Unless you are the Mafia, a child or dead (although you can never be sure…more on that later) you have to pay tax. It is an unavoidable as bad drivers, rain in summer (well if you live in the UK) and snow in the Alps. After having read Sara Valor’s excellent article, I thought I would write a couple of articles to see how tax as well as healthcare how it works in the United Kingdom. Let me just say this is not meant to bash the system in the United States because I have not stayed there for any significant amount of time to make statements about it. I only know, to some extent, how it works in the United Kingdom. There are some taxes that I (personally) have not had to pay so can only make brief, summarising statements about them and how they apply. This is written mainly from personal experience so before anyone complains (tax authorities included), please bear this in mind. This article deals with taxes…So are you ready?…
The area of tax is dealt with by Her Majesty’s Revenue and Customs (HMRC for short). It was formed in 2005 after the Inland Revenue (the UK equivalent of the IRS) and the Customs and Excise departments merged together. They are there to make sure that the correct tax is paid and collected. There are quite a lot of taxes (as usual) to be paid but I will only deal with those that apply to the article that was written - those that the government takes and those that they give away (in a matter of speaking). The applicable taxes that are payable by you or your business are:
- National Insurance (NI) - These are contributions payable on any wages earned by anyone aged between 16 and 65 (if you are a man, 60 if you are a woman). These contributions are made towards the pension supplies by the state. However, with the current economic climate, I would strongly advise having a personal pension or something else in your financial locker to help in your ‘twilight’ years. How much you pay depends on two things - whether you are an employee/self employed and how much you earn. You can be both employed and self employed at the same time which means you may be liable to pay more than one class of NI contributions.
There are six classes of National Insurance but the ones that apply here are Class 1 NI (paid by people who work as employees and their employers), Class 2 (paid by those who are self employed) Class 3 (these are voluntary to protect one’s entitlement to the State pension. These are paid if you do not pay enough of Class 1 and 2 contributions) and Class 4 (paid in addition to Class 2 by those who are self-employed)
- Income Tax - As the name suggests, it is a tax on income. However, not all income is subject to tax. They are only taxed when they reach a certain level. For example, if you receive ‘top up’ credits from the government (Pension Credits, Working Tax Credits etc), these are not taxed. If you, as an individual earn less than £6,475, you will not be taxed. IN addition to