UK TAX SYSTEM: EXPLAINED
The main authority in the British Tax system is denominated as HM Revenues & Customs (HMRC). They are responsible for collecting the money that pays the UK public services (such as NHS, education, and welfare system) and individuals and families with financial support. The current UK Tax Authority is a non-ministerial department, and it was established in 2005 by the Act of Parliament replacing Inland Revenue and Customs and Excise.
The basic taxes include:
- Income Taxes
- Property taxes
- Capital gains
- UK Inheritance taxes
- VAT tax
These taxes are subject to progressive taxes which means that those with higher incomes pay a higher rate of taxes.
An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Taxation rates may vary by type or characteristics of the taxpayer and the type of income.
The tax rate may increase as taxable income increases. The tax imposed on companies is usually known as corporate and is commonly charged at a flat rate.
However, you do not pay Income tax on all your taxable income due to the standard personal allowance.
What is PERSONAL ALLOWANCE?
Everybody including students to business owners has a personal allowance which is the amount of money you are allowed to earn each tax year before you pay Income Tax. The standard personal allowance stated by the HRMC is £12,570 which means that on this income you are exempt from paying taxes.
How much tax will I need to pay?
The table below shows the rates of Income Tax depending on your income band size:
Source: HRMC Income Tax https://www.gov.uk/income-tax-rates
National Insurance contributions on earnings paid by employees and employers to qualify for the following benefits:
- certain State benefits such as State Pension and Maternity Allowance.
The national insurance is charged if you are:
- Age 16 or over
- An employee earning above £184 a week
- Self-Employed and have a profit income of £6,151 annually.
How to obtain a National Insurance Number?
If you are living in the UK and have the right to work in the UK, you are eligible to apply for National Insurance Number (NIN). To obtain your National Insurance Number, you can either apply it online on the government website or by appointment in your nearest Job Centre.
It is important to have a National Insurance Number if you wish to live and work in the UK.
Property tax is imposed on property owned by individuals or other legal entities such as associations.
The following taxes can apply to you if you own property:
- Stamp Duty Land Tax
- Land Transaction Tax
- Capital Gains Tax
These taxes will depend on where you are buying or selling a property. For instance, Stamp Duty Land Tax is paid when buying a home in England while Land Transaction Tax is bought in Wales. In case, you wish to sell your property capital gains tax will be charged.
Stamp Duty Land Tax
The Stamp Duty Land Tax is a type of tax imposed by the UK government on purchasing land and properties with values over a certain threshold. This is charged by the competent HRMC authority, and it needs to be submitted within 14 days of the completion of a property purchase. On the other hand, if you buy a property in Wales you need to submit the Land Transaction Tax.
Capital Gains Tax
A capital gains tax is a tax on the profit realized on the sale of a non-inventory asset. The most common capital gains are realized from the sale of stocks, bonds, precious metals, real estate, and property.
What at you pay it on
You pay Capital Gains Tax on the gain when you sell (or “dispose of”):
- Most personal possessions worth £6,000 or more, apart from your car
- Property that is not your main home
- Shares that are not in an ISA or PEP
- Business assets
These are known as ‘chargeable assets.
What you do not pay it on
You do not pay Capital Gains Tax on certain assets, including any gains you make from:
- ISAs or PEPs
- UK government gilts and Premium Bonds
- Betting, lottery, or pools winnings
UK Inheritance taxes
Inheritance Tax is a tax on property, money, and possessions of someone who has passed away.
The standard Inheritance Tax rates are 40% and it is charged on the part of your estate that is above the threshold.
Value-added tax, or VAT, is the tax you must pay when you buy goods or services. The standard rate of VAT in the UK is 20% on most goods and services, reduced VAT tax is 5% on some goods and services such as children’s car seats and home energy, while the Zero (0%) VAT Tax applies to goods and services such as most food and children’s clothes.