Income Tax on earnings, pensions and benefits
In the UK tax is collected by the HM Revenue & Customs. Key taxes that individuals may have to pay include Income Tax, Capital Gains Tax, Inheritance Tax, Stamp Duty, and Value Added Tax (VAT) and certain other duties.
You pay Income Tax on:
- your wages if you're employed
- the profits from your business if you're self-employed
- your State Pension and any private pensions
- some benefits like Jobseeker's Allowance, Carer's Allowance and Incapacity Benefit
As well as paying Income Tax on your wages and on income from self-employment, you also have to pay National Insurance contributions (NICs).
Income Tax is a tax on income. Not all income is taxable - and you're only taxed on 'taxable income' above a certain level. Even then, there are other reliefs and allowances that can reduce your Income Tax bill - and in some cases mean you have no tax to pay.
Tax-free allowances
Everyone who is resident in the UK for tax purposes has a 'personal allowance', which is an amount of taxable income you are allowed to earn or receive each year tax-free.
This tax year (2008-2009), the basic personal allowance - or tax-free amount - is ?5,435. You may be entitled to a higher personal allowance if you are 65 or over.
Income Tax is only due on taxable income that's above your tax-free allowances.
National Insurance Contributions
You pay National Insurance contributions (NICs) to build up your entitlement to certain social security benefits, including the State Pension. The type and level of NIC you pay depends on how much you earn and whether you're employed or self employed.
You pay NICs if you are an employee or self-employed and you are aged 16 and over, providing your earnings are more than a certain level. You stop paying NICs at State Retirement age. This is currently 65 for men and 60 for women but will gradually increase to 65 for women over the period 2010 to 2020.
National Insurance number (NI number) is your own personal account number. The number ensures that the National Insurance contributions and the tax you pay are properly recorded on your account. It also acts as a reference number for the whole social security system.
If you don't already have a NI number you must apply for one as soon as you start work as soon as you or your partner claims benefit
To be able to apply you must be:
- over 16 years of age
- resident in Great Britain (England, Wales or Scotland) I
- if you are a parent or guardian and receiving Child Benefit, any children you care for will automatically get a card showing their NI number just before they reach the age of 16.
To apply for a NI number you will need to telephone the Jobcentre plus NI allocation service helpline on 0845 600 0643. They will make sure you need a number and arrange for you to undertake an evidence of identity interview. The interview will usually be one-to-one (unless, for example, you need an interpreter). The interviewer will ask you questions about your background and circumstances.
The interviewer may also ask you to fill in an application form.If you haven't got any official documents you still have to go to the interview. You might be able to prove your identity with the information you give at the interview
Income Tax on savings and investments
You pay Income Tax on most of the income you get from your savings and investments. This includes:
- Bank and building society interest
- Dividends from shares
- Rents from any investment properties you own
- Tax on bank and building society accounts
- Tax on UK dividends
- Tax on rental income
Tax on certain types of transaction
You may have to pay tax when you buy or sell things or give them away, for example:
- Capital Gains Tax if you sell or give away assets
- Stamp Duty when you buy property or shares
- Inheritance Tax on your estate when you die, including some gifts made up to seven years beforehand
Tax on goods and services
When you buy goods and services, there are various taxes you may have to pay, like:
- Value Added Tax (VAT) on many everyday purchases
- Fuel Duty on petrol, diesel and LPG
- Excise Duty on alcohol and tobacco
- General Betting Duty
How the tax you have to pay is worked out and collected
Income Tax and National Insurance contributions:
You get a tax-free personal allowance and then you pay Income Tax on anything over this. The more you earn, the higher the amount of tax you pay.
The amount of National Insurance you pay also depends on how much you earn.
If you're an employee, your employer operates Pay As You Earn (PAYE) and deducts tax and NICs from your wages. If you're self-employed you'll be responsible for paying your own tax and NICs and filling in your Self-Assessment tax returns.
Savings interest and dividends
Bank and building society interest and dividends are usually 'taxed at source' (meaning tax is deducted before they're paid to you).
Capital Gains Tax
You get a special tax-free allowance for capital gains and you only pay Capital Gains Tax on anything over this.
You pay Capital Gains Tax all in one go through Self-Assessment.
VAT and other duties
Other taxes, like VAT and the duties on fuel, alcohol, tobacco and betting are charged at flat rates and are added to the price you pay for the goods or services.
For more information on the above click here.
