Through this blog post, we will try to explore the UK taxation system with a key focus on the generic taxes that apply to individuals and their eligibility criteria. We will gain an overview of the amount of tax due upon individuals on the basis of their income and assets as well as conditions that may exempt certain incomes and individuals from being taxed.

How Much Tax Do I Have To Pay In The UK?

According to a general estimate, an individual pays one-third of their income in the form of taxes in the UK. While the amount of tax one pays depends on the scale of their income, some people will pay a higher tax perhaps due to the property that they own or inheritance that they may receive.

There are different types of taxes under the UK taxation system. Direct taxes include PAYE (Pay As You Earn) and National Insurance. These account for 20 per cent of an individual’s income. On the other hand, indirect taxes include VAT, council tax as well as duties on alcohol and petrol. 

Direct taxes are automatically deducted from your wages, income or pension before you receive them. This is termed as Pay As You Earn. Anyone earning equal to or less than £12,750 is not eligible for PAYE as the amount is considered under the law as an individual’s personal allowance. 

Incomes above the minimum cap are taxed at an incremental rate of 20 per cent to 45 per cent depending on whether an individual belongs to the basic, higher or additional tax rate band. Below are details of these bands:

  • 0 per cent income tax when income is up to £12,570
  • 20 per cent income tax when income is between £12,571 and £50,270 
  • 40 per cent income tax when income is between £50,271 and £150,000 
  • 45 per cent income tax when income is above £150,001

If you are self-employed, you are required to file a self-employed tax return in order to pay your taxes through a self-assessment. 

Therefore, basic taxes in the UK include the following:

  • Income Taxes 
  • Property Taxes 
  • Capital Gains 
  • UK Inheritance Taxes 
  • Value Added Tax 

These are all progressive taxes; which means that the amount of tax increases with an increase in income.

Which Incomes Are Tax-Free In The UK?

Incomes derived from any of the following sources are considered to be tax-free in the UK:

  • Transport costs of an employee’s (and their immediate family) relocation for work in the UK
  • Winnings from games, pool betting, lotteries or competitions with prizes
  • Long service employee awards (certain limitations apply)
  • Individual savings account amounting to £20,000
  • Incomes such as interest or dividends arising from savings accounts 
  • Pensions paid to war widows and dependents
  • Social security and state benefits include maternity allowance, employment and support allowance, and attendance allowance, child tax credit and housing benefit. 

What Are Direct Taxes?

In addition to income tax, direct taxes include National Insurance. During the last fiscal of 2021-22, employees paid 12% on earnings exceeding £9,568 up to £50,270 a year, and 2% on earnings above this.

Salaried individuals have NIC deducted from their wages directly by their employer. While self-employed people are required to submit a self-assessment tax return.

Who Has To Pay Property Tax?

According to The complete guide to the UK tax system | Expatica the UK has the second-highest property taxes in the world at the moment and tax revenue through this model accounts for more than 12 per cent of all tax collections.

The two forms of property tax in the UK include stamp duty and council tax. Stamp Duty tax is paid when someone buys a property in the UK over a certain threshold. The tax applies to residential properties that have a market value of above £125,000, or to non-residential land and properties that are valued at more than £150,000. Here is an online calculator to help with your property tax assessment. 

Council tax is a local tax collected by the local council to provide community-based services to their residents.

What Is Capital Gains Tax?

Whenever someone sells an asset, there is a difference between the purchase price and the selling price. If you receive gain while selling, this is a capital gain and the incremental amount will be taxed. These may include the following:

  • Personal possessions that are valued at or above £6,150 (does not include vehicles)
  • Real estate property that cannot be claimed as your main home
  • Your main home if it is being rented or used for business
  • Shares (those which are not in an ISA or PEP)
  • Business assets
  • Cryptoassets (only in certain cases)

Do I Have To Pay Council Tax?

Council tax is a property based yearly tax levied on all homeowners and tenants over the age of 18. It is paid to local council offices over 10 months; as the yearly bill is split into instalments by local authorities. This makes it easier for individuals to make small payments that are spread over months as compared to making a lump sum annual payment of the tax.

It is based upon the valuation band that a property is categorized under by the local council and Valuation Office Agency. While the local council may assign an annual bill in April, the annual tax is spread over 10 monthly instalments to make payments convenient for individuals as well as to account for any desirable changes such as inflation rates. 

Do I Have To Pay Taxes on Benefits?

