Editorial Director at Quidable
It is a common adage that only death and taxes are two painful inevitabilities in life. Certainly, the latter seems to benefit us back under good governance.
Taxes are used primarily to raise the revenue for the government’s budget. It also allows for some form of redistribution of wealth and income.
Taxes are also used to encourage a better lifestyle by putting higher taxes on specific products that have been proven to have adverse effects either on us directly or on the environment we live in; however, the tax system changes per country or continent concerning the laws and policies governing the territory.
If you’ve just moved to the UK and do not know how to go about taxes, read on up ahead as we discuss several important points to better understand the system (and perhaps, even find ways to make paying taxes a bit more bearable budget-friendly for you).
The UK Tax System
Her Majesty’s Revenue and Customs (HMRC) is the main body responsible for the tax system throughout the entire United Kingdom. They require any tax-paying individual or group to initially have a national insurance number before actually allowing them to pay their taxes.
Since the exit from the EU, this fiscal system also applies to the citizens of the European Economic Area (EEA). Additionally, the former Tier 2 visa, now called the Skilled Worker Visa, is also a requirement along with the national insurance number.
A major difference in the UK tax system is that married couples are still taxed as two separate individuals, albeit there are a few exceptions.
The taxes in the UK are standardized–this means that everyone pays the same thing–however, residency status can create differences in tax returns. You may read up on how to go about tax returns online as materials are also easily accessible.
There are three main government bodies that collect these taxes:
- Central government (HMRC)
- Devolved governments
- Local government
Each of these three bodies works specifically per the type of tax collected.
Types of Taxes in the UK
A thorough discussion on the breakdown of taxes in the UK is available online, but we will be discussing the most common ones today. There are generally six main types of taxes in the UK. Below are the details of each of them:
This is the tax directed towards personal income, which depends on the amount you exceed your Personal Allowance and where that amount falls under the designated tax band.
Because of the Personal Allowance, this means that you’re not taxed for the total income you earn but only in the amount that goes beyond the designated Personal Allowance. The income tax is a 20% basic rate.
National Insurance Contribution
This type of income tax is similar to a pension. Anyone over 16 years of age, earning as an employee or self-employed, must pay contributions towards national insurance.
The amount to be paid differs this time depending on the nature of employment and your track record of consistently delivering your contributions.
This is also known as Value Added Tax (VAT) which is now at 20%. This is commonly found in goods and services.
However, VAT for children’s essentials and basic utilities has been discounted by 5% less. Certain essential items, such as vegetables, fruits, books, household water, and meat, are exempted from this tax.
Since taxes are also used to promote a better, healthier life for everyone, certain products that are proven to be health risks are taxed. This is what excise duties cover.
This is an added tax to what the product’s VAT already has. Products that have excise duties include alcohol, tobacco, legal gambling or betting, and vehicles.
This is tax paid by companies who are making a profit. This includes local companies, foreign companies who have branched out in the UK, and clubs or co-operatives.
The rate is within 17-19% depending on the size of the group. This, however, is a bit more challenging as it is paid prior to filing tax returns, thus requiring companies to have two accounting calendars to check.
This tax is short for Stamp Duty Land Tax (SDLT) which is to be paid upon buying houses or becoming shareholders.
However, for first-time buyers, certain conditions allow for tax exemption.
Possibilities of Paying Less Tax
Because of the wide range of tax coverage that the UK system has, it can be worrisome to consider every aspect. You can still maximize your income and look into possibilities of paying less tax through certain exemption conditions.
Consider these brief steps to learn how to reduce the number of payable taxes:
- Be religious about paying your pension as it can qualify you for fewer taxes
- Double-check your tax codes to ensure you’re in the right bracket
- Opening an Individual Savings Account (ISA) that gains interest, tax-free
- Look into Child-Tax Credit if you’re a parent/guardian of children below 16, so long as you fall under the two-children policy
- Avail of the marriage allowance, which works much like a tax credit
- Claim your Personal Allowance
- Donate to a charity and then claim your tax relief
- Sell your assets if they’re not of much use to you anymore so that you can claim your Capital Gains Tax (CGT) rights
- Switch to a fully electric car, which exempts you from road taxes
Though taxes are generally worrisome, understanding the UK’s comprehensive system (and, more importantly, why and where these taxes go) will enable you to better budget your income. Researching through the many possible exemptions can also aid you in settling into the UK.
George Relish is the Editorial Director at Quidable. Before starting his work at Quidable, he was a bank auditor for more than 5 years. He is passionate about reading science fiction, travelling, and football.