In the UK, paying taxes is an integral part of daily life. Many people contribute to various types of taxation. At the same time, people can also get confused about which taxes apply to them and why. This is because the UK tax system includes a variety of taxes on income, business profits, property, investments, and customer spending, with different rules depending on your circumstances.
Regardless of whether you are an employee, self-employed, a limited company owner, an investor, or a property purchaser, understanding the main types of taxes is important. It helps you manage your finances more effectively, avoid unexpected tax liabilities, and fulfil your obligations to HM Revenue & Customs (HMRC).
This guide provides a comprehensive explanation of the following:
- What are the main types of taxes in the United Kingdom
- How do they work?
- What are the five types of taxes in the UK?
- What are the four direct taxes? and many more.
We keep things simple — fixed fees, no hidden charges, and no surprise bills at the end of the year. Tell us a bit about your limited company and we’ll send you a clear quote straight away.
What are Taxes in the UK?
Businesses and individuals are required to pay tax to the United Kingdom government. Local councils and HM Revenue and Customs (HMRC) collect the main types of taxes. Moreover, they are used to support important public services such as schools, healthcare, policing, highways, and national defence. Conversely, local authorities are responsible for collecting local taxes, such as Council Tax.
Some common examples of taxes in the UK include: Income Tax on earnings, Value Added Tax (VAT) on purchases, National Insurance for state benefits, and Council Tax for local services.
What are the Main Types of Taxes?
To understand your financial obligations, it is important to know the main types of taxes in the UK. The following are the types of taxes:
- Direct taxes: Income Tax, Corporation Tax and Capital Gains Tax are major examples.
- Indirect taxes: VAT, Insurance Premium Tax and many excise duties.
- Property/local taxes: SDLT, LBTT, LTT and Council Tax, depending on the transaction or location.
- National Insurance: NICs are contributions rather than technically a tax, although they are commonly discussed alongside taxes because they are compulsory payments linked to earnings/employment.
What are The 5 Types Of Taxes In The UK?
In the UK, most individuals and businesses are subject to the following main types of taxes:
- Income Tax
- National Insurance Contributions (NICs)
- Value Added Tax (VAT)
- Corporation Tax
- Stamp Duty Land Tax (SDLT)
These are the taxes that most individuals face during their personal or business financial activities. Other taxes include Inheritance Tax, Stamp Duty Land Tax (SDLT), Insurance Premium Tax (IPT), and Excise Duties, which are also significant components of the UK tax system. Depending on your circumstances, they may apply to you. Let’s explore the 5 types of taxes individually.
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Income Tax
Income Tax is one of the main types of taxes in the UK and is charged on the taxable income that individuals receive. This includes income from employment, self-employment profits, most pensions, rental income, and savings interest (above any applicable allowances), depending on your circumstances. Certain state benefits and employment benefits may also be included.
Remember that the amount of income tax depends on your total taxable income, the applicable tax rates, and any allowances or tax reliefs that you are eligible to claim. Most employees and pensioners pay Income Tax automatically through the Pay As You Earn (PAYE) system. However, many self-employed individuals and those with untaxed or more complex sources of income report and pay their tax through Self Assessment.
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National Insurance Contributions (NICs)
National Insurance Contributions (NICs) are not technically considered a tax. Instead, they are compulsory contributions that are commonly discussed alongside the UK tax system. Many self-employed individuals, employers, and employees are required to pay National Insurance Contributions (NICs) based on their earnings or profits. NICs are distinct from income tax and contribute to funding certain state benefits, such as the State Pension and other contributory benefits.
Furthermore, employment status, earnings or profits, the applicable National Insurance class, and current thresholds all affect the amount of National Insurance payable.
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Value Added Tax (VAT)
In the UK, VAT is another of the main types of taxes and is charged on most goods and services supplied by VAT-registered businesses. Businesses are required to register for VAT when their taxable turnover exceed the current VAT registration threshold of £90,000.
The test is based on taxable turnover over the previous 12 months, or where the business expects to exceed the threshold in the next 30 days. However, voluntary registration is also possible. VAT may be charged at the standard, reduced, or zero rate, depending on the supply, while certain supplies are exempt.
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Corporation Tax
Corporation Tax is a tax that is charged on the taxable profits of limited companies and specific other organisations. Taxable profit means trading profits, investment income, and chargeable gains. Corporation Tax applies to companies and certain other organisations on their taxable profits. Whereas sole traders and ordinary partnerships generally pay tax on their business profits through Income Tax rather than Corporation Tax.
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Stamp Duty Land Tax (SDLT)
Stamp Duty Land Tax (SDLT) is a tax that is charged on the purchase of land or property in England and Northern Ireland that exceeds specific thresholds. The amount payable depends on the property’s value. Additionally, it depends on whether it is residential or commercial, whether you currently own another property, and whether you are eligible for any reliefs.
Keep in mind that Scotland and Wales have different property transaction taxes. Scotland uses the Land and Buildings Transaction Tax (LBTT), and Wales uses the Land Transaction Tax (LTT) instead of SDLT.
