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Tax rates and allowances

What taxes you pay

By Ian Robinson

Article 2 of 11

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What taxes you pay

Confused about tax? Find out what the main types are, as well as how, and how much, you pay.

Did you know that tax accounts for around a third of the money we earn? 

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.

Below are some of the main taxes you'll pay.

  • Get a head start on your 2016-17 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?.

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 2017-18, National Insurance contributions for employees (Class 1) are 12% of earnings between £157 and £866 a week (£8,164 and £45,000 a year) and 2% on earnings above this.    

The self-employed

Self-employed people have to pay Class 2 National Insurance contributions of £2.85 a week if their annual profits are above £6,025 in 2017-18.   

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 9% on any profits between £8,060 and £43,000 (2016-17) and 2% on profits above this.  

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%. 

Stamp duty 

Stamp duty land tax (SDLT) is paid on residential property purchases above £125,000. The starting rate, for properties worth between £125,001 and £250,000 is 2%. You'll pay 5% on the portion between £250,000 and £925,000. Between that point and £1.5 million, it’s 10%, and then 12% on anything over £1.5 million.

From 1 April 2016, an extra 3% SDLT supplement has applied for second homes. This is based on the full value of the property. 

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

Our stamp duty calculator lets you work out in seconds how much stamp duty is due on a property.  

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 2017-18 (or potentially up to £650,000 if you are married or in a civil partnership). The nil-rate band is not due to change until  2018-19. 

The new main-residence nil-rate band, which gives extra allowance to those passing the family home to their children, begins on 6 April 2017. 

This allows you to pass on an additional £100,000, which rises by £25,000 every year until it reaches £175,000 in 2020-21. This means married couples and civil partners can pass on a potential £1 million by 2020, if their estate includes their property.  

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. 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%

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 £11,300 in total during 2017-2018.   

For basic-rate taxpayers, capital gains are taxed at 10%. For those who pay income tax at 40%, the rate rises to 20%. On gains made from the sale of residential property (second homes), higher rates will apply (18% for basic-rate taxpayers and 28% for higher-rate taxpayers).   

Find out more: 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

Find out more: Council tax

Insurance premium tax 

Insurance premium tax is paid on most insurance policy premiums (but not life insurance). Two rates apply – 10% on most insurance policies, and 20% in some cases; for example, where insurance is sold in conjunction with holidays and most consumer electrical goods.

  • Last updated: April 2017
  • Updated by: Gareth Shaw

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