How Much Tax Do I Pay?

As Benjamin Franklin once famously remarked: “In this world nothing can be said to be certain, except death and taxes.”  We pay tax on everything from our income to our home and our groceries and so our guide looks at how much tax you can expect to pay.

Income Tax

There are several different tax bands and rates depending on your income.  The question “How much tax do I pay?” will therefore depend very much on your specific personal circumstances such as the tax allowances that you are eligible for and where your income comes from.

Typically, you’ll pay the following tax in the 2011/12 tax year:

• 0% on the first £7,475 that you earn (this is your Personal Allowance)
• 20% on the next £37,400 that you earn
• 40% on the next £112,600 that you earn
• 50% on anything over this

National Insurance Contributions

The amount of National Insurance contributions that you pay will depend on whether you are employed or self employed.

If you’re employed you pay Class 1 National Insurance contributions at the following rates:

• if you earn more than £139 a week and up to £817 a week, you pay 12 per cent of the amount you earn between £139 and £817
• if you earn more than £817 a week, you also pay 2 per cent of all your earnings over £817

If you’re self-employed you pay Class 2 and Class 4 National Insurance contributions at the following rates:

• Class 2 National Insurance contributions are paid at a flat rate of £2.50 a week
• Class 4 National Insurance contributions – you pay 9 per cent on any profits between £7,225 and £42,475, and a further 2 per cent on profits over that amount

VAT

Value Added Tax (VAT) is a tax that you pay when you buy certain goods or services.  Most goods and services in the UK are subject to VAT and the tax is payable at one of three rates:

• Standard rate (20%) – Most goods and services attract VAT at this rate
• Reduced rate (5%) – On certain goods such as children’s car seats and gas and electricity for your home
• Zero rate (0%) – There are some goods on which you don’t pay any VAT such as most foodstuffs, books, children’s clothes, magazines and newspapers

Other Taxes

As well as these three main taxes there are other taxes that you may pay.  Again, the rates vary depending on your specific circumstances.

The main other taxes are:

• Inheritance Tax (IHT) – Payable if your estate (including any assets held in trust and gifts made within seven years of death) is valued over the current Inheritance Tax threshold (£325,000 in 2011-12).  The tax is payable at 40%
• Capital Gains Tax (CGT) – Payable on capital gains’ (any profit that you make when you sell or give away an asset if it has increased in value.  The tax is payable at 10%,18% or 28% depending on your circumstances
• Road Tax – Payable if you want to take a vehicle on a public road.  The rate varies from £0 to over £1,000
• Council Tax – Payable based on the value of your home.  The rate payable is determined by your local authority