How Is UK Personal Tax Calculated? Income, Capital Gains etc.

How Is UK Personal Tax Calculated? Income, Capital Gains etc.

What personal taxes do I pay in the UK?

The United Kingdom has a progressive income tax system that taxes people at different rates, depending on how much money they earn. In addition to this, there are also additional charges for things like VAT (Value Added Tax), National Insurance Contributions and various Duties.

In essence, you are taxed when you:

• Earn money.

• Spend money.

• Eat and drink.

• Buy a property.

• Live in a property.

• Insure yourself.

• Travel.

• Make a profit by investing money.

• Die.

There’s a lot to cover. However, please bear in mind that tax rates, tax relief, VAT ratings and Duties are constantly evolving, depending on the whims of the latest administration. For this reason, this article does not aim to be a definitive list of every tax rate, but rather offer an illustration of each type of tax an individual will pay in the UK, when that tax is paid and where you can get the details of the latest tax rates. Furthermore, this is not an absolute list of every personal tax in the UK, it’s merely to give you an idea of the level of taxation in the UK.

Read on to find out how you will be paying tax in the UK.

What is the personal tax year in the UK?

In the UK, the personal tax year runs from the 6th of April to the the 5th of April in the following calendar year, not from January to December, as is commonly mistaken. The tax year is typically used to calculate income and investment returns on the income side - the taxes paid on spending are usually paid at the point of consumption.

How much tax do I pay on earnings in the UK?

What is Income Tax in the UK?

Income Tax is one of the most common taxes paid in the UK and it was introduced in the late 18th Century to fund the Napoleonic wars and then it was on and off until the mid 19th Century when more income was needed to fund a Government budget deficit. However, as with many things governments do, once they find new ways of generating money, they haven’t stopped charging it since then! The huge sums of money required to fund both the first and second world wars and in more recent times, the financial fallout of lockdown, means that successive governments are always likely to find new ways to spend more than they have and income tax is here to stay.

Every individual in the UK will have a certain level of ‘Personal Allowance’ every year, which is the amount they are allowed to earn before they start paying tax. Above this threshold, the percentage tax paid is tiered with new thresholds, eventually leading to a level whereby the highest rates are paid and the previously mentioned Personal Allowances are phased out.

What are the Income Tax rules for non-domiciled people (non-doms) in the UK?

The income tax rules above apply to the vast majority of workers in the UK, however, things can start to get very complicated with regard to foreign nationals, their earnings in the UK and abroad and how they are taxed. Wealthy non-domiciled people (‘non-doms’) may be able to pay a very small payment to the UK government each year in lieu of income tax - which can be a bitter pill to swallow for UK resident middle and higher earners, who will often pay considerably more than this. A good example of this controversy is Prime Minster Rishi Sunak’s wife, who uses ‘non-dom’ status to her benefit. HMRC outlines these complicated rules in more detail on its website.

What is National Insurance in the UK?

On top of Income Tax, an additional tax called National Insurance is paid on income to fund state benefits and pensions. We have an in-depth article on National Insurance, which is well worth a read.

How much tax do I pay on personal spending in the UK?

What is Value Added Tax (VAT) in the UK?

As with many countries around the world, your income is taxed and the money you spend is taxed again when you spend it - typically in the form of Value Added Tax (VAT). In the UK, VAT is generally already applied to the price advertised in stores or online. However, some items are free of VAT in the UK (known as 0% rated), such as seeds and sports activities. VAT rates can vary significantly when it comes to food and drink and it depends on where it is eaten and if it is hot or cold! Equally, you may remember the saga of the Jaffa Cakes a few years ago where it was hotly contested whether or not a Jaffa Cake is actually a cake or a chocolate-covered biscuit as these two categories have different VAT rates.

VAT was originally introduced in the early 1970s as part of the UK’s transition into the European Economic Community (EEC) at 10% and it fluctuated at different rates and eventually settled at 17.5% in the early 1990s. In the wake of the Global Financial Crisis, it was temporarily reduced to 15% before being hiked to 20% in 2011 and has remained unchanged.

What are alcohol and tobacco duties?

In addition to the VAT you pay on tobacco products such as cigarettes and cigars, you will also need to pay an additional duty at various rates, depending on the weight or packet. It’s the same situation for beer, cider and wine, although you pay different rates depending on their strength and whether the cider or wine is sparkling or not. Duty on spirits is calculated on a per litre and strength basis.

How much tax do I pay on transport in the UK?

How are cars and motorbikes taxed in the UK?

Transportation is heavily taxed in the UK as in addition to paying VAT on purchasing a car, you then become subject to paying an additional duty (tax) on the fuel you put in it (alongside VAT) and you have to pay Vehicle Excise Duty (VED or Road Tax) to drive it on the roads. In addition to this, you may also have to pay a Congestion Charge and/or a Low Emissions Zone charge to drive in towns and cities. You will also need to pay Insurance Premium Tax when you take out compulsory car insurance.

