Taxes are how the government raises money in order to pay for public services such as education, healthcare and transport. This page will go through the different kinds of tax, how much you’ll pay and when you’ll pay it.

This page was last checked on 24th March 2022.

Income tax

Income tax is a tax on money that you earn. In the UK, you can earn £12,500 tax-free each year. 20% of anything you earn above £12,500 and below £50,000 is taxed. Anything you earn above £50,000 is taxed at 40%.

For example, if you earn £30,000 every year, you get £12,600 tax-free. That leaves £17,400 that is taxed.

So 20% of £17,400 is £3,480.00. You would get £3,480.00 removed from your pay with income tax if you earn £30,000 every year.

Anything you earn above £50,000 is taxed at 40%.

For example, if you earn £75,000 every year, you get £12,600 tax-free. £35,000 is taxed at 20%, which is £7,000. £25,000 is taxed at 40%, which is £10,000. Overall, you get £17,000 removed from your pay with income tax if you earn £75,000 every year. [check sums with new threshold]

If you’re working for someone, then income tax is taken from your salary before you get it.

If you work for yourself, you have to send a tax return document to HMRC. You can find out more on how to do this at https://www.gov.uk/government/organisations/hm-revenue-customs (link opens in a new tab.)

National Insurance

Like income tax, national insurance is a tax on money you earn. It is different to income tax in several ways:

National insurance rates change each year, but as of 24th March 2022, income between £12,600 and £50,200 per year is taxed at 13.25% and anything above £50,200 is taxed at 2%.

For example, if you earned £30,000 each year, National Insurance would take out £2,705.12 from your salary. If you earned £75,000 each year, it would take £4,945.05 from the base rate (13.25%) and £495 from the additional rate (2%)

If you’re working for someone else, you start paying National Insurance when you earn at least £12,600 each year (if you’re a university student, this amount is different at £1,042 each month). Like income tax, this money is taken out of your salary before you get it.

If you work for yourself, you have to send a tax return document to HMRC.

Unlike income tax, employers also pay National Insurance at the same rates.

Why do I pay National Insurance?

National Insurance was introduced in 1911 to allow workers to have benefits such as sick pay and a basic pension from the government. In 1946, Clement Atlee, who was prime minister at the time, expanded National Insurance to fund more education and set up the NHS.

In 2021, the UK government announced that there would be a new Health & Social Care Levy at a 1.25% rate from April 2023. This is included in the rate of National Insurance from April 2022 until April 2023. After that, the levy will be included as a separate tax, which everyone, including those over 65, must pay.

In March 2022, UK Chancellor Rishi Sunak announced that the minimum thresholds for paying national insurance and income tax would be the same from July 2022.

VAT (Value Added Tax)

Value Added Tax, or VAT, is a tax on products and services that you buy. These can be physical or digital products. VAT is usually included in the price of the product. Some products don’t have a VAT charge, including:

The current rate of VAT is 20%. This means, if something costs £1.00 without VAT, then it will cost £1.20 with VAT.

However, certain products and services don’t have to pay VAT or they pay it at a reduced rate. You can find out more about product and service exemptions at https://www.gov.uk/guidance/vat-exemption-and-partial-exemption (link opens in a new tab.)

Vehicle tax

Vehicle tax is a fixed charge on each vehicle you own. How much this costs you depends on the type of vehicle that you own.

How much you pay depends on how old your vehicle is and when you registered it. You can see all vehicle tax rates at https://www.gov.uk/vehicle-tax-rate-tables (link opens in a new tab.)

Inheritance tax

Inheritance tax is a tax charged on when someone dies and leaves their assets (property, money and belongings) to someone else. You don’t need to pay inheritance tax if the amount you’re giving away is below £325,000. Anything above £325,000 is taxed at 40%.

For example, if you have assets worth £600,000 when you die, you only get taxed on £275,000 of it. In this example, the tax would cost £110,000.

There are exceptions to this tax. These include:

There are also other exemptions. If you give your house to your children or grandchildren, the assets that are not taxed is £500,000.

Council tax

Council tax is paid to your local council. The amount you pay depends on 2 things:

There are times when you can get reduced or no council tax – you can find out more about that at https://www.gov.uk/council-tax (link opens in a new tab.)

Stamp duty

Stamp duty is a tax paid when land, a house or a flat are bought. It goes under different names in Scotland and Wales. For residential houses, the tax-free amount is £125,000. For non-residential properties, it is £150,000.

First-time buyers pay very little, if any, tax on their first property if the property is sold for less than £500,000.