Income Tax, Capital Gains, National Insurance - we’ve all heard these terms before, but do we know what they mean? If you’re paying these types of taxes, it’s probably best to understand why you’re paying them and how much. So, let’s learn together!
The most well-known type of tax is Income Tax, which is simply tax you pay on your income. You may not have to pay it on all types of income, but most people will be familiar with paying this in one job or another.
Usually, you will pay this as PAYE (pay as you earn), which means it’s taken off your wage before you get paid. Self-assessment is a way of paying tax if you are self-employed, as it is your responsibility to complete a Tax Return form and pay your tax separately. There are different ‘bands’ for income tax, so you will pay a different amount depending on how much you earn over the tax-free Personal Allowance (£12,570).
VAT stands for Value Added Tax and is another common tax you are probably familiar with as it is a tax added to most products and services sold by VAT-registered businesses. The standard rate is 20%, but a few exceptions of items are classed as zero-rated. This includes children’s clothes and shoes, motorcycle helmets and books.
Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died. You will only have to pay this if the estate is worth £325,000 or more or everything over the £235,000 threshold is left to a spouse, civil partner, charity or community amateur sports club. If the person who dies leaves their entire estate to their children, this threshold can be increased to £500,000 (including adopted, foster or stepchildren).
The standard tax rate is 40% and is only charged on the amount above the threshold. For example, if the state is worth £450,000, you will only pay text on £125,000 (over the £325,000 threshold).
You pay National Insurance contributions to qualify for certain benefits and the State Pension if you are over 16 and either employed, earning more than £242 per week or self-employed, earning more than £6,725. Rates vary depending on your income, but the maximum is 8%.
This is a tax you pay on the profit when you sell something that has increased in value. For example, if you buy a collectable item for £1,000 and then sell it later on for £10,000, you will have to pay tax on £9,000 (the profit).
There are exemptions from the tax types listed above, and you may be able to apply for tax relief in certain situations. Gov.co.uk is the best resource for extra tax information; you can contact them if you have any questions about your financial situation.