How the UK Tax System Works

The UK tax system collects revenue to fund public services such as healthcare, education, and infrastructure. Here’s a concise overview of its key components:

Income Tax

Income Tax is levied on individual earnings, including wages, pensions, savings, and investments.

• Personal Allowance: £12,570 for the 2023/24 tax year.
• Tax Bands:
  • 20% on income over £12,570 up to £50,270 (basic rate).
  • 40% on income over £50,270 up to £125,140 (higher rate).
  • 45% on income over £125,140 (additional rate).

National Insurance Contributions (NICs)

NICs fund state benefits, including healthcare and pensions. Contributions come from employees, employers, and the self-employed.

• Employees: Pay Class 1 contributions.
• Self-Employed: Pay Class 2 and Class 4 contributions.

Value Added Tax (VAT)

VAT is a consumption tax on goods and services.

• Standard Rate: 20%.
• Reduced Rate: 5% on certain goods and services.
• Zero Rate: On most food, children's clothing, and books.

Corporation Tax

Corporation Tax is paid by companies on their profits.

• Rate: 19% (2023/24 tax year).

Capital Gains Tax (CGT)

CGT is charged on the profit from selling assets like property or shares.

• Annual Exemption: £12,300 for the 2023/24 tax year.
• Rates: 10% for basic rate taxpayers, 20% for higher/additional rate taxpayers.

Stamp Duty Land Tax (SDLT)

SDLT is payable on property or land purchases above a certain value.

• Residential Property: Rates vary based on property value.
• First-Time Buyers: Relief on properties up to £300,000.

Inheritance Tax (IHT)

IHT is levied on the estate of a deceased person.

• Threshold: £325,000.
• Rate: 40% on the amount above the threshold.

Council Tax

Council Tax is a local tax on residential properties to fund local services.

• Valuation Bands: A to H, based on property value.

PAYE (Pay As You Earn)

PAYE is a system where employers deduct Income Tax and NICs from wages before payment.

Tax Reliefs and Allowances

Various reliefs and allowances can reduce tax liabilities, such as the personal allowance for Income Tax and exemptions for Capital Gains Tax.

Filing and Payments

• Self-Assessment: For complex tax affairs, an annual tax return is required.
• PAYE System: Ensures timely monthly tax payments via employer deductions.
• Deadlines: Specific deadlines apply for tax returns and payments.

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