Introduction
to tax
Tax is the name given to money that the
Government collects from us to pay for public services such as
transport, social housing, education and healthcare.
We pay a number of different taxes and these are collected from
us in different ways.
This section explains how the different types of taxes
work.
You can read through this information sheet, or go directly to
the sections you want to read by clicking on these links:
Income tax
Income tax is the tax that we pay on our income, for example our
wages, money we earn through self-employment or the money we make
on our savings and investments.
We all have a personal allowance, which is a sum of money that
we can earn without having to pay tax on it. After this, we
generally pay 20% of our income in tax and then, if we earn above a
certain amount of money, the tax we pay goes up to 40% and in some
cases 50% (this highest rate is reducing to 45% in 2013/2014). This
means that more we earn, the more tax we pay.
The Government sets personal allowances and the amount we can
earn before going on to the higher rate of tax each year. The
Directgov (link opens in a new window) website has more
information.
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Paying income tax
Pay as you earn (PAYE): If you are employed by
someone and receive wages, you pay your tax by PAYE. This means
that the tax is taken from the amount you earn and passed on to the
Government before you get your wages.
Self assessment: If you work for yourself or
have income coming from a number of places, you will probably have
to fill in a self-assessment tax form to tell the Government how
much you have earned and pass the tax on to the Government
yourself. If you do not submit self assessment tax forms by the
deadline set out, you will be liable for penalties in the form of a
fine.
See self assessment for more
information.
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National insurance
This is the tax that the Government collects
from us to go into the national insurance fund
that contributes towards the National Health Service
(NHS) and various welfare benefits, including the State Retirement Pension, Maternity Allowance, Incapacity Benefit, and contribution-based Jobseeker’s Allowance. By
paying into it, we become entitled to claim some of these benefits
if we need to. The type and amount of national insurance we pay
depends on how much we earn and whether we are employed or
self-employed.
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Paying national insurance
If you are employed and pay tax via PAYE, your national
insurance contributions are collected at the same time.
If you are self-employed, you pay a flat weekly rate of national
insurance, usually straight from your bank account, together with a
percentage of your earnings, which you pay alongside your taxes via
self assessment.
The Government's Directgov website has more information on
national insurance (link opens in a new window), see
Directgov.
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Council Tax
Council Tax is a local tax that is set by councils to help pay
for a wide range of local services such as the police, libraries,
schools, parks and rubbish collection. How much you pay in Council
Tax has nothing to do with how much you earn but instead what the
value of the home you live in is. Each council sets its own Council
Tax so the amount you pay depends on where you live.
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Paying Council Tax
You need to tell your local council where you are living so it
can send you a Council Tax bill. This should arrive in April and
you can either pay it all at once or in 10 instalments. If you miss
even one of these 10 payment instalments, councils are within their
rights to ask for the whole amount back straightaway.
The Directgov website has more information on
Council Tax (link opens in a new window).
See Council Tax Benefit.
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Taxes on goods and services
We also have to pay tax on a lot of the things we buy.
Value Added Tax (VAT) is usually included in the price when we
buy something so we do not tend to notice it. If you look at a
receipt when you buy something like clothes or CDs, the amount of
VAT you are paying is set out. There are three rates:
- Standard rate – this is the rate added to most goods and
services. The current rate is 20%.
- Reduced rate – the gas and electricity we use at home and other
items such as children’s car seats attract the reduced rate, which
is currently 5%.
- Zero rate – there is no VAT added to a range of things such as
food, books and children’s clothes.
See the HM
Revenue and Customs (link opens in a new window)
website for more information on VAT.
As well as VAT, we also pay:
- Fuel Duty on petrol, diesel and LPG
- Excise Duty on tobacco and alcohol
- General Betting Duty on gambling.
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Other taxes
Other taxes to watch out for include:
- Capital Gains Tax, which we may have to pay when we sell or
give away things that belong to us, such as property
- Stamp Duty, which we usually have to pay when buying shares or
property
- Inheritance Tax, which is primarily a tax on your estate when
you die.
There are serious consequences for not paying tax, so if you are
having trouble paying do not ignore the problem. Instead,
contact HM Revenue and Customs and explain your
circumstances. If this does not produce a satisfactory response
then seek further independent advice.
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Acknowledgement
This information has been reproduced with the kind permission of
the Low Incomes Tax Reform Group (link opens
in a new window), which is an initiative of the Chartered
Institute of Taxation to give a tax voice to the unrepresented.
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Last updated: 6 April 2012
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