Taxation is a fundamental component of each country's economic system, allowing governments to fund public services and infrastructure. In the United Kingdom, taxes serve a key part in supporting numerous government activities. Understanding the main types of taxes is vital for people and organisations alike. This article discusses the major categories of taxes levied by the UK government.
Income tax is the major type of direct taxation in the UK, paid on people based on their wages. It is progressive, meaning that the tax rate grows as income rises. The income tax system consists of various tax bands, with each band liable to a separate tax rate. Currently, the tax bands in the UK are basic rate, higher rate, and extra rate. The income tax money is employed to pay public services, welfare, and other government initiatives.
National Insurance Contributions
National Insurance contributions (NICs) are payments made by employees and businesses to cover different state benefits and pensions. NICs are grouped into three classes, including Class 1 (paid by workers and employers), Class 2 (paid by self-employed persons), and Class 3 (voluntary contributions). These payments help support the National Health Service (NHS), state pensions, unemployment benefits, and other social security programs.
Value Added Tax
Value Added Tax (VAT) is an indirect tax levied on the sale of goods and services. It is charged at each level of manufacturing and distribution, but ultimately paid by the final customer. VAT is now established at multiple rates, including the regular rate of 20%, reduced rates of 5% and 0% (for essential commodities), and exempt suppliers (such as some financial services). VAT income adds considerably to the UK's overall tax revenue.
Corporation tax is charged on the profits of firms operating in the UK. The tax rate for corporate tax is decided annually by the government. As of 2021, the primary rate is 19% for most organisations. However, a separate rate applies to enterprises having ring-fenced income from oil and gas exploitation. Corporation tax revenues help to paying public services and government projects.
Capital Gains Tax
Capital gains tax (CGT) is imposed when an individual or organisation sells or transfers an asset that has gained in value. It is computed depending on the profit earned from the sale or transfer. The rate of CGT varies based on the individual's income tax category and the type of the asset. The cash earned by CGT is utilised to fund government spending and projects.
Inheritance tax is placed on the estate of a deceased individual. It is levied on the value of the assets left behind after subtracting any obligations and exemptions. The current standard rate for inheritance tax is 40%. However, there are exclusions and limits in place to prevent smaller estates from being liable to this tax. The cash earned by inheritance tax helps to state budgets.
Stamp duty is a levy paid on different transactions involving property and shares. In the UK, it is typically linked with property transactions, such as buying a house or land. The amount of stamp duty charged depends on the value of the property or shares being transferred. Stamp duty rates vary for residential and non-residential buildings, with varying thresholds and rates imposed appropriately. Revenue from stamp duty adds to government revenue.
The UK tax system consists of many sorts of taxes, each having a distinct function in paying public services, infrastructure, and social security programs. Income tax, national insurance payments, value-added tax, corporation tax, capital gains tax, inheritance tax, and stamp duty are the primary kinds of taxes in the UK.