Tax rates, allowances and amounts What taxes you pay

A large proportion of your income may go towards paying taxes

Typically, around 35% of the money we earn goes on tax. Direct taxes such as income tax and National Insurance account for 20% of the money we earn. The rest goes on VAT, duty on alcohol and petrol, council tax and other indirect taxes.

From an average salary of £30,456 in 2008-9, £4,884 was taken in income tax, and £2,750 in National Insurance.

Some of the main taxes that you might pay are:

Income tax

Income tax is paid on earnings, pensions, benefits, savings and investment income and rents. 

Your taxable income is often less than the overall income you actually receive, as a first slice is tax-free. 

You may be charged income tax on fringe benefits you receive as an employee, such as a company car or private health insurance. 

You may also have to pay pre-owned asset tax (POAT) on items you have given away but continue to use.

National Insurance

National insurance is paid on your income from working or business profits. 

Some National Insurance contributions mean that you qualify for certain state benefits, such as the basic state pension, Employment Support Allowance, and bereavement benefits. 

Everyone who earns above a certain threshold has to pay National Insurance as well as income tax. 

Rates and thresholds

In 2010-11, National Insurance contributions for employees (Class 1) were 11% of earnings between £110 and £844 a week (£5,715 and £43,875 a year) and 1% on earnings above this. From April 2011 the rates increase by 1%, to 12% and 2%. The thresholds will change too. Class 1 NI is payable at 12% on earnings between £7,225 and £42,475. On earnings over £42,475 it will be charged at 2%.   

The self-employed

Self-employed people have to pay Class 2 National Insurance contributions of £2.40 a week if their annual profits are above £5,075 (in 2010-11). In 2011-12 their contribution rate rises to £2.50 if their annual profits exceed £5,315.  

Below this, they can opt not to pay, but they will not be credited with qualifying years for their entitlement to state pension. 

They must additionally pay Class 4 National Insurance contributions of 8% on any profits between £5,715 and £43,875 (2010-11) and 1% on profits above this. For 2011-12 the percentage rate rises to 9% for profits between £7,225 and £42,475. On profits above £42,475 the rate will be 2%.  

For more details, see National Insurance explained.

Value added tax (VAT)

VAT is currently paid at a standard rate of 20% on most goods and services.  

What's VAT free

You don't pay VAT on books, children's clothes and food. Fuel and power are taxed at 5%.

You will be liable for stamp duty when you buy a house

Stamp duty 

Stamp duty land tax (SDLT) is paid on most residential property purchases above £125,000. The starting rate, for properties worth between £125,000 and £250,000 is 1%.  On property worth over £250,000 it is paid at 3% and a rate of 4% is charged on property worth over £500,000. From April 2011, SDLT at 5% will be payable on properties worth over £1,000,000. 

For first-time buyers, the nil-rate threshold has been increased to £250,000 until 24 March 2012. 

Stamp duty is also payable on purchases of shares and some other securities at a flat rate of 0.5%.

Excise duty

Excise duty is paid on tobacco, alcohol, petrol and air travel, at different rates for different categories (unleaded petrol has a lower rate than standard diesel, for example).

Inheritance tax (IHT)

Inheritance tax is paid on your estate if it is worth more than £325,000 during 2010-11 (or potentially up to £650,000 if you are married or in a civil partnership). The nil-rate band remains unchanged for 2011-12. 

Inheritance tax may also be due on some gifts (mainly to trusts) that you make during your lifetime, depending on the overall value of your estate. From April 2011, gifts to charity that amount to 10% or more of the total estate can reduce the rate of IHT due on the remainder from 40% to 36%

For more details, see Inheritance tax explained.

Capital gains tax

Capital gains tax is paid on the profit you make on any possessions or investments you sell, or the increase in value from the date you acquired the assets if you give them away, unless these are exempt. For example your main home or personal assets with a value of less than £6,000, or if the gain is less than £10,100 in total during 2010-2011. For 2011-12 the capital gains tax allowance is increased to £10,600.  

For standard rate taxpayers, capital gains are taxed at a standard rate of 18%. For those who pay income tax at 40%, the rate rises to 28%.  

For more details, see Capital gains tax explained.

Council tax 

Council tax is charged according to property value by your local authority. An alternative system of domestic rates applies in Northern Ireland. 

For more details, see Council tax.

Insurance premium tax 

Insurance premium tax is paid on most insurance policy premiums (but not life insurance). Two rates apply – 5% on most insurance policies, and 17.5% in some cases, for example where insurance is sold in conjunction with holidays and most consumer electrical goods.

For more information if you're self-employed, see our book Working for Yourself or, for expert advice on how to cut your tax bill, see Tax Handbook 2011/12.