Do you really know your tax types? Whether or not you do, it’s always a good idea to make sure you understand the British tax system so you know where your hard earned cash is actually going. Here’s a breakdown of the types of taxes you may come across.
The five types of taxes:
- Income Tax on pensions, earnings and benefits.
- Income Tax on savings and investments.
- Tax on certain types of transactions.
- Tax on goods and services.
- Tax for local services.
1) Income Tax on pensions, earnings and benefits
This is the most common of all the UK taxes and you have to pay it on:
• The profits you make if you’re self-employed and have your own business.
• Any benefits you claim like Jobseeker’s Allowance, Carer’s Allowance and Incapacity Benefit.
• Your state, private or company pension.
Without meaning to rub it in, you also have to pay National Insurance Contributions (NICs) on top of the income tax you’ve paid. If you’re an employee this should be deducted off your wages by your employer. If you’re self-employed you will have to pay this when filling out your self-assessment form.
2) Income Tax on savings and investments
If you own any properties, receive dividends from shares or gain interest from a bank or a building society then you will have to pay Income Tax.
So, if you invested in a property recently, for example, and you decide to rent it out you have to pay income tax on the incoming payments you receive.
3) Tax on certain types of transactions.
This may seem somewhat vague. But essentially it’s a tax on certain things you buy or sell, or give away. This includes:
• Capital Gains Tax – For those that sell or give away goods.
• Stamp Duty – This applies when you buy a property or shares.
4) Tax on goods and services.
When you’re shopping or buying goods or betting on the dogs, you might not realise the different types of taxes you’re actually paying, like:
• Value Added Tax (VAT) – applied to most goods.
• Excise Duty on tobacco and alcohol.
• Fuel Duty on petrol, diesel and LPG.
The reason why you may not notice paying this type of tax is because much of it, unlike the US, comes as a flat rate and is added on to the commodity you’re buying.
5) Tax for local services.
Another term for this, and perhaps the most common, is Council Tax. How much you pay depends on what ‘valuation band’ your property falls under – Band I being the highest and A the lowest.
The tax exists to fund all your local services like dustbin collection, street repairs and policing. Properties that fall under Band A, for example, pay less council tax than homes in Band I as the property is typically in a less desirable area.