Some state benefits are taxable while others are not. Below are details of each category:

Taxable state benefits include the following:

  • Bereavement Allowance 
  • Carer’s Allowance
  • Employment and Support Allowance (contribution related)
  • Jobseeker’s Allowance
  • Widowed Parent’s Allowance
  • Incapacity Benefit
  • Pensions paid by the Industrial Death Benefit scheme
  • State Pension

Non-taxable state benefits are listed below:

  • Attendance Allowance
  • Disability Living Allowance 
  • Guardian’s Allowance
  • Employment and Support Allowance (income-related)
  • Maternity Allowance
  • Severe Disablement Allowance
  • Bereavement support payment
  • Child Benefit 
  • Housing Benefit
  • Industrial Injuries Benefit
  • Child Tax Credit
  • Pension Credit
  • Universal Credit
  • Working Tax Credit
  • Free TV licence for over-75s
  • Income Support
  • Lump-sum bereavement payments
  • Personal Independence Payment 
  • War Widow’s Pension
  • Winter Fuel Payments and Christmas Bonus

Who Collects Tax Revenues In The UK?

The HMRC collects and administers tax collection in the UK. HMRC administers the following central taxes while local governments collect council tax:

  • Income tax
  • Corporation tax
  • Capital gains tax
  • Inheritance tax
  • Insurance premium tax
  • Stamp, land, and petroleum revenue taxes
  • Environmental taxes
  • Climate change and aggregates levy and landfill tax
  • Value-Added Tax
  • Customs duty
  • Excise duties

Who Is Tax Exempt In The UK?

Individuals may apply for tax exemption if they face  the following conditions:

  • If someone is a tax resident for at least one year out of the previous three years 
  • They have spent less than 16 days in the UK during the previous tax year
  • They are not a UK resident

The same applies in case:

  • Someone is not a tax resident for the previous three years
  • They have spent less than 46 days in the UK

Can I Reduce Assets To Avoid Tax?

When someone deliberately reduces their assets to avoid paying taxes or to claim benefits, it is considered as “Deprivation of Assets”.

While most individuals consider that transfer of savings, selling of one’s property or gifting their home to a family member is all that counts as deprivation of assets, that is not all. Any of the following actions will be counted as deprivation of assets if it takes place within a short period of time prior to one’s claim for care home residency:

  • To give away a large sum of money
  • To transfer the title deed of one’s property
  • To spend a large amount of money which is in contrast with the spender’s usual spending pattern
  • To lose money through gambling 
  • To use savings in order to purchase items excluded from a means-test such as a car or jewellery

Conclusion:

While the amount of tax that an individual pays may depend on their income and assets, UK residents with an income above £12,750 are bound to pay at least income tax. Similarly, depending on the property value band assigned to their house, individuals are bound to pay council tax as well; although a lower band qualifies them for a lower rate of the tax as compared to those who pay for a higher band due to the market value of their property.

FAQs: How Much Tax Do I Have To Pay In The UK?

How much tax is taken in the UK?

As an employee in the UK, you will be required to pay 20% on incomes earned between £11,851 and £46,350. Individuals earning between £46,351 to £150,000 will be required to pay 40% income tax.

What taxes do British people pay?

There are different types of taxes under the UK taxation system. Direct taxes include PAYE (Pay As You Earn) and National Insurance. These account for 20 per cent of an individual’s income. On the other hand, indirect taxes include VAT, council tax as well as duties on alcohol and petrol. Basic taxes in the UK include the following:

  • Income Taxes 
  • Property Taxes 
  • Capital Gains 
  • UK Inheritance Taxes 
  • Value Added Tax 

How much tax is taken out of my paycheck UK?

As an employee in the UK, you will be required to pay 20% on incomes earned between £11,851 and £46,350. Individuals earning between £46,351 to £150,000 will be required to pay 40% income tax.

How do I know how much tax I should pay?

As an employee in the UK, you will be required to pay 20% on incomes earned between £11,851 and £46,350. Individuals earning between £46,351 to £150,000 will be required to pay 40% income tax. If you are self-employed, you are required to file a self-employed tax return in order to pay your taxes through a self-assessment. 

Do I need to do a tax return if I earn under 10000 UK?

Yes, you need to file for a tax return if you earn under £10,000 in the UK. Individuals are required to sign up for self-assessment with the HMRC if their earnings are than £1,000 through self-employment. Once someone has registered for self-assessment, you will be given a Unique Taxpayer Reference number as proof that you are a self-employed taxpayer.

References:

Self-Assessment Guide by Listentotaxman – Tax Guides

Income tax calculator 2022-23, 2021-22 and 2020-21

UK Tax Calculators

HM Revenue & Customs – GOV.UK

Income Tax – GOV.UK

Income Tax rates and Personal Allowances – GOV.UK

Getting tax advice

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.