Many people think taxes only matter when it’s time to file a tax return, but it’s not true. Every day, millions of people pay different taxes in the UK. Whether it’s Value Added Tax (VAT) added to your purchases or income tax deducted from your salary, understanding the main types of taxes can help you take control of your finances.
When you know which taxes apply to you, it helps you stay compliant with UK tax laws, avoid penalties, and plan your finances more effectively. This guide explains the key taxes in the UK, how they work, and who pays them.
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What are Taxes?
Taxes are important and mandatory payments that businesses and individuals make to the UK government. These payments help fund essential public services, including schools, roads, defence, public transport, policing, and other government services. In the UK, the main types of taxes are usually collected by HM Revenue and Customs (HMRC). However, some local taxes, such as Council Tax, are collected by local authorities.
Examples of Taxes In the UK
There are several taxes in the UK. For instance, Income Tax, National Insurance contributions (NICs), Corporation Tax, Capital Gains Tax, VAT, Inheritance Tax (IHT), Stamp Duty Land Tax (SDLT), and Council Tax.
What are the Main Types of Taxes in the UK?
To help you understand your financial obligations, let’s break down the main types of taxes in the UK:
- Personal and employment taxes include Income Tax, National Insurance Contributions (NICs) and Council Tax.
- Business and corporate taxes.
- Spending and property taxes such as VAT, capital gains tax, SDLT, and IHT.
What are the 5 Types of Taxes In the UK?
The five most common types of taxes in the UK are income tax, NICs, VAT, corporation tax and SDLT. HMRC manages these and other vital levies to fund public services like healthcare and education.
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Income Tax
Income Tax is one of the main types of taxes in the UK, which is charged on most types of taxable income that exceed your available tax-free allowances. You may pay Income Tax on employment income, self-employment profits, pension income, rental income, savings interest (above any available allowances), and some state benefits and employment benefits.
Generally, income tax is deducted automatically through the Pay As You Earn (PAYE) system for employees. However, self-employed individuals usually pay Income Tax through Self Assessment. Sole traders, employees, company directors, landlords, and pensioners with taxable income pay income tax.
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National Insurance Contributions (NICs)
NICs are included in the main types of taxes in the UK. It helps fund certain state benefits, including the State Pension and some other contributory benefits. This tax is generally paid by employees, employers, and self-employed individuals. Also, the amount you pay depends on your income and employment status.
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Value Added Tax (VAT)
In the UK, VAT is charged on many goods and services sold. UK businesses must register for VAT if their taxable turnover exceeds the VAT registration threshold set by HMRC. However, some businesses choose to register voluntarily. VAT rates include standard rate, reduced rate, and zero rate. Some supplies are exempt as well.
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Stamp Duty Land Tax (SDLT)
SDLT is another of the main types of taxes. This tax applies when purchasing land or property in England and Northern Ireland above the relevant thresholds.
The amount payable depends on property value, whether the property is residential or commercial, whether you already own another property, and eligibility for any reliefs. Keep in mind that Wales and Scotland have different property transaction taxes.
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Corporation Tax
Limited companies pay Corporation Tax on their taxable profits. Taxable profits may include trading profits, investment income, and chargeable gains from selling business assets.
Unlike a sole trader, a company pays Corporation Tax on its profits before any remaining profits are distributed to shareholders.
What are the 4 Direct Taxes?
When discussing the main types of taxes, it is important to understand the personal direct taxes in the UK. Direct taxes are taxes paid directly to HMRC by individuals or businesses. These taxes are generally based on income, profits, gains, or property. The four main direct taxes in the UK are:
Income Tax
In the UK, Income Tax is one of the most common direct taxes. It is charged on most types of taxable income received by individuals, such as self-employment profits, employment income, rental income, pension income, and savings interest (above any available allowances).
You can earn up to your available Personal Allowance before paying Income Tax. Usually, employees pay Income Tax through the PAYE system. However, self-employed individuals generally pay through Self Assessment.
