Your guide to understanding the UK tax system
You may not have given much thought to taxes and how they work, but it's important to have a basic understanding of the UK tax system. This knowledge will help you manage your money more effectively, plan your career and make informed financial decisions. In this article, we'll explore how the tax system in the UK works, including PAYE, self-assessment, VAT, tax bands and ISAs.
The UK tax system is divided into several categories, including income tax, national insurance contributions (NICs), corporation tax, value-added tax (VAT), and others. The most common type of tax that affects most people is income tax.
PAYE (Pay As You Earn) is the method used to collect income tax and NICs from employees' salaries or wages. When you start working for a company, you'll be given a tax code, which determines how much tax you'll pay. Your employer will use this tax code to calculate how much tax to deduct from your pay and send it to HM Revenue and Customs (HMRC).
If you're self-employed, you'll need to complete a self-assessment tax return every year. This is used to calculate how much income tax and NICs you need to pay. You'll need to keep track of your income and expenses throughout the year, so you can report them accurately on your tax return.
VAT (Value-Added Tax) is a tax on goods and services. If you run a business or are self-employed, you'll need to register for VAT if your annual turnover exceeds a certain threshold. You'll need to charge VAT on your sales, and pay VAT on your purchases.
There are different tax bands for income tax in the UK, which determine how much tax you pay. The current tax-free personal allowance is £12,570 for the tax year 2021/22. Any income above this amount is taxed at a certain percentage, depending on your income level. For example, the basic rate tax band is from £12,571 to £50,270, and the tax rate is 20%. The higher rate tax band is from £50,271 to £150,000, and the tax rate is 40%.
ISAs (Individual Savings Accounts) are a tax-free way to save or invest your money. You can invest up to £20,000 per tax year in an ISA, and any interest or capital gains you make are tax-free. There are several types of ISAs, including cash ISAs, stocks and shares ISAs, innovative finance ISAs, and lifetime ISAs.
In conclusion, understanding the UK tax system is essential for making informed financial decisions. Whether you're a student, an employee, or a business owner, you'll need to pay taxes, and knowing how they work can help you manage your money effectively. Remember to keep track of your income, expenses, and tax deductions, so you can accurately report them to HMRC. And if you need help or advice on tax matters, you can always contact HMRC or seek the advice of a qualified tax professional.