How are flights taxed in the UK?

Although there is no VAT charged on flights, airline operators have to pay Air Passenger Duty (APD) for every person who flies from the majority of UK airports. To protect their profits, the Airlines usually pass this charge onto passengers and it is therefore included in the price of your ticket. The amount paid depends on how far away your destination is and what class you are flying in.

Don’t forget that if you have bought any sort of travel insurance, you will also have paid Insurance Premium Tax.

How much tax do I pay when I die in the UK?

What is Inheritance Tax in the UK?

Inheritance Tax is paid by your estate when there is a transfer of value from one party to another, typically when someone passes away or when gifts are made a few years before death (known as Potentially Exempt Transfers or PETs). As is the case with other taxes, there is a threshold up to which no tax is paid and then a percentage of the value above the threshold is subject to taxation.

There is some controversy around the Inheritance Tax threshold as it is not moving in line with house prices. This means that many everyday people used to be able to pass on their home tax-free to their children but are no longer able to do so and in many cases, the home has to be sold to pay an inheritance tax bill. There are however some exemptions for married couples to ease the tax burden and also for those killed in the act of duty, and since April 2017 there has been an additional threshold for those with eligible estates, but these can all get very complicated

How much tax do I pay on investments in the UK?

What is Capital Gains tax in the UK?

When you buy an investment and later sell it for a profit, it’s known as a ‘capital gain’. This could be a house or shares, for example, and a tax must be paid on the Capital Gains you have made. The rate paid varies, depending on your personal circumstances and there are some personal allowances and exemptions that apply.

Is the income from investments taxable in the UK?

In the most basic sense, your income from investments in the UK is classed as normal income and they will form part of your annual income tax return. However, some investment wrappers, including Individual Savings Accounts (ISAs), are exempt from tax and therefore both the income and any capital growth are free of both income and capital gains tax. However, there is a limit on the amount you can pay into an ISA each tax year, so the investments have to perform particularly well or you have to invest over a long period of time for the value of your ISA to provide a significant income.

What is Stamp Duty Reserve Tax in the UK?

Stamp Duty Reserve tax is paid upon the paperless transfer of shares and it is also payable by overseas investors trading shares in the UK. Given the size of the UK financial sector, you will appreciate that raises a large sum each year for the UK Government. Where shares are traded using a share transfer form, the tax paid is simply called Stamp Duty.

How much tax do I pay on property in the UK?

What is Stamp Duty Land Tax in the UK?

The other form of Stamp Duty, known as Stamp Duty Land Tax, is payable upon the transfer of land ownership in England and Northern Ireland. In Scotland, you pay Land and Buildings Transaction Tax and in Wales, it’s Land Transaction Tax. In many cases, the amount you pay is based on thresholds, including an amount that is exempt from any taxes.

As with many other taxes, the thresholds haven’t been changed significantly in recent years and, as house prices inflate over the years, the number of transactions that fall under the remit of the tax increases, therefore increasing revenue for the government. This process is known as fiscal drag.

What is Council Tax in the UK?

Council Tax is paid by homeowners and tenants to their local authorities to partially fund the various local services provided by councils (additional funding is provided by central government). It was introduced in the early 1990s and replaced several previous systems, all of which proved to be unpopular for various reasons. The amount paid all depends on which value band your house or flat falls into alongside how populated the area you live in is - for example, council tax in Westminster is much cheaper than somewhere like rural Herefordshire.

What tax do I pay on home insurance in the UK?

As with most other types of insurance, there is no VAT to pay but you do pay an Insurance Premium Tax.

What tax do I pay on heating my home in the UK?

As with the fuel for your car, you will also pay Fuel Duty on any fuel used to heat your home including LPG, natural gas and heating oil.

Conclusion.

It’s clear from the above that the UK government has devised many ways to keep a constant flow of funds running in from a wide variety of taxes on earnings, investments, consumption and asset transfer. Equally, with so many thresholds, bands and options of investment wrappers, it can understandably be confusing to know what your best options are to stay as tax-efficient as possible. For this reason, it’s important to maintain a keen interest in your investments and regularly review your choices with a regulated Financial Adviser when planning for the future.

What’s next?

If you need help or advice on your personal or business finances or if you want to consider investing to make your money work harder, you can get in touch with one of our advisors for independent financial advice. We offer a free initial consultation and although we are based in Tunbridge Wells, we advise clients across the UK.

Don’t forget, this article offers general financial information and should not be taken as personal advice. Remember that investments and pensions can go up and down in value, so you could get back less than you put in. Tax rules can change and the benefits depend on individual circumstances.