A Beginner’s Guide to Taxation. Everything you need to know, from stampede allowances to VAT

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The fall statement was all about tax. But don’t stop reading – this article is unlike any other you have read on the subject, in that you will understand what we are talking about. Taxation can be a brain-melting topic – but it’s important to understand so you can spot the sneaky stuff Jeremy Hunt does with your money and take steps, if you wish, to pay less.

Income tax

When you make money you pay tax on earnings over £12,570. This is called income tax and is levied on wage income, pension income and rental income from property if you own it. It is billed at three rates: base rate, 20%; higher rate, 40%; additional rate, 45 percent.

Basic rate tax: Basic rate tax of 20% is levied on income between £12,571 and £50,270 in most parts of the UK (Scotland has a different system). About 80% of us – 27 million – are basic rate taxpayers.

Higher tax rate: About 5.5 million workers – or 17% of total taxpayers – are subject to a higher rate. This means they pay 40% tax on income over £50,270.

The number is expected to reach eight million by 2028, now that the Chancellor has kept tax thresholds frozen until 2028.

Additional tax rate: the additional rate of 45% is applied on taxable income over £125,140, ​​reduced by £150,000 in the return, in England, Wales and Northern Ireland. Only 1.8% of us paid this rate, but that will increase now that the threshold has been lowered.

In Scotland, which has the power to set its own income tax rates, it is broadly similar to the rest of the UK with a few extra thresholds thrown in for good measure: £12,571 to £14,732, 19%; £14,733 to £25,688, 20%; £25,689-£43,662, 21%; £43,663 to £150,000, 41%; £150,000+, 46%.

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Natural Advantage

If you are employed and receive company benefits, such as a company car or discounted private health insurance, you will generally pay income tax on the value of the benefit. For example, if you have private health insurance worth £100 each month, you would pay a fee of £20 per month if you are a base rate taxpayer and £40 if a higher rate.

Allowance for the blind

An allowance of £2,600 is available for any registered blind person. It is paid in addition to the personal allowance, bringing the total amount a person can earn tax-free to £15,170.

This will rise in line with inflation of 10.1 percent next year.

If the income is below this threshold, the additional allowance can be transferred to a spouse or civil partner so that they can benefit from it in their place.

Corporation tax

Corporation tax is paid by corporations on the profits made by the business, after deducting expenses such as the purchase of shares and the employment of staff. Currently the corporate tax rate is 19%, but it will reach a maximum rate of 25% from April 2023 for those with annual profits over £250,000.

Capital gains tax

If you sell assets such as an investment property or shares, you will likely have to pay capital gains tax. Many people won’t have to worry about this, as there is an annual allowance of £12,300 per person. However, this amount will be halved to £6,000 in April next year and there will be a further reduction to £3,000 in April 2024.

Profits above this amount will be subject to capital gains tax of 10% if you are a basic rate taxpayer and 20% if you are a higher rate taxpayer. Money held in an Isa is not subject to capital gains tax.

If you sell a property that is not your principal residence, the rates are higher: 18% or 28% depending on your tax bracket.

Figuring out how much tax you owe can seem like a challenge, especially after so many changes (Twenty47studio/Getty Images)

Housing tax

Council tax is paid by households to their local council to fund local services such as refuse collection and libraries.

It is paid by all dwellings, whether they are owners or tenants. The amount you pay will depend on the value of your home. The average amount is around £1,500 per year. Various municipal tax reductions and exemptions are available.

Currently councils cannot increase council tax by more than 3% unless they hold a local referendum, but Jeremy Hunt announced yesterday that councils will now be allowed to raise the rate up to 5% without consulting residents.

Dividends

A dividend is the distribution of a company’s profits to investors or shareholders. Many LLC owners pay themselves primarily through dividends.

The first £2,000 of dividend income is currently tax free, but will drop to £1,000 next April and £500 in April 2024. After that you pay 8.75%, 33.75% or 39 .35%, depending on whether you are a taxpayer at the basic rate, the increased rate or the additional rate.

The gift aid

Donating to charities through gift aid means the charity can claim an additional 25 pence for every pound you donate. If you are a higher rate taxpayer you can claim an additional 25p through a self-assessment or by asking HMRC to change your tax code.

Inheritance tax

The least popular of taxes. Upon your death, inheritance tax of 40% may be levied on your estate. But everyone gets an allowance of £325,000 – up to £500,000 if you own a family home that you leave to children or grandchildren. This has been frozen until 2028. Married or civil partnership couples can transfer their allowance to the spouse on death, doubling the allowance to £1million.

In reality, few people pay this tax because they don’t meet the threshold or take steps to avoid it, mostly by donating your assets (if you do it seven years before you die, there’s no IHT).

Life allowance

The lifetime allowance is the total amount you can save in your pension. It is currently £1,073,100. If you exceed this threshold, you will have to pay a tax of 25-55% when withdrawing the money.

Marriage allowance

Marriage Allowance can reduce a husband’s, wife’s or civil partner’s annual tax bill by £252, if their other half earns less than Personal Allowance. This allocation will increase by 10.1% next year.

Jeremy Hunt described a number of changes in the fall statement earlier this week (Xinhua/Shutterstock)

National insurance

National insurance contributions are paid by employees, employers and the self-employed and are important for claiming state pensions.

For employees, the national insurance rate is currently 12% on earnings between £12,570 and around £50,000, and 2% above that. This threshold has been frozen for five years.

Annual retirement allowance

You can contribute up to £40,000 towards a pension each year and get tax relief. Any contributions over this amount will be taxed at your regular income tax rate. If you earn more than £240,000 the annual allowance gradually drops to £4,000 per year.

Personal allowance

Personal Allowance is the amount anyone can earn in the UK before paying income tax. It is currently £12,570 and will not increase until at least 2026, meaning more people are likely to pay tax.

Rent a room program

Through the Room Rental Scheme, you can earn up to £7,500 tax-free by renting a furnished room in your home.

Savings taxes

You may have to pay income tax on savings interest, if the money is outside an Isa. Most people can earn £1,000 a year without worrying about tax (higher rate taxpayers can earn £500 tax free, while top rate taxpayers lose the allowance entirely).

Stamp duty

Stamp duty is paid when buying real estate. There are several stamp duty rates (see table), which increase as a good becomes more expensive:

People buying a second home or investment property pay an additional 3% (4% in Scotland and Wales). There are stamp duty reductions for first-time buyers, who pay no stamp duty on the first £425,000 in England and Northern Ireland, and the first £175,000 in Scotland. There is no first time buyer discount in Wales.

This reduction will be phased out from March 2025.

Bargaining Allowance

Under the Business Allowance, you can earn £1,000 a year from your side business, whether that’s babysitting or selling items on eBay.

VAT

Value Added Tax (VAT) of 20% is applied when purchasing many goods and services. It is often included in the price of a product, so consumers are not always aware that they are paying for it. Some things are exempt from VAT, including clothes and shoes for young children.

Vehicle tax

Vehicle Excise Duty (VED) is paid annually by most types of vehicle used on public roads in the UK. Electric cars will no longer be exempt from this tax from April 2025.

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