How much tax do I pay?
Did you know that tax accounts for around a third of the money we earn?
Taxes deducted from our income, such as PAYE and National Insurance, account for 20%. The rest goes on indirect taxes – including VAT, duty on alcohol and petrol, and council tax.
This guide explains each type of tax, how much you’re charged for it, and how it’s collected from you.
- Get a head start on your 2017-18 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 is paid on money you earn – from being in employment, being self-employed, receiving a pension and other forms of income, such as from letting a property.
Your taxable income is the amount you earn above the personal allowance (£11,850 for 2018-19) and any other reliefs you are eligible for.
You may also be charged income tax on fringe benefits you receive as an employee, such as a company car or private health insurance.
Find out more: income tax calculator 2018/19
England Wales and Northern Ireland
Those in England, Wales and Northern Ireland are split into three tax bands.
People with taxable income up to £34,500 are basic-rate taxpayers and pay tax at 20%. Including your personal allowance of £11,850, this means the earnings threshold for basic-rate taxpayers is £46,350.
Those with taxable income of more than £46,350 will pay 40% tax on any income above this threshold.
Taxable income over £150,000 is taxed at 45%.
Income tax rates are different if you live in Scotland.
With a taxable income between £11,850 and £13,850, you pay 19% (the starter rate).
Between £13,851-£24,000, you pay 20% (the basic rate).
Between £24,001-£43,430 you pay 21% (the intermediate rate).
Between £43,431 and £150,000, you pay 41% (the higher rate).
If you earn more than £150,000 you'll pay 46%.
Find out more: income taxes in Scotland – our guide to the latest changes
Income you receive from an employer is usually taxed through PAYE before you receive your salary, so you do not need to do anything.
If you’re self-employed, or receive untaxed income from renting a property or a salary from more than one employer, you must submit a self-assessment tax return to pay income tax. Read our guides on self-assessment for everything you need to know.
Everyone who earns above a certain threshold has to pay National Insurance as well as income tax.
Some National Insurance contributions mean that you qualify for certain state benefits, such as the basic state pension, Employment Support Allowance and bereavement benefits.
In 2018-19, National Insurance contributions for employees (Class 1) are 12% of earnings between £162 and £892 a week (£8,424 and £46,350 a year), and 2% on earnings above this.
Self-employed people have to pay Class 2 National Insurance contributions of £2.95 a week if their annual profits are above £6,205 in 2018-19. Below this, they can opt not to pay or volunteer to make Class 2 contributions.
They must additionally pay Class 4 National Insurance contributions of 9% on any profits between £8,424 and £46,350 (2018-19) and 2% on profits above this.
Value added tax (VAT)
Value added tax (VAT), is the tax applied to most goods and services though some things – postage stamps, financial and property transactions – are exempt.
Most things have the standard VAT rate of 20%, but there’s a reduced VAT rate of 5% on things such as children’s car seats and home energy.
VAT works in a similar way to excise duty, which 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).
How do I pay VAT?
If you’re buying goods and services, VAT is usually added into the price before you pay – so you don’t have to do anything extra. It may be possible to claim back the VAT you’ve spent if the goods or services you’re buying are for your work or business.
If you’re self-employed and are selling the goods or services, you add the VAT yourself. You must register for VAT with HMRC if your business’ VAT taxable turnover is more than £85,000.
Find out more: self-employed VAT return
In England and Northern Ireland, 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 then pay 5% on the portion of the property price between £250,001 and £925,000. Between that point and £1.5m, you pay 10%, and 12% on anything over £1.5m.
If you’re a first-time buyer, you won’t pay stamp duty on homes that cost £300,000 or less, and will pay 5% on on home values between between £300,001 and £500,000. If the property is worth more than £500,000, you'll pay at the same rates as other buyers.
Our stamp duty calculator lets you work out in seconds how much stamp duty is due on a property.
Stamp duty is also payable at a flat rate of 0.5% on purchases of shares and some other securities.
In Scotland, you pay Land and Buildings Transaction Tax (LBTT), with different price bands but a fairly similar system. Our guide on LBTT in Scotland fully explains how it works.
In Wales, there’s Land Transaction Tax. This is payable if a property you’re intending to live in costs more than £180,000 – well above the £125,000 threshold in England. For more, see our guide to Land Transaction Tax in Wales.
How do I pay stamp duty?
Stamp duty is payable once you complete the purchase of the property, and you must pay HMRC within 30 days. To do this, you need to submit a Stamp Duty Land Tax return.
In a lot of cases, your conveyancer will pay HMRC for you and will add the stamp duty charge in with all of the other fees, but it is still your responsibility to pay it on time.
Inheritance tax (IHT)
Inheritance tax is paid on your estate if it is worth more than £325,000 during 2018-19.
The main-residence nil-rate band, which was introduced on 6 April 2017, gives extra allowance to those passing the family home to their children.
