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Overview of personal tax

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The government collects taxes from individuals through HM Revenue & Customs (HMRC) under a variety of different headings including: Income Tax, Capital Gains Tax (CGT), Inheritance Tax (IHT), Stamp Duty and Value Added Tax (VAT).

Income tax 

What is taxable?

Income tax is payable on earnings (wages if you’re employed, profits from your business if self-employed), state and private pensions, some benefits (like Jobseeker's Allowance, Carer's Allowance and Incapacity Benefit), interest from most savings, income from shares, rents and trusts. Employees also have to pay National Insurance Contributions (NICs) on their earnings.

You may receive non-tax benefits from your employers which you may need to pay tax on. These include: company cars; fuel for your vehicles; medical insurance, living accommodation; and loans at low interest rates.

How is it paid?

Income tax and NICs, are usually deducted from an employee’s wages on a PAYE (Pay As You Earn) basis, while the self-employed are responsible for paying their own tax and NICs and filling in their self assessment tax return. Tax on savings’ interest is usually deducted at source by your bank or building society.

Non-taxable income

The amount of tax you pay depends on how much your income is but some income isn’t taxable. This includes certain benefits, income from tax exempt accounts, working tax credit and premium bond wins. If you're registered blind, or can’t carry out any work for which eyesight is required, you can also claim a tax-free blind person's allowance.

Most UK residents are entitled to earn a certain amount tax free. This basic personal allowance in the 2009-10 tax year is £6,475. You may be entitled to a higher personal allowance if you're aged 65 or over.

Allowances and reliefs

There are several deductible allowances and reliefs that can reduce the amount of tax you have to pay. These include:

  • Married couple's allowance - the spouse or civil partner has to be born before 6 April 1935. 
  • Maintenance payment relief - either you or your former spouse or civil partner must have been born before 6 April 1935.
  • If you're an employee or director you might be able to get tax relief for business expenses you've paid for.

Capital Gains Tax

CGT is payable when you sell or give away something which has increased in value or receive money from an asset (eg compensation for a damaged asset). You are currently required to pay tax at 18% on the gain.

Exceptions to this include any personal asset you sell which is worth £6,000 or less; your main home (subject to certain conditions); your car; ISAs or PEPs; UK government bonds; betting, lottery or pools winnings; or cash which is subject to income tax.

Spouses or co-habiting civil partners don’t have to pay CGT if they transfer assets to each other, but you do have to pay it if you give your children stuff or sell it to them cheaply. If you’ve inherited something in a will you don’t have to pay CGT straight away but if you sell it later, any CGT you have to pay will be based on the difference between the market value at the time of death and the value at the time of disposal.

If you make a loss when you dispose of something you might be able to set that loss against other gains, but only if the asset normally attracts CGT.

Inheritance tax

If someone dies and the property and assets they leave is worth more than £312,000 (the current IHT threshold) IHT at 40% will usually have to be paid on anything over that amount. The tax must be paid within six months of the deceased’s death and before the grant of probate can be issued (or grant of confirmation in Scotland). 

Who pays the IHT?

The executor or personal representative usually pays the tax from the deceased’s estate, while trustees are generally responsible for paying the tax on any trust assets.

If the assets are tied up in property which needs to be sold, the executor might have to pay it from their own funds and reclaim the cash later. If the executor can’t pay the IHT the beneficiaries will have to pick up the tab if they: receive a share of an estate after a death; receive a gift from someone who dies within seven years of making the gift; benefit from assets in a trust at the time of death or receive income from those assets; they are the joint owner - other than a spouse or a civil partner - of a property.

Trustees must pay IHT on land or assets already held in trust if there is a transfer out of trust; every 10 years after the original transfer into trust; or when the beneficiary of the trust dies.

Exemptions

You are allowed to pass on amounts during your lifetime or in your will without incurring IHT in certain circumstances. These include:

  • If you pass assets to your spouse or civil partner, whatever the amount.
  • Most gifts made more than seven years before your death
  • Wedding gifts and gifts in anticipation of a civil partnership up to £5,000, gifts to charity, and £3,000 given away each year.

Stamp duty

You pay stamp duty when you buy property or shares. Stamp Duty Land Tax (SDLT) is payable if the property you buy is more than £175,000, thereafter you pay between 1% and 4% depending on how much the purchase price is.

You pay stamp duty or stamp duty reserve tax at the rate of between 0.5% and 1.5% when you buy shares. The amount you pay depends on how the shares are transferred.

VAT

You pay tax on many goods and services bought within the EU (including the UK). It is usually incorporated into the price that you pay so you don’t have to worry about paying for it separately.

The standard rate in the UK is 15% (rising to 17.5% in January 2010). For some goods – e.g., children’s car seats and domestic fuel or power – you only pay 5%, while some goods are exempt. These include: food; books, newspapers and magazines; children's clothes; and some equipment for disabled people.

Businesses with annual sales below £67,000 (2008-2009) don't have to charge VAT so the price you pay for their goods or services may be cheaper than if you bought the same goods or services from a VAT-registered supplier.