United Kingdom Income Tax Explained
You might be wondering what is income tax, and why you need to pay income tax? On this page you’ll find a comprehensive description of the income tax, where it originates from, and how income tax benefits you and the society that we live in.
What is income tax?
At first glance, paying income tax can seem to be a bad thing – at the end of the day, we need to give away our hard earned money to the government. But why do we give away a part of our lives to the government? Wait a minute, did I just say part of our lives? Yes, the time you spent for earning that money was spent from your life. You may actually spend over 10 years from your life working for the government for free! See the Free Work Calculator page to check how many years you’ll work for free for the government.
Well, even though it might seem like free work, in most cases, the government is using that tax to make our society a better place. Our government is using the money that you pay month by month for conducting their affairs, taking care of the elderly, investing in infrastructure, funding healthcare, increasing security, and many more.
Income tax – a brief history
The earliest evidence of taxation was found in the ancient city-state of Lagash in modern day Iraq.
From ancient China, to Egypt, Greece, and the Roman Empire, all nations in the history imposed tax on their citizens, and the percentage of tax paid always increased in times of hardship. However, history shows that it was not always the case. Some nations like the Roman Empire is said to have collapsed mainly because they abused the citizens and demanded unfairly high amount of taxes from the citizens.
How does income tax work?
The concept of income tax is fairly simple – you work, earn revenue, and pay a part of your revenues to the government. The more you earn, the more tax you’ll pay to the government.
What is income tax, and what other taxes do we pay?
Income tax is a percentage of wages earned that goes to the government to pay for things such as the National Health Service, the armed forces, the police force, public services, roads and infrastructure. No one likes paying income tax but if you imagine a world where we didn’t have any of the above, you will understand why it is necessary.
The first £12,500 earned in a year is tax free, then after that the rates vary depending on what you earn, explained in the table below.to
Basic rate (£12,500 to £50,000) – 20%
Higher rate (£50,000 to £150,000 – 40%
Additional rate (over £150,000 – 45%
These rates are for the years 2019-2020, but they often change, depending on factors such as which political party is in government, and the economic climate.
Income tax is most commonly collected at source, i.e. deducted from your wage packet before it’s handed to you, by your employer. This system is known as PAYE, which is an acronym for Pay As You Earn. However, adjustments may be needed at the end of the year, which could mean that you owe more tax, or even be due a refund. To make thinks a little more complicated, the tax year is different from the normal year, and runs from April 6th – April 5th the following year.
Another form of income tax you are required to pay is National Insurance. National Insurance was put in place to cover times of unemployment and pensions. The more National Insurance you pay, the more financial help you will get when unemployed, and ultimately, retired and require a pension. It is again deducted at source, and topped up by your employer, who is also obliged to contribute.
If you think that enough of your hard-earned cash is already being paid to the government, there is more bad news.
If you have savings or investments, any return you get from them are taxed too. Again, usually taken from source, but you may be required to file a Self-Assessment tax return. If you don’t, you can find yourself with a hefty fine. If in doubt, check here, to see if you’re liable.
Other types of tax
Then there is Value Added Tax, which was introduced when the UK joined the European Union in 1973. It was set at 10% and levied on, initially, items of luxury, such as fridges, TVs etc. Since then, VAT has not only doubled but the range of goods and services have been gradually yet dramatically extended, to include things such as take away food. In fact, very few things are now exempt from VAT. Books, children’s clothes and sometimes groceries are about all that are VAT free.
The rate sometimes varies, such as electricity and gas, which is taxed at 5%. As are tampons, which is a contentious issue and is constantly being campaigned to be dropped.
Surely that must be it, I hear you ask. But no. You will even be taxed when you die.
Inheritance Tax, again a highly contentious issue, is levied after your death and is calculated on the value of your estate, i.e. money, real estate, valuables. So, in essence, all of the things that you’re afforded to acquire after paying all the above taxes, is taxed again. In fairness, the recent governments have raised the levels where it needs to be paid considerably over the past ten years or so, but many still see it as an unfair and greedy tax.
We also pay other taxes besides income tax, National Insurance and VAT.
Council tax is calculated on the value of the property you live in and is used to pay for local services such as bin collections, schools and street lighting. If you are on benefits and live in a council home or housing association property, with a spare bedroom, will also get clobbered with bedroom tax, resulting in a reduction in your benefits. If you run a car you will pay road tax, and if you buy a house you will pay stamp duty. If you smoke or drink, there is duty, which can be as high as 80% on alcohol and 82% on tobacco.
There is also a tax that you may have no idea that you’re paying, and that’s the green levy, and adds around £112 to your fuel bill. It’s there to subsidise investment in renewable energy.
There is a common belief that the tax freedom date (so if you work, every penny you earned from January 1st to 29th May would go to the tax man) is May 30th each year, but if you factor in all of the other taxes we pay, it’s probably more like September/October.
Are you from Cyprus or planning to work in Cyprus?
Use this Cyprus tax calculator to figure out your net pay