This allows you to pass on an additional £125,000 in 2018-19. This allowance is set to increase by £25,000 every year until it reaches £175,000 in 2020-21.
Married couples and civil partners can combine their allowances, so could potentially pass on a £1m by 2020.
If the value of your estate exceeds the nil-rate band, and/or the property nil-rate band, the amount over the threshold is charged at 40%.
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.
Find out more: our guide to inheritance tax
How do I pay inheritance tax?
Those inheriting the estate must pay inheritance tax by the end of the sixth month after the person died – so, if the person died in January, inheritance tax must be paid by 31 July.
If you don’t pay by this time, HMRC will charge interest on the payment due.
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 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).
How do I pay capital gains tax?
You can either report the capital gains in a self-assessment tax return and pay the tax on them annually, or you can use HMRC’s ‘real time’ capital gains tax service.
Find out more: Capital gains tax rates and allowances
Local authorities charge council tax to residents to fund local facilities such as refuse collection, social care, policing, parks maintenance and fire services.
The amount you’re charged depends on the kind of property you live in. Properties are split into council tax bands depending on what their value would have been at a specified date.
Some properties are exempt from council tax or qualify for a discount, depending on the current occupancy.
Northern Ireland has a domestic rates system, which is calculated based on rental values.
To find out more about reducing your bill and how much you pay, see our guide to council tax.
How do I pay council tax?
Your council will send you a bill for your council tax. You can choose to pay for the year in a lump sum, but it may be easiest to set up a direct debit, where you’re usually billed for 10 out of 12 months.
Find out more: Paying council tax
Insurance premium tax
Insurance premium tax (IPT) is paid on most insurance policy premiums (but not life insurance). This includes things like car insurance, home insurance and pet insurance.
Two rates apply – 12% is the standard rate, payable on most insurance policies. There is also a higher rate of 20%, which is usually applied where insurance is sold in conjunction with holidays and most consumer electrical goods.
How do I pay insurance premium tax?
IPT should be added to your insurance quote before you pay – so the prices you see advertised are inclusive of insurance premium tax, and you'll pay when you purchase the policy.
Dividend tax is charged on money earned from shares you’ve bought. This can be a result of the shares growing in value giving you a profit when you sell them, or by the company distributing some of the profits they make to shareholders.
In 2018-19 tax year, you are taxed on any dividend income exceeding £2,000. This has been reduced from £5,000 in 2017-18.
The amount you’re taxed depends on the usual amount of income tax you pay. Basic-rate taxpayers are charged 7.5%; higher-rate taxpayers pay 32.5% and additional-rate taxpayers have to pay 38.1%.
How do I pay dividend tax?
If you earn between £2,000-£10,000, you need to tell HMRC. You can pay the tax owed by HMRC adjusting your tax code, so the tax is gradually taken from your salary or pension, or by filling out a self-assessment tax return and receiving a bill for the entire amount due.
If you earn more than £10,000 in dividends, you must complete a self-assessment tax return.
Find out more: Dividend tax calculator
Tax on savings
You're charged tax on the interest you earn on your savings while they're in a bank or building society account unless your savings are held in an Isa, which is tax-free.
If you earn less than the personal allowance of £11,850, you might qualify for up to £5,000 in tax-free savings – also known as the savings starter rate. For every £1 you earn over the personal allowance, this tax-free savings amount reduces by £1.
In addition to this, any basic-rate taxpayers (as well as low-earners who don't pay tax) can earn up to £1,000 per year from their savings interest.
Higher-rate taxpayers can earn up to £500. Additional-rate taxpayers do not qualify for any savings allowance, so must pay tax on any interest earned from their savings.
Find out more: Income tax on savings and investments
How do I pay tax on savings?
If you exceed your personal savings allowance, you need to tell HMRC and either pay the tax you owe through a self-assessment tax return or via an adjustment to your PAYE tax code.
Untaxed income and late fees
There are specific deadlines for filing your tax return, paying your taxes and, in some circumstances, informing HMRC of new income.
If you file your return or pay your taxes late (or fail to meet any other deadlines), you may have to pay a penalty. Interest is also charged where tax is paid late.
If you receive untaxed income that is liable for tax, you have to declare this to HMRC – your tax office will tell you how to do this. You pay the extra tax either through a tax return or via an adjustment to your tax code if you're a PAYE taxpayer.
You must tell your tax office about new untaxed income by 5 October following the end of the tax year in which you received the income. So if you received untaxed income during the 2017-18 tax year, you'll have to tell your tax office about this by 5 October 2018.
Tax avoidance, where you arrange your finances to pay as little tax as possible, is a legal course of action. HMRC describes it as ‘operating within the letter, but not the spirit, of the law’.
Many people who enter tax-avoidance schemes will find they end up paying more tax than they tried to save once HMRC has investigated them.
Tax evasion, where you conceal income or gains or fraudulently claim allowances or other deductions, is a criminal offence. You can be fined or even imprisoned if HMRC finds you guilty of tax evasion.