Capital Gains Tax (CGT)
CGT is one of the main types of taxes that is charged on the profit (gain) you make when you sell or dispose of certain assets that have increased in value. For example, shares, investment properties (such as buy-to-let properties), business assets, second homes, and certain valuable personal possessions.
Typically, CGT is not payable on the sale of your main home if it qualifies in full for Private Residence Relief. If you sell all or part of your shares or business in a qualifying trading company, you may get Business Asset Disposal Relief (if eligible). This can reduce the CGT rate you pay.
Inheritance Tax (IHT)
IHT is among the main types of taxes in the UK, which is applied to the estate of someone who has died. An estate may include money, property, personal possessions, and investments. Usually, IHT may apply where the estate exceeds the available nil-rate bands after exemptions and reliefs.
Some exemptions and reliefs may reduce the amount of tax you pay. The amount you pay depends on the value of the estate and the circumstances of the beneficiaries.
National Insurance Contributions (NICs)
NICs are not technically a tax, but they are compulsory contributions that employees, employers, and many self-employed individuals pay. These contributions help fund the State Pension and some other contributory state benefits. Your employment status and earnings decide how much you pay.
What are the Indirect Taxes In the UK?
Indirect taxes are one of the main types of taxes. Unlike direct taxes, indirect taxes are charged on goods and services. They are not charged directly on an individual’s income or profits. These types of taxes are usually included in the price you pay.
Value Added Tax
In the UK, VAT is charged on many goods and services sold. VAT-registered businesses collect it from customers and pay it to HMRC.
Insurance Premium Tax (IPT)
Insurance Premium Tax (IPT) is another indirect tax charged on most insurance policies in the UK. A customer pays it as part of their insurance premium, and the insurer pays it to HMRC.
Excise Duties
Some products, such as tobacco, fuel, and alcohol, are subject to additional duties. The amount of duty depends on the type of product.
What are the Property Taxes?
In the UK, property taxes include SDLT, Council tax, and CGT.
Stamp Duty Land Tax (SDLT)
SDLT is one of the main types of taxes that is paid when buying land or property in England and Northern Ireland above the relevant thresholds. Wales and Scotland have their own property transaction taxes.
Council Tax
It is a local recurrent tax that households pay annually based on the estimated value of the property.
Capital Gains Tax
A direct tax paid on the profit made when selling or disposing of a property that is not your main home.
What are the Big 3 Taxes in the UK?
While discussing the main types of taxes, it is essential to know the Big 3 taxes in the UK. The Big 3 taxes that generate the most revenue for the UK government are income tax, NICs, and VAT.
Income Tax is paid by individuals on taxable income, such as pensions, wages, rental income, and self-employment profits. On the other hand, NICs are compulsory contributions paid by employers, employees, and many self-employed people based on earnings. Furthermore, VAT is an indirect tax charged on most goods and services sold in the UK.
What Happens If You Don’t File Taxes Correctly?
In the UK, filing incorrect taxes can lead to HMRC penalties and interest, depending on whether the error was deliberate, careless, or concealed. For Self Assessment, an immediate £100 penalty is charged for being one day late with an online tax return. If it remains outstanding, it leads to additional penalties.
Additionally, if there is incorrect information on your returns, HMRC may charge further penalties depending on the reason for the error and may carry out a compliance check.
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To Sum Up
It is important to understand the main types of taxes for anyone living, working, or running a business in the UK. From National Insurance and Income Tax to VAT, Corporation Tax, and CGT, each tax serves a different purpose and applies in different circumstances. Understanding these taxes helps you make better financial decisions.
Always seek advice from a qualified accountant whenever you are unsure about which tax applies to you. If you need an accountant to manage your tax affairs efficiently, we are here to assist.
At MicroEntityAccounts, we have the best accountants who can help you with VAT returns, bookkeeping, payroll, and corporation tax.
Disclaimer: All the information provided in this article is general in nature; it does not intend to disregard any professional advice.
