The taxation system in the United Kingdom is a complex and ever-changing system that plays a crucial role in the country’s economy. It involves the collection of taxes from individuals, businesses, and organizations to fund the government’s various spending programs and initiatives.
Understanding how the taxation system works is important for both individuals and businesses, as it can significantly impact their financial situation.
If you are stuck in some financial disputes, you can take the help of a tax lawyer in the UK who has expertise in HMRC civil tax investigation.
In this blog, we will provide an overview of the taxation system in the UK.
Types of Taxes in the UK
Different types of taxes are collected in the UK, including income tax, value-added tax (VAT), corporation tax, and council tax.
Income Tax
Income tax is a tax on the money that individuals and businesses earn. The government collects it based on the income a person or company earns. In the UK, income tax is calculated as a percentage of a person’s taxable income, which is their total income minus any personal allowances and reliefs to that they are entitled.
The percentage of income tax an individual pays depends on their taxable income and the tax band they fall into. For example, in the 2021-2022 tax year, individuals who earn less than £12,570 pay no income tax, while those who earn between £12,571 and £50,270 are charged 20% income tax.
Value-Added Tax (VAT)
VAT is a tax on goods and services that is added to the price of the product or service. It is collected by businesses when they sell goods or services to consumers and is then passed on to the government. The rate of VAT in the UK is currently 20%, although some goods and services, such as books, children’s clothes, and public transport, are taxed at a lower rate of 5%.
Corporation Tax
A corporation tax is a tax on the profits of businesses and organizations. It is calculated as a percentage of a company’s taxable profits, which is the company’s total profits minus any allowable deductions. The current rate of corporation tax in the UK is 19%.
Council Tax
A council tax is a tax on domestic properties used to fund local government services such as schools, roads, and waste collection. It is calculated based on the value of the property and the number of people living in it. The amount of council tax that a person pays depends on the value of their property and the council tax band it falls into.
Paying Taxes in the UK
In the UK, taxes are collected by HM Revenue and Customs (HMRC), the government department responsible for managing the country’s tax system. With the introduction of Making Tax Digital for ITSA (Income Tax Self Assessment), the process of paying taxes has become more digital and streamlined. Individuals and businesses can now pay their taxes online, and submit their tax returns through a compatible software. Though the payment options remain the same like direct debit, credit cards, cheque or postal order, now you need to submit your tax return digitally through the software. You can pay monthly, weekly, yearly or per quarter.
Self-Assessment System in the UK
Self-assessment is a system used to calculate and collect income tax from self-employed individuals or those who receive income from sources other than employment, such as rental income or investments. Under the self-assessment system, individuals must calculate and pay their own income tax and file a tax return with HMRC each year detailing their income and any tax they owe.
Conclusion
Understanding the different types of taxes collected and how they are used is important for both individuals and businesses, as it can significantly impact their financial situation. It is important for everyone to pay the taxes that they owe in a timely and accurate manner and to avoid activities such as tax evasion, which can have serious consequences.