxes in the UK
Individuals who are self-employed or have income from sources other than employment (such as rental income) must complete a self-assessment tax return each year. The deadline for submitting a self-assessment tax return is 31 January following the end of the tax year.
Pay As You Earn
Employers deduct income tax and NICs from their employees’ pay through the Pay As You Earn (PAYE) system. Employers must submit a report to HM Revenue and Customs (HMRC) each time they pay their employees.
Businesses registered for VAT must submit a VAT return to HMRC every three months. The VAT return shows the amount of VAT charged on sales and the amount of VAT paid on purchases.
Tax Credits and Allowances
There are several tax credits and allowances available to individuals and businesses in the UK.
The personal allowance is the amount of income an individual can earn before they start paying income tax. The current personal allowance is £12,570.
Married couples and civil partners can transfer some of their personal allowance to their spouse or partner if they earn less than the personal allowance. This can reduce the amount of income tax they pay.
Research and Development Tax Credits
Businesses that carry out research and development (R&D) may be eligible for R&D tax credits. These credits can reduce a company’s corporation tax bill or provide a cash payment.