What is tax?
Tax is a compulsory contribution you make to the government (whether local or national) and can be in the form of an additional cost on a product, service, or taken from business profits or an individual’s wage. The money raised from taxes goes straight to the UK Government so it can fund things like roads, schools, healthcare as well as paying for police officers and even MPs.
Both businesses and members of the public pay tax and the Government decides how much tax, as a percentage, should be paid. Tax rates are typically reviewed annually and don’t often rise or fall sharply.
What is income tax?
Income tax is a tax you pay on your income, which is most commonly money you earn from having a job. If you’re employed by a business, income tax gets deducted from your wage before your weekly or monthly salary lands in your bank account. If you’re self-employed, you submit your own income tax via a HMRC self-assessment form. But income tax isn’t just restricted to money you earn from your job. If you have houses that you rent out or investments, you pay income tax on the profits. You will also need to pay tax on interest earned from savings if you go over personal allowance threshold.
What is VAT?
VAT stands for Value Added Tax. It is typically set at 20% for most products and services. This means if you go clothes shopping then everything you buy will have had a 20% charge added on.
There is a reduced rate of 5% which applies to items such as children’s car seats and home energy bills. 0% VAT is applied to essentials, so things like most foods, nappies and since 2021 it applies to women’s sanitary products, too.
What are other common types of tax?
You will pay tax on virtually everything. Common types of tax include;
- Road tax, which you pay on your car
- Stamp duty, which you pay when you buy a house. Fortunately, first time buyers are exempt from stamp duty up to £300,000
- National Insurance, which is another type of income tax
- Excise duties – this applies to things like fuel, alcohol and tobacco. These duties can often be high to help dissuade usage. For example, petrol or diesel advertised at £1.50 per litre, 83p of this goes to the government, with 25p VAT and 58p duty.
What are the different tax codes?
A tax code is a combination of numbers and letters given to you to show HMRC how much income tax you should be paying. A tax code shows the amount of tax-free income an employee can receive in a single tax year – this is also known as their personal allowance. There are numerous different tax codes, here’s what the most common ones mean:
- L: You’re entitled to the standard tax-free Personal Allowance (£12,570 for 2021/22)
- T: Your tax code includes other calculations to determine your Personal Allowance
- 0T: Your Personal Allowance has been used or you’ve started a new job and your employer doesn’t have the details they need
- BR: All income from this job is taxed at the basic rate of Income Tax (20%)
- D0: All income from this job is taxed at the higher rate of Income Tax (40%)
- D1: All income from this job is taxed at the additional rate of Income Tax (45%)
- NT: You’re not paying any tax on this income
- S: Your tax is based on rates in Scotland
- C: Your tax is based on rates in Wales
The letter in your tax code is usually has a number in front of it. In most circumstances, the tax code can be multiplied by 10 to show the total amount of income an employee can earn before having to pay Income Tax. For example, if your tax code is 1257L, you can earn £12,570 before tax applies.
What do I have to pay tax on?
You pay tax on your income (income tax), on the vast majority of products and services in the form of Value Added Tax (VAT) and even on the house you buy, through stamp duty. Virtually everything you buy will have some sort of tax associated with it, the major exemptions are essentials like most foods and drink – so long as it’s alcohol free!
What are my tax payments used for?
The money raised from taxes goes to pay for essential products and services. Schools, emergency services, roads and healthcare are some of the major things we benefit from by paying taxes. Money raised through taxes also goes to people who need extra support for a wide variety of reasons, such as disability or those who are carers, both in the UK and abroad.
What circumstances allow me to claim tax back?
You may be able to get a tax refund, which is often called a tax rebate, if you’ve paid too much tax. Common areas where people overpay on tax could include;
- Pay from your current or previous job
- Pension payments
- Redundancy payment
- Self Assessment tax return
- Interest from savings or PPI
- Foreign income
- UK income if you live abroad
- Fuel costs or work clothing for your job
If you think you may be due a tax rebate, you can complete a request via HMRC. HMRC stands for ‘Her Majesty’s Revenue and Customs’ and it’s the government department responsible for tax collection among many other things like issuing national insurance numbers and the national minimum wage.
How do taxes work when I'm self-employed?
When you're self-employed, you pay income tax on your business profits – not your total revenue. To work out your profits, deduct your business expenses from your total income. The profit you have made puts you into a tax band. The amount you will pay on your annual profits is;
- The first £0 to £12,570 you will pay zero income tax on your profits
- Your earnings between £12,571 to £50,270 you will pay 20% tax on your profits
- Your earnings between £50,271 to £150,000 you will pay 40% tax on your profits
- For everything over £150,000 you will pay 45% tax on your profits