As this is the first tax related post on this site, we here at Money Grower thought it best to give an introduction on the various types of taxes you will be paying throughout your life. The list is not comprehensive as we chose to focus on the most common taxes. Only a brief introduction is given in this post and we have the intention of delving further into each tax in the future to see how you could legally reduce your tax liability.
At the most basic level, there are 3 variations of taxes. Namely, Direct taxes, Indirect Taxes and Environmental Taxes. All the most common taxes you know fall under these 3 categories and we will look at these and there constituents below.
1) Direct Taxes – Are those taxes paid by individuals (and companies) on the income they have earned or capital gained. Taxes falling under direct taxes include :
- Income Tax – This is the tax you pay on income earned during a tax year. If you are employed , the person or company you work for deducts this from your salary or wage. If you are self-employed, you need to fill out a form and pay your income tax by 31 January following the end of the tax year you are paying for (or you face paying penalties and interest). Even if you work for a business and your Income Tax gets taken away at source as mentioned, if you are earning money on the side, you need to pay your own income tax on the money you earned on the side.
The current rates of income tax for this tax year ( 6 April 2014 – 5 April 2015) are 0% tax on the first £10,000 you earn as this is called Personal Allowance. If you earn up to £41, 865 a year, the first £10,000 is free of income tax and you pay 20% on the remaining amount. If you earn between £41,866 to £150,000, you will be classed as a higher rate tax payer and you will pay 40% on any amount over £41,865 as the first £10,000 is free of Income Tax and you pay 20% on the amount between £10,000 and £41, 865. There is an additional rate of tax of 45% if you are lucky enough to earn over £150,000.
There are certain legal ways of reducing your income tax bill such as using a SIPP or using the Gift Aid scheme but we will talk about these in further detail in a different post.
Here is the table found on the .gov website :
|Tax rate||Taxable income above your Personal Allowance|
|Basic rate 20%||£0 to £31,865
Most people start paying basic rate tax on income over £10,000
|Higher rate 40%||£31,866 to £150,000
Most people start paying higher rate tax on income over £41,865
|Additional rate 45%||Over £150,000|
- Corporation Tax – This is the tax paid by corporations on their net profit figure. The current rate in the U.K is 20% for both large and small companies and this low figure has made people dub the U.K. a tax heaven (Yeas, seriously!). If you are invested in any company, it means that dividends are dispensed from the profit after tax figure.
Capital Gain Tax – This is the tax on the profit when you sell something that has increased in value. It is basically the difference between the cost you buy something for and the price you receive when you sell it. So for example, if you bought shares for £5,000 and then sold them for £20,000, your capital gain would be £15,000. If you are a basic rate payer, you will pay 18% on your capital gain but if you are a higher rate payer, you pay 28% on your gain. In this current tax year (6 April 2014 – 5 April 2015), you are given a tax free allowance of £11,000 so you do not need to pay a tax for any gain made up to £11,000.
- National Insurance – You pay this in order to qualify for certain benefits the state provides such as State pensions. The amount of National Insurance depends on how much you earn and whether you are employed or self-employed.
- Inheritance Tax – This is tax you pay if you inherit a person’s estate (property and possessions) and the estate is worth more than £325, 000. The rate of Inheritance Tax is 40% on anything above the the £325, 000 threshold.
There are legal ways of reducing your inheritance tax bill such as leaving a certain proportion to charity or starting to plan to bequest things in advance and this will be discussed in another post.
- Petroleum Revenue Tax – This is the main reason why fuel prices at the pumps have not gone down in proportion to the recent slump in worldwide oil prices. The current rate of PRT is 50% so when ever you go to fill up your car, just know that you are paying double the amount that you should actually be paying. Feel better?
2) Indirect Taxes – Are those taxes that are levied on goods and services ( collected by companies and other business as intermediaries) but it is ultimately paid by consumers like you and I in the form of higher prices.
- VAT – Value Added Tax is a consumption tax on goods and services. So basically, the more you buy a good or service, the more tax you pay. As you have a tax on your incomings such as income or capital gains tax, naturally, government has made a tax on your outgoings or spending and this is called VAT.
There are 3 rates of VAT. Standard rate of 20%, reduced rate of 5% and zero rated products at 0%
Customs Duties – Ever wondered what the officials at airports are looking for wham they ask you open your bags. They are checking to see if you brought in any goods from countries outside the EU and if so, you are due to pay Customs Tax. There is a limit for which you could bring in products without incurring any tax but the limits depend on the individual products.
- Stamp Duty Land Tax – This is the tax you pay when you buy a property in the U.K over £125,000. The rates of SDLT changed yesterday in the autumn statements and are as follows.
The portion of the transaction value up to £125,000 is charged at a rate of 0%, the portion of the transaction value between £125,001 and £250,000 is charged at a rate of 2%, the portion between
£250,001 and £925,000 is charged at a rate of 5%, the portion between £925,001 and £1,500,000 is
charged at a rate of 10% and the portion over £1,500,001 is charge at a rate of 12%.
3) Environmental Taxes – Are those taxes which are levied on, for example, waste material deposited and and and gravel extraction.
- Aggregates Levy -This s a tax on the commercial exploitation in the UK of rock, sand and gravel. It is more to do with corporations so we won’t go into detail here.
- Climate Change Levy – This is another tax businesses pay on items like electricity, gas and solid fuels.
With all the taxes mentioned above, sometimes you must wonder here all you hard earned money goes. Here is a picture which came out earlier this year showing how government spends tax money (based on contributions by a person earning £30,000 a year. .
I hope this post has enabled you to get a deeper knowledge on taxes and also given you the ability to better grasp all the taxes you have to pay. I will be writing more posts in the future to see how you could reduce your tax liabilities. Please feel free to drop me an email or leave a comment if you would like me to answer a question or would like a specific Tax being talked about!