Overview of the British Tax System: Types of Taxes and Tax Rates

May 17, 2024May 17, 2024 admin

The British tax system is designed to fund public services, infrastructure, and social welfare programs. It encompasses a variety of taxes imposed on individuals and businesses. Understanding the types of taxes and their rates is essential for both residents and businesses operating in the UK. This article provides an overview of the main types of taxes in the UK and their current rates.

Income Tax

Individual Income Tax

Income tax is levied on the earnings of individuals, including salaries, wages, pensions, and other income. The rates are progressive, meaning they increase with higher levels of income.

Personal Allowance: Up to £12,570 (2023/24 tax year) is tax-free.
Basic Rate: 20% on income between £12,571 and £50,270.
Higher Rate: 40% on income between £50,271 and £125,140.
Additional Rate: 45% on income above £125,140.

National Insurance Contributions (NICs)

National Insurance Contributions are paid by employees, employers, and self-employed individuals to fund state benefits, including the state pension, unemployment benefits, and healthcare.

Class 1 (Employees): 12% on earnings between £242 and £967 per week; 2% on earnings above £967 per week.
Class 2 (Self-Employed): £3.45 per week if profits are £12,570 or more per year.
Class 4 (Self-Employed): 9% on profits between £12,570 and £50,270 per year; 2% on profits above £50,270.

Corporate Tax

Corporation Tax

Corporation tax is levied on the profits of UK-resident companies and foreign companies with UK branches or offices.

Standard Rate: 25% from April 1, 2023, for companies with profits over £250,000.
Small Profits Rate: 19% for companies with profits of £50,000 or less.
Marginal Relief: Applies to profits between £50,000 and £250,000, providing a gradual increase from the small profits rate to the main rate.

Value Added Tax (VAT)

VAT Rates

Value Added Tax is a consumption tax levied on the sale of goods and services. It is included in the price paid by consumers.

Standard Rate: 20% on most goods and services.
Reduced Rate: 5% on certain goods and services, such as domestic energy and children’s car seats.
Zero Rate: 0% on essential items, including most food and children’s clothing.

Capital Gains Tax (CGT)

Individuals

Capital Gains Tax is charged on the profit made from selling or disposing of assets such as property, shares, or businesses.

Annual Exempt Amount: £6,000 (2023/24 tax year) for individuals.
Basic Rate Taxpayers: 10% on gains above the annual exempt amount.
Higher Rate Taxpayers: 20% on gains above the annual exempt amount.
Property Gains: 18% for basic rate taxpayers; 28% for higher rate taxpayers.

Businesses

Businesses pay Corporation Tax on their capital gains at the standard rate of corporation tax (25% from April 1, 2023).

Inheritance Tax (IHT)

Inheritance Tax Rates

Inheritance Tax is levied on the estate of a deceased person.

Nil-Rate Band: The first £325,000 of the estate is tax-free.
Standard Rate: 40% on the value of the estate above £325,000.
Reduced Rate: 36% if 10% or more of the estate is left to charity.

Stamp Duty

Stamp Duty Land Tax (SDLT)

Stamp Duty Land Tax is charged on the purchase of property and land in England and Northern Ireland.

Residential Properties: 0% on properties up to £250,000; rates increase incrementally to 12% for properties over £1.5 million.
First-Time Buyers: Exempt from SDLT on properties up to £425,000; reduced rates up to £625,000.
Additional Properties: An additional 3% surcharge on top of the standard rates.

Excise Duties

Alcohol, Tobacco, and Fuel

Excise duties are specific taxes on the sale of certain goods, including alcohol, tobacco, and fuel.

Alcohol Duty: Varies by type and strength of alcohol.
Tobacco Duty: A specific rate per cigarette or weight of tobacco.
Fuel Duty: A fixed rate per litre of petrol and diesel.

The British tax system encompasses a wide range of taxes aimed at funding public services and maintaining economic stability. Understanding the various types of taxes and their rates helps individuals and businesses navigate their financial responsibilities. Staying informed about tax rates and regulations is crucial for compliance and effective financial planning.