“What taxes do I need to pay?”
A question most of us will probably ask on multiple occasions throughout our lives. This is more than understandable, given the wide range of taxes that are payable by UK individuals throughout their lifetimes.
That’s why we have decided to put some of the common (and some less common) UK taxes into one comprehensive reference guide.
- Personal Direct Taxes
- Income Tax
- Capital Gains Tax
- National Insurance Contributions (NICs)
- Inheritance Tax (IHT)
- Indirect Taxes & Duties
- Value Added Tax (VAT)
- Insurance Premium Tax
- Excise Duties
- Stamp Duty & Property/Land Taxes
- Taxes for Businesspeople
- Income Tax for Sole Traders
- Taxes on Dividends
- Capital Gains Tax on Business Sale
- Other Taxes
- Council Tax
- Tax on Vehicles
Personal Direct Taxes
Direct taxes are levied on people or properties, and are usually based on income, profits, and assets. Income tax, National Insurance Contributions and Capital Gains Tax are three of the most common types of direct tax. Corporation tax is another type of direct tax, but is paid by a company, not an individual.
One of the most widely known about taxes is Income Tax, which is a direct tax paid on income or profits earned by individuals. While most commonly paid on salary-based income, it is also payable from property income, business profits pensions, and income from additional sources.
Income Tax is subject to a Personal Allowance, which is the maximum amount an individual can earn before paying income tax.
Capital Gains Tax
Capital gains are profits which are derived from the sale of an asset that has increased in value since it was purchased. Common examples of assets subject to CGT are shares, buy-to-let properties, second homes or other investments.
Capital gains tax is generally not payable by individuals who sell their homes, subject to some specific HMRC rules.
If you sell a trade, or shares in a trading company, your gains may qualify for Business Asset Disposal relief such that you will pay a reduced rate of CGT.
National Insurance Contributions (NICs)
Although not strictly a tax, similar to income tax, National Insurance Contributions (NICs) are based on a percentage of a person’s employment income and self-employed profits. NICs are used to fund various state benefits, including statutory sick pay, maternity pay, unemployment benefits and the state pension.
In September 2021, the UK government announced a new UK wide “health and social care levy”, which will be introduced from April 2022. Read our summary article for more information.
Inheritance Tax (IHT)
Inheritance Tax is a tax paid on the property, money, and possessions of someone who has passed away. There is a standard rate of Inheritance Tax in the UK, but this is not payable on the full value of the person’s estate as there is a Nil Rate Band available.
Estates valued at less than this amount will not be subject to IHT. It is only charged on the part of an estate that is above the Nil Rate Band. There are also several exemptions and reliefs from IHT, which you can read about on the Shorts Financial Services blog.
Indirect Taxes & Duties
Indirect taxes are generally levied on goods and services, not people. Most people pay these taxes without knowing it, as it will often be included in the price they pay. For example, when you buy alcoholic beverages, you are also paying alcohol duty and VAT; similarly, when you buy items from shops, you will often also be paying VAT (for the goods to which it applies).
Value Added Tax (VAT)
VAT is a tax that is applied to the purchase price of certain goods, services and other taxable supplies that are sold within the UK.
We have written an in-depth blog on all things VAT, including VAT advice for businesses, how to calculate VAT and how to check a company is VAT registered.
Insurance Premium Tax
Insurance Premium Tax (IPT), like VAT, is a type of indirect tax which is levied on most UK insurance premiums. This is paid by customers in addition to their basic premium; the insurance provider then passes the IPT on to HMRC.
Other indirect taxes that many people will encounter throughout their lives are a series of four excise duties, intended to discourage the over-consumption of certain products. These main product types are:
- Alcohol: There are a wide range of different duties which apply to different alcoholic beverage types – for the full list, visit the UK Government website.
- Tobacco: There are different rates of duty for different tobacco products, including cigarettes, cigars and rolling tobacco.
- Gambling: This covers, online gaming, lotteries, bingo, machine games, and more gambling activities. See the full list here.
- Hydrocarbon fuels: Most people will encounter this when fuelling their vehicles, but it also applies to heavy oils, biofuels, road fuel gases and more.
Stamp Duty and Property/Land Taxes
Stamp Duty Land Tax is paid when a property or land is bought over a certain price.
First time buyers purchasing a property valued at less than a set amount will also be eligible for a Stamp Duty discount, with many paying none at all.
You can use the UK Government’s Stamp Duty calculator to find out how much Stamp Duty you would need to pay on a property purchase.
Stamp Duty is a tax paid on the purchase of shares, above a 'de minimis' threshold.
Taxes for Businesspeople
The taxes listed so far are the most common that most individuals in the UK are likely to encounter; for businesspeople there are specific applications of some of the above taxes.
Income Tax for Sole Traders
A sole trader who runs their own business is categorised by HMRC as self-employed; this means they will need to pay Income Tax. For sole traders, Income Tax is paid on profits, not all income. A sole trader will also need to pay Class 2 and Class 4 National Insurance and will need to register to pay VAT if their turnover exceeds a set figure.
Sole traders will pay Income Tax by way of Self-Assessment.
Taxes on Dividends
Individuals who own shares in a company may receive dividends. Where it is the individual’s own company, extraction of profits via dividends is generally more tax efficient than receiving a salary.
Dividends are subject to Income Tax, at different rates to other forms of income, but they can still make use of the personal allowance.
Following the UK government’s announcement of a new Health & Social Care Levy in September 2021, there will be a 1.25% increase in dividend tax from April 2022.
For full info on dividend taxes, visit the UK government website, or speak to one of our tax team for qualified advice.
Capital Gains Tax on Business Sale
Capital gains tax, which we have already mentioned, is also payable by businesspeople who choose to sell part of their unincorporated business or shares in their own company at a profit.
Local government is largely funded by Council Tax, which is paid by those living in residential property.
The amount of council tax paid is determined using the property value. In England, there are 8 bands of Council Tax. As a general rule, the greater the value of your property, the higher the council tax band will be. We encourage you to check your local council website for more information on the Council Tax bands in your area.
Tax on Vehicles
Vehicle owners will need to pay one of a variety of taxes based on the type of vehicle that they drive, as well as its CO2 emissions. This is separate and additional tax to fuel duty.
Vehicle tax rates can be quite confusing, with several different bands across different vehicle types. Some vehicles, specifically those with zero emissions and some low emission vehicles registered between 1 March 2001 and 31st March 2017, will not have to pay any vehicle tax (however, they will still need to be “taxed” annually).
Lower emitting cars, depending on fuel type, are generally taxed lower; vehicle tax gets considerably higher for cars with higher emissions.
Different vehicle tax rates apply for vans, motorcycles, and other types. A full list of all vehicle tax bands can be found on the UK Government website.
Navigating a lifetime of taxes
This article has covered the most commonly encountered taxes for individuals living in the UK; however, the tax system is broad and complex, and there may be other taxes that you are liable for.
Navigating taxes is not easy, and many people, particularly for those who own shares in a company.
Qualified tax advice is a useful way to ensure your taxes are planned effectively, and helps people ensure they capitalise on any tax opportunities available to them.
If you have concerns about your tax liabilities, feel you are paying too much, or are otherwise interested in more efficient tax planning, get in touch with our team today or download our 2021/22 Tax Saving Guide.