By Edward Newman, CEO of Finance.co.uk. Last updated 8th November 2023.
Income tax is often viewed with a general sense of negativity because most of us understandably dislike seeing deductions on our payslips. However, it is worth examining the actual extent of our tax contributions and questioning whether taxes are genuinely detrimental.
Tax in the UK is the money the government makes you and businesses pay to fund public services, such as healthcare, education, roads and social welfare.
Tax isn’t something exclusive to the UK; almost every country in the world has some tax in place; whilst there are around 20 countries that don’t have an income tax, they still have other taxes, such as sales and corporation tax.
Taxes are the government's primary income source and help fund all public spending, from running the NHS, schools and emergency services to repairing roads, collecting your rubbish or supporting carers and those unable to work.
So whilst paying tax is no one’s favourite thing to do, and you may disagree with how public spending is allocated, it’s necessary. You probably use publicly funded services every day without even thinking about it.
In the UK, we pay several taxes; you get taxed on the money you earn and then pay tax again every time you spend money. Here’s an overview of the main taxes we all pay:
In the UK, we pay two main taxes on our earnings: Income Tax and National Insurance. How much income tax you pay will depend on how much you earn.
Almost everyone in the UK pays National Insurance, and you must have made a certain amount of National Insurance contributions to qualify for certain benefits and the state pension. You stop paying National Insurance when you reach state pension age.
If you earn under £242 a week (£1,048 a month), you won’t pay National Insurance, but your contributions will be treated as having been paid, known as National Insurance credits.
For everything you earn between £1,048 and £4,189 a month, you’ll pay 12% National Insurance. Any amount you earn over £4,189 a month, you’ll pay 2% National Insurance.
Income tax works in a similar way, with four different tax bands. As you move up the income tax bands, you’re only taxed the higher amount on your income above the threshold for each band. Here are the income tax bands (it’s worth noting that income tax bands are a little different in Scotland, you can find out more on the Gov.UK website):
Personal Allowance - Up to £12,570 - 0%
Basic Rate - £12,571 - £50,270 - 20%
Higher Rate - £50,271 - £150,000 - 40%
Additional Rate - Over £150,000 - 45%
In the UK, we have a tax-free personal allowance, which means everyone can earn £12,570 tax-free, although you don’t get a tax-free personal allowance if you earn over £125,140 per year.
The following are examples of how income tax bands work:
You earn £35,000 annually; the first £12,570 is tax-free, leaving £22,430. This amount is taxable, but as you fall into the basic rate tax band (under £50,270 per year), you’ll pay 20% tax, which equates to £4,486.
You’ll therefore pay 20% tax on 64% of your income, so for every £100 you earn, you’ll pay £12.80 in income tax. Between income tax and National Insurance, you would pay £20.48 for every £100 earned.
You earn £70,000 per annum - you’ll still get your personal allowance, so taking that away leaves £57,430 in taxable income. For the first £37,700 of this, you’ll pay 20% (the difference between the lower and upper limit of basic rate tax). Leaving £19,730 to be charged at the higher rate of tax. So in total, you would pay £15,432 in tax.
You would pay 40% tax on 28% of your income and 20% tax on 53%, so for every £100 you earn, you’ll pay £21.80. However, if you earn more than £4,189 a month, you’ll pay 12% National Insurance on 54% of your wages and 2% National Insurance on 28% of your wages. So between National Insurance and income tax, you would pay £28.84 in taxes for every £100 you earn.
If you’re self-employed, income tax and National Insurance work a little differently, but you can read our guide on tax for the self-employed to find out more.
In the UK, VAT (Value Added Tax) is added to most of the products and services we purchase.
Here’s a breakdown of the different VAT rates:
Standard rate - 20% - This applies to most products and services.
Reduced rate - 5% - This applies to goods and services such as household energy.
Zero rate - 0% - This applies to essential goods such as food, equipment for disabled people, children’s clothes and shoes and sanitary products.
Some goods and services, such as financial products, insurance and antiques, are exempt from VAT. You can learn more about which products have VAT added to them on the Government website.
Unfortunately, it’s impossible to determine how much you’ll pay in VAT for every £100 you earn because it will depend on how much you spend and what you spend it on.
For every £100 you spend on standard rate VAT items, you will pay around £16.67 in VAT.
Some items, such as alcohol, tobacco and petrol, are subject to other taxes or duties.
Income tax, National Insurance, and VAT aren’t the only taxes you’ll pay. Here’s a brief overview of some of the other common taxes we pay in the UK:
Council Tax - Almost every household in the UK will pay council tax - your local council collects this and helps to fund services provided by your local authority. How much council tax you pay depends on the size of your property.
Road Tax - All motorists will pay road tax (also called car tax) every year. How much you pay for road tax will depend on how much CO2 your car releases when first registered. Cars worth more than £40,000 new will have to pay an extra £355 a year in road tax for the first five years (this doesn’t include electric vehicles).
Capital Gains Tax - This is a tax you pay on the profit you make from the sale of chargeable assets. You only pay capital gains tax when your overall gains for the year are over £12,300.
Stamp Duty - Stamp Duty, or Stamp Duty Land Tax, is the tax you pay when you buy property or land in the UK. You don’t have to pay stamp duty on properties under £250,000.
Inheritance Tax - Inheritance tax is a tax on the estate (the total value of property, money and possessions) of someone who’s passed away. Inheritance tax isn’t charged in certain circumstances, for example, if all the money is left to the deceased’s spouse, civil partner, or a charity or if the estate's total value is less than £325,000.
The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.