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Types of Taxation in the United Kingdom

Since 2009, the United Kingdom (UK) has had the longest tax code in the world and the taxation system in the UK is relatively straightforward. One of the aspects that makes the taxation system of the United Kingdom (UK) interesting is that the spouses are separate entities and pay taxes as individuals, although there are a few exceptions. If you live in the United Kingdom (UK) and pay your taxes there, it can potentially involve making payments to at least three different levels of the UK’s government: the central government (Her Majesty’s Revenue and Customs), devolved governments, and the local government. It is pertinent to mention here that the tax year is also sometimes referred to as the Fiscal Year and runs from April 6th until April 5th in the subsequent year. There are several taxes that the residents of the United Kingdom pay.

The five main types of taxes are mentioned below.

  • Income Tax
  • National Insurance Contributions
  • Value Added Tax (VAT)
  • Excise Duties
  • Corporation Tax

Income Tax

The name itself describes the nature of the tax. This is the tax that applies directly to the personal income and the amount you pay as the income tax depends on mainly two things:

  • How much of your income is above your Personal Allowance
  • How much of your income falls within each tax band

According to the taxation laws of the UK, the taxable income is not the same as your total income since the tax payers are allowed to earn a certain amount before they start paying the income tax. This is called the Personal Allowance, that stands at £12,500, it means that the government will start asking you to pay the income tax once your income exceeds this amount.

National Insurance Contributions

In order to qualify for certain benefits and the State Pension, you have to pay the National Insurance Contributions in the United Kingdom. As per the UK’s law, if anyone is above 16 and earning as many as £157 or more in a week or is self-employed and had a profit of more than £6,025 a year is expected to this tax. It is pertinent to mention here that there are different National Insurance Classes in the United Kingdom (UK). It means that not everyone living in the UK pays the same amount as the National Insurance; the status of your employment and your earnings play a decisive role, as well as if you have any gaps in your National Insurance record.

Value Added Tax (VAT)

Value Added Tax is also known as a consumption tax that is the third-largest source of income of the government of the UK after income tax and the National Insurance. The people are bound to pay this tax on most goods and services, with the standard VAT rate being 20% since 4th January 2011 which was 17.5% before that. As per the UK’s law, there is a reduced rate of 5% levied on children’s car seats, electricity, gas, heating oil and solid fuel, and mobility aids for elder people. There are several other products that are zero-rated and those products include; books, meat and poultry, fruit and vegetable, and household water, etc. There are several other goods and services in the country that are exempted from the Value Added Tax (VAT) or those goods and services are outside the tax system.

Excise Duties

The government of the United Kingdom charges Excise Duties on things including alcohol, tobacco, betting, and vehicles. On the other hand, the producers of these goods also being charged. The government imposes the Excise Duties on the people in addition to an indirect tax such as Value Added Tax (VAT) and in the United Kingdom, a separate tax form from the VAT one must be filled in. The Excise Duties are included in the final sale price of the product, meaning that the consumer pays indirectly.

Corporation Tax

The Corporation Tax is the tax that applies to the company profile it means that you will have to pay it if you are doing business in the UK as:

  • A limited Company
  • A foreign company with a UK branch or office
  • A club, co-operation, or other unincorporated association such as a sports club
From 1st April 2017, the normal rate of the corporation tax in 19%, but in the coming few years this tax may fall to 17%. Prior to this, the Corporation Tax was depended on the size of the profit of any business in the United Kingdom (UK). The Corporation Tax is a little bit confusing because it must be paid before you file your company tax returns, which leaves many businesses with two accounting periods, making it harder for the company to keep an overview.

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