What are The 4 Direct Taxes?
When exploring the main types of taxes, it is equally important to understand what direct taxes are. In the UK, the four principal direct taxes consist of Income Tax, Corporation Tax, Capital Gains Tax, and Inheritance Tax. However, these taxes are directly charged on the income, profits or property of individuals and businesses. Below are four types of direct taxes:
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Income Tax
As previously mentioned, income tax is charged on the taxable income of individuals. This includes earnings from employment, self-employment profits, pension income, and rental income. It also includes savings interest (above any available allowances).
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Corporation Tax
Corporation Tax is charged on the taxable profits of limited corporations and specific other organisations. Trading profits, investment income, and chargeable gains are all examples of taxable profits. Furthermore, companies are responsible for directly reporting and paying Corporation Tax to HMRC.
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Capital Gains Tax (CGT)
CGT is one of the main types of taxes that are charged on the profit (gain) you make when you sell certain chargeable assets that have increased in value. Certain chargeable assets include shares and investment properties (such as buy-to-let properties). It also includes business assets or valuable personal possessions.
The tax is charged on the gain rather than the total sale proceeds. Moreover, various exemptions, reliefs, and allowances may reduce the amount of CGT payable, depending on your specific circumstances.
For example, CGT is not payable if you sell your main home and may qualify in full for Private Residence Relief. Similarly, you may be eligible for Business Asset Disposal Relief if you sell all or a part of a business or shares in a qualifying trading company. This can lower your Capital Gains Tax rate.
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Inheritance Tax (IHT)
Inheritance Tax is a tax that is charged on the property, money, and possessions of someone who dies. In the UK, if the estate exceeds the available nil-rate bands after exemptions and reliefs, and, where eligible, the residence nil-rate band, IHT typically applies. Certain exemptions and reliefs may reduce the amount of tax you pay. Whereas the value of the estate and the circumstances of the beneficiaries determine the amount you are required to pay.
What are Indirect Taxes In The UK?
Indirect taxes are one of the main types of taxes that businesses collect on behalf of HM Revenue & Customs (HMRC) when customers purchase goods or services. In contrast, direct taxes are paid directly by individuals or businesses. Below are the following examples of indirect taxes:
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Value Added Tax (VAT)
VAT is a tax added to most products and services sold by VAT-registered businesses. VAT-registered businesses are responsible for collecting the tax from their customers and submitting it to HMRC.
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Insurance Premium Tax (IPT)
Insurance Premium Tax (IPT) is a tax charged by the United Kingdom government on general insurance policies. Insurance providers collect the tax as part of the insurance premium and submit it to HMRC. Furthermore, the IPT rate depends on the type of insurance policy, and certain insurance products are exempt from the tax.
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Excise Duties
Excise duties are additional taxes that are imposed on specific goods, such as alcohol, fuel, and tobacco. However, the amount of duty depends on the product’s size and the type of product.
What are the Property Taxes in the UK?
Certain taxes may apply to property in the United Kingdom, depending on whether you are purchasing, selling, or owning a property. These include:
- First, Stamp Duty Land Tax (SDLT)
- Then, Council Tax
- Lastly, Capital Gains Tax (CGT)
What are The Big 3 Taxes In The UK?
While exploring the main types of taxes, you need to know the big 3 taxes in the UK. The three largest sources of UK tax revenue are Income Tax, National Insurance Contributions (NICs), and Value Added Tax (VAT).
Income Tax is charged on taxable income, whereas National Insurance Contributions are paid by employers, employees, and many self-employed people on earnings. Additionally, VAT is added to most goods and services provided by VAT-registered businesses.
Get Expert Support With Understanding the Main Types of Taxes
Navigating the main types of taxes is difficult, particularly if you are uncertain about which tax applies to your personal or business circumstances. At LimitedCompanyAccountants, our accountants provide support on Income Tax, Corporation Tax, VAT, Capital Gains Tax, and ongoing HMRC compliance, tailored to your business needs. Additionally, we help you reduce tax liabilities and make well-informed financial decisions.
Contact us today to learn how we can help you with your personal or business tax requirements.
Whether you’re just forming your company or already knee-deep in paperwork, our London-based accountants are ready to jump in. One quick call and we’ll figure out what you actually need.
The Bottom Line
In the United Kingdom, it is important for anyone living, working, or operating a business to understand the main types of taxes. These include Income Tax, National Insurance, VAT, Corporation Tax, and Capital Gains Tax, which affect the majority of taxpayers. However, taxes such as Inheritance Tax, Stamp Duty Land Tax, and Excise Duties may also apply to you, depending on your personal or business circumstances.
One thing to keep in mind is that UK tax rules, rates, and thresholds are subject to change over time. That is why it is essential to review your tax position regularly and seek professional advice when needed. This can help you minimise errors and take advantage of available reliefs under current HMRC rules.
Disclaimer: The information provided in this article is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.
