A beginner’s guide to the taxes you’ll hear about this election season

National insurance, income tax, VAT, capital gains tax, inheritance tax… it’s easy to get confused about the many different ways we contribute to the cost of running the country. The budget announcement is the key time each year when the government shares its financial plans with us all, and announces changes that may make a tangible difference to what you pay.

But you’ll likely be hearing a lot more about taxes in the coming months – promises to cut or raise them are an easy win (or lose) for politicians in an election year. We may even get at least one “mini-budget”^[1].

If you’ve recently entered the workforce or the housing market, you may still be wrapping your mind around all of these terms. Here is what you need to know about the different types of taxes and how they affect you.

The UK broadly uses three ways to collect tax:

1. When you earn money

If you are an employee or own a business, taxes are deducted from your salary or profits you make. For most people, this happens in two ways: income tax, and national insurance contributions (or NICs).

If you are self-employed, you will have to pay your taxes via an annual tax return assessment. You might also have to pay taxes this way for interest you earn on savings, dividends^[2] (distribution of profits from a company or shares you own) received and most other forms of income not taxed before you get it.

Around two-thirds of taxes collected^[3] come from people’s or business’ incomes in the UK.

2. When you spend money

VAT and excise duties are taxes on most goods and services you buy, with some exceptions like books and children’s clothing. About 20% of the total tax collected is VAT.

3. Taxes on wealth and assets

These are mainly taxes on the money you earn if you sell assets (like property or stocks) for more than you bought them for, or when you pass on assets in an inheritance. In the latter case in the UK, the recipient doesn’t pay this, it is the estate paying it out that must cover this if due. These taxes contribute only about 3% to the total tax collected.

You also likely have to pay council tax, which is set by the council you live in based on the value of your house or flat. It is paid by the user of the property, no matter if you own or rent. If you are a full-time student or on some apprenticeship schemes, you may get a deduction^[4] or not have to pay council tax at all.

This article is part of Quarter Life^[5], a series about issues affecting those of us in our 20s and 30s. From the challenges of beginning a career and taking care of our mental health, to the excitement of starting a family, adopting a pet or just making friends as an adult. The articles in this series explore the questions and bring answers as we navigate this turbulent period of life. You may be interested in: If you get your financial advice on social media, watch out for misinformation^[6] Future graduates will pay more in student loan repayments – and the poorest will be worst affected^[7] Selling on Vinted, Etsy or eBay? Here’s what you need to know about paying tax^[8] Put together, these totalled almost £790 billion in 2022-23, which the government spends^[9] on public services^[10] such as the NHS, schools and social care. The government collects taxes from all sources and sets its spending plans accordingly, borrowing to make up any difference between the two. Income tax The amount of income tax you pay is determined by where your income sits in a series of “bands”^[11] set by the government. Almost everyone is entitled to a “personal allowance”, currently £12,570, which you can earn without needing to pay any income tax. You then pay 20% in tax on each pound of income you earn (across all sources) from £12,570-£50,270. You pay 40% on each extra pound up to £125,140 and 45% over this. If you earn more than £100,000, the personal allowance (amount of untaxed income) starts to decrease^[12]. If you are self-employed, the same rates apply to you. You just don’t have an employer to take this off your salary each month. Instead, you have to make sure you have enough money at the end of the year to pay this directly to the government. Read more: Taxes aren't just about money – they shape how we think about each other^[13] The government can increase the threshold limits to adjust for inflation. This tries to ensure any wage rise you get in response to higher prices doesn’t lead to you having to pay a higher tax rate. However, the government announced in 2021 that they would freeze these thresholds until 2026 (extended now to 2028^[14]), arguing that it would help repay the costs of the pandemic. Given wages are now rising for many to help with the cost of living crisis, this means many people will pay more income tax this coming year than they did before. This is sometimes referred to as “fiscal drag”^[15] – where lower earners are “dragged” into paying higher tax rates, or being taxed on more of their income. National insurance National insurance contributions (NICs) are a second “tax” you pay on your income – or to be precise, on your earned income (your salary). You don’t pay this on some forms of income, including savings or dividends, and you also don’t pay it once you reach state retirement age (currently 66). While Jeremy Hunt, the current chancellor of the exchequer, didn’t adjust income tax meaningfully in this year’s budget, he did announce a cut to NICs. This was a surprise to many, as we had already seen rates fall from 12% to 10% on incomes higher than £242/week in January. It will now fall again to 8% from April. Read more: Budget 2024: experts explain what it means for taxpayers, businesses, borrowers and the NHS^[16] While this is charged separately to income tax, in reality it all just goes into one pot with other taxes. Some, including the chancellor, say it is time to merge these two deductions and make this simpler for everyone. In his budget speech this year, Hunt said he’d like to see this tax go entirely. He thinks this isn’t fair on those who have to pay it, as it is only charged on some forms of income and on some workers. I wouldn’t hold my breath for this to happen however, and even if it did, there are huge sums linked to NICs (nearly £180bn^[17] last year) so it would almost certainly have to be collected from elsewhere (such as via an increase in income taxes, or a lot more borrowing) to make sure the government could still balance its books.

References

1. ^{^} “mini-budget” (www.bbc.co.uk)
2. ^{^} dividends (www.investopedia.com)
3. ^{^} two-thirds of taxes collected (www.gov.uk)
4. ^{^} get a deduction (www.gov.uk)
5. ^{^} This article is part of Quarter Life (theconversation.com)
6. ^{^} If you get your financial advice on social media, watch out for misinformation (theconversation.com)
7. ^{^} Future graduates will pay more in student loan repayments – and the poorest will be worst affected (theconversation.com)
8. ^{^} Selling on Vinted, Etsy or eBay? Here’s what you need to know about paying tax (theconversation.com)
9. ^{^} government spends (ifs.org.uk)
10. ^{^} public services (www.gov.uk)
11. ^{^} series of “bands” (www.gov.uk)
12. ^{^} starts to decrease (www.gov.uk)
13. ^{^} Taxes aren't just about money – they shape how we think about each other (theconversation.com)
14. ^{^} now to 2028 (www.ftadviser.com)
15. ^{^} “fiscal drag” (commonslibrary.parliament.uk)
16. ^{^} Budget 2024: experts explain what it means for taxpayers, businesses, borrowers and the NHS (theconversation.com)
17. ^{^} nearly £180bn (www.gov.uk)
18. ^{^} Alex from the Rock/Shutterstock (www.shutterstock.com)
19. ^{^} limited amount (www.gov.uk)
20. ^{^} up to £1 million (www.thetimes.co.uk)
21. ^{^} income inequality (equalitytrust.org.uk)
22. ^{^} recent study (www.lse.ac.uk)