The UK ranks high when comparing developed countries and their tax burdens. Speculations have been that the exit of Britain from the EU will give it freedom to implement fair taxes on its inhabitants. However, until that happens, individuals are faced with several taxes with some of them weighing very heavily on the pockets of ordinary residents. The distribution of the tax burden varies upon many factors such as the income of a taxpayer. The following taxes are some of those with a big impact on personal finance. National Insurance Contributions and income tax are the two biggest burdens with some taxpayers spending almost 40% of their earnings.
One of the biggest burdens comes from the costs of paying for income tax. The UK has tax requirements for different types of incomes, but not all of them. For example, earnings generated from a majority of means-tested social security benefits don’t incur tax. Some savings products such as ISAs (individual savings accounts) and national savings certificates are also not subject to taxation. The incomes subject to this tax include; earnings from self-employment, jobseeker’s allowance, employment, unincorporated businesses, property, dividends on shares, retirement pensions, bank and building society interest.
The UK taxation system uses bands, allowances and rates to determine taxable income. Personal allowance is deducted from the entire income to give the amount due for taxation. Recent policy changes have seen the income tax shift, with individuals in the higher brackets facing a heavier burden. Chancellor George Osborne instituted new regulations that saw the personal income stand at £11,000 up from £6,475. Note that taxable income of over £122,000 does not get a personal allowance. What happens is that for every pound above £100,000, the persona allowance reduces by a pence.
The amount of the tax paid by each individual depends on how far from the personal allowance the income is. The basic-rate band, which is for incomes below £32,000, charges 20% tax. Incomes of over £43,000 but below £150,000 fall into the higher-rate band and incur a tax of 40%, while those above £150,000 are in the additional-rate limit and pay 45% income tax.
National Health Insurance
Contributions to the National Health Insurance are other burdens that UK inhabitants have to deal with. These contributions work like taxes by the difference is that individuals get social security benefits in return. The money gotten from NHI contributions goes to the National Health Service and the National Insurance Fund. NICs apply to any individual who is above 16 with weekly earnings of above £155 or have self-employed ventures with annual profits of £5,965 or more. Payments for NIC are based on classes, which also determine when to stop. One group in the Class 1 is employees who are under the State Pension age. The contributions are deducted directly by the employer. Another group is employers who deduct contribution as tax from their employees.
Taxation of Savings Income
Individuals also have to shoulder taxes when saving for their futures. A personal savings allowance came into effect since April 2016. Any savings income that falls below this allowance is not subject to tax. However, the amount of the allowance depends on the savings bracket you a variation. For a taxpayer in the basic-rate class, the allowance is £1,000 and £500 for a person in the higher-rate band. Incomes that fall into the traditional rate limit don’t get a personal savings allowance. The tax rates are the same as those for income tax, and that is a 20, 40 and 45% in the corresponding bands.
If your savings are in form of dividends, then the tax is 7.5% for amounts in the basic rate band. Next, it goes to 32.5 percent for the higher rate and 38.1% for the additional rate income. The allowance for dividend income is set at £5,000, so your taxable savings fall above that amount.
Transferring assets and property from the estate of a deceased person also incurs significant taxes. As of the 16/17 tax year, any transfers above £325,000 are charged at a 40% tax if they take place during the previous three years or on death. Since 2013, an inheritance that donates more than 10% to charity incurs a tax of 36%.
Capital Gains Tax
Another tax to keep an eye out for is the one charge on individuals who are disposing of assets. Whether you are giving away an asset or selling it, this tax will apply to any capital gains resulting from the transaction. A capital gain is the variation in an asset’s value when it was initially acquired and when gets disposed of. In the UK, there is an exempt amount for which tax does not apply to capital gains, which is currently £5,550 for trusts and £11,100 for individuals.
As with other allowances, this amount is deducted from the total capital gains to give the taxable figure. Taxation on capital gains is also based on classes, in addition to the source of revenue. If you are in the basic-rate band, CG from residential property will incur a tax of 18% while those from other assets are 10%. For taxpayers in the higher and additional rate band, residential capital gains come with a 28%/while others have a 20% tax.
Insurance Premium Tax
When getting an insurance policy, watch out for the taxes that come with the product. This tax applies to a majority of insurance products where the insured is in the UK. Since October 2016, a standard rate of 10% was instituted for all new contracts. If you still have an old contract (drawn before October 1), then the IPT is 9.5%, but that only lasts until 1 February 2017. In case the insurance product you buy is an add-on, say an appliances coverage bought with home insurance, then the tax is 20%.
Most consumers concentrate on the direct taxes and overlook some common hidden taxes. These taxes are usually integrated into purchases, so it’s hard to detect. Excise duties, for example, are applied to alcoholic drinks, road fuels and tobacco. Value added tax is another one that the government uses to raise a substantial percentage of its revenues. Car owners also have to deal with vehicle excise duties, which apply annually.
David Milberg is a financial expert in NYC with nearly 3 decades of experience in the finance industry. He is a long-time owner of Milberg Factors, a factoring and finance company with locations in New York, California, and North Carolina.