below, i have created three easy to understand guides on the main types of tax in the uk. after all, when it comes to tax, knowledge is power.
how does income tax work and how much should i be paying?
what is liable for capital gains tax and how can i manage it?
what is inheritance tax and will i ever pay it?
in the uk, the tax system is based on marginal rates. this means that tax is worked out as a percentage of income that you earn, within certain thresholds, so ultimately you do not pay the same amount of tax on everything you earn.
how much you earn is based on a tax year, which currently runs from 6th april 2019 to the 5th april 2020.
here at the current tax bands for the tax year 2019/2020:
Personal Allowance: Up to £12,5000 - 0% tax
Basic rate: £12,501 to £50,000 - 20% tax
Higher rate: £50,001 to £150,000 - 40% tax
Additional rate over: £150,000 - 45% tax
the personal allowance is how much you can earn before you start paying income tax.
the personal allowance also reduces by £1 for every £2 of income earned over £100,000.
for each of the above bands, you will only pay tax on the amount of money earned within those tax bands. at the end of the year, this leaves you with an effective tax rate.
let's go through a couple of examples:
john earned £64,000 of gross income during the 19/20 tax year. this is how much tax he had to pay:
£0 - £12,500 of income = 0% tax
£12,501 - £50,000 of income = 20% tax (£7,499.80)
£50,000 - £64,000 of income = 40% tax (£5,600)
the total amount of tax that john paid = £13,099.80
his effective tax rate = 20.4% (13,099.80/64,000 x 100)
mary earned £200,000 of gross income during the 19/20 tax year. this is how much tax he had to pay:
no personal allowance
£0 - £50,000 of income = 20% tax (£10,000)
£50,001 - £150,000 of income = 40% tax (£39,999.60)
£150,000 - £200,000 of income = 45% tax (£22,500)
the total amount of tax that mary paid = £72,499.60
his effective tax rate = 36.25% (72,499.60/200,000 x 100)
in the UK, a capital gains tax is levied on the profit that is made when you sell an asset that has increased in value. it is only the gain that is taxed, not the overall amount.
every year, you have a capital gains tax-free allowance. the current allowance is £12,000. this amount does not roll over each year.
the current rates for any gains above the allowance for the 2019 - 2020 tax year are as follows:
a capital gain on residential properties have the following rates:
it is worth noting that in most cases, you don't have to pay any capital gains tax if you're selling your main home.
you only have to pay capital gains tax on 'chargeable assets'. these include:
there are numerous tax-friendly accounts that you can manage to avoid capital gains tax. these include:
in the uk, inheritance tax is a tax on the estate of someone that has died.
an estate includes all assets such as; property, cash and possessions.
you usually do not pay inheritance tax on the following scenarios:
the threshold can increase to £475,000 if an estate is left to children or grandchildren.
the standard rate for inheritance tax is 40%. this will be charged on the part of the estate that is above the threshold.
as an example, if an estate is worth £525,000 and the threshold is £325,000, the total amount of tax payable would be 40% of £200,000 (£80,000).