Tax is a vital element of how the UK government funds essential services such as healthcare, education, transport infrastructure, defense, and welfare programs. While it is something that most people encounter regularly, many are often unsure about how much tax they pay or how different taxes work. The UK has a complex tax system that includes income tax, National Insurance, VAT (Value-Added Tax), property tax, and various other levies that impact individuals and businesses alike.

In this article, we will explore how much tax the average person in the UK pays, looking into different types of taxes, how they are calculated, and what factors affect the amount you pay.

1. Income Tax

Income tax is the primary form of taxation for most people in the UK, and it is levied on earnings from employment, self-employment, and pensions, as well as certain benefits like dividends or rental income. The income tax system in the UK is progressive, meaning that the more you earn, the higher the percentage of your income that you will be taxed.

The tax-free personal allowance is the threshold under which no income tax is paid. For the 2023/24 tax year, this allowance is set at £12,570. This means that the first £12,570 of your income is tax-free. After this threshold, the income tax brackets are as follows:

• Basic rate (20%): This applies to earnings between £12,571 and £50,270.
• Higher rate (40%): This applies to earnings between £50,271 and £125,140.
• Additional rate (45%): This applies to earnings over £125,140.

For example, if you earn £40,000 annually, you would not pay tax on the first £12,570. You would then pay 20% on the amount between £12,570 and £40,000, meaning you would pay £5,486 in income tax for the year.

Adjustments to Personal Allowance

The personal allowance decreases for individuals earning over £100,000, and once earnings exceed £125,140, the allowance is completely removed, making all income subject to tax. For instance, if you earn £110,000, your personal allowance would reduce by £5,000, and you would only have £7,570 as tax-free income.

Tax on Dividends

If you receive income through dividends from shares in a company, this income is taxed differently. Dividend income over £1,000 is subject to tax at the following rates:

• Basic rate taxpayers: 8.75%
• Higher rate taxpayers: 33.75%
• Additional rate taxpayers: 39.35%

2. National Insurance Contributions (NICs)

National Insurance Contributions (NICs) are another significant tax for people in employment or self-employment. These contributions help fund the National Health Service (NHS), state pensions, and other welfare benefits.

There are different classes of NICs, but the two most common are:

• Class 1: Paid by employees and employers on earnings over a certain threshold.
• Class 2 and Class 4: Paid by the self-employed.

For employees, you pay 12% on earnings between £12,570 and £50,270, and 2% on earnings above £50,270. Employers also pay National Insurance contributions for their employees at a rate of 13.8% on earnings over £9,100.

For the self-employed, Class 2 NICs are set at a flat rate of £3.45 per week if profits exceed £6,725 per year. Class 4 contributions are 9% on profits between £12,570 and £50,270 and 2% on profits over £50,270.

For example, if you are employed and earn £40,000 per year, you will pay NICs of approximately £3,294.

3. Value-Added Tax (VAT)

VAT is a tax on goods and services that is included in the price you pay for many items. It is charged at different rates depending on the product or service. The standard VAT rate in the UK is 20%, but there are reduced rates for certain goods and services, including:

• 5%: For energy bills, child car seats, and some health products.
• 0%: For most food items, children’s clothing, and books.

VAT is usually included in the price of everyday items, and although you don’t pay it directly as a separate charge, it significantly impacts the total cost of living.

4. Council Tax

Council tax is another significant levy for people who own or rent property in the UK. It is used to fund local services such as rubbish collection, street cleaning, and social services. The amount of council tax you pay depends on the value of your property and the area in which you live.

Properties are assigned to one of eight council tax bands (A to H), based on their assessed value. The amount payable varies significantly by location and property value. For instance, a Band-D property in London may attract a much higher council tax than a Band-D property in a rural area.

5. Stamp Duty Land Tax (SDLT)

If you buy property in the UK, you are likely to pay Stamp Duty Land Tax (SDLT). This tax applies to residential properties over £250,000 and is tiered based on the purchase price. First-time buyers benefit from a higher threshold of £425,000 before paying SDLT.

The rates for SDLT are as follows:

• Up to £250,000: 0%
• £250,001 to £925,000: 5%
• £925,001 to £1.5 million: 10%
• Over £1.5 million: 12%

For example, if you buy a house for £300,000, you would pay 0% on the first £250,000 and 5% on the next £50,000, resulting in £2,500 in stamp duty.

6. Capital Gains Tax (CGT)

Capital Gains Tax (CGT) is a tax on the profit made from selling certain assets such as property (that is not your main home), shares, or other valuable items. CGT is charged at different rates depending on the asset type and the taxpayer’s income tax band:

• Basic rate taxpayers: 10% for most assets and 18% for residential property.
• Higher rate taxpayers: 20% for most assets and 28% for residential property.

You do have an annual tax-free allowance for capital gains, which is £6,000 for the 2023/24 tax year.

7. Inheritance Tax (IHT)

Inheritance Tax (IHT) is a tax on the estate (money, property, and possessions) of someone who has died. It is charged at 40% on the value of estates above the threshold of £325,000. However, if you leave your home to your children or grandchildren, the threshold can increase to £500,000.

8. Other Taxes and Levies

Other smaller taxes and duties include:

• Excise duties: Levied on goods like tobacco, alcohol, and fuel.
• Vehicle tax: Charged annually based on the vehicle’s CO2 emissions.
• TV license: A charge for using or recording live television or the BBC’s iPlayer service.

Conclusion

The total tax you pay in the UK depends on various factors, including your income, how you earn your money, your property ownership, and your spending habits. The UK tax system is progressive, meaning that those who earn more generally pay a higher percentage of their income in taxes.

Whether through income tax, National Insurance, VAT, or council tax, taxation touches almost every part of life in the UK, ensuring that public services are funded while trying to balance fairness and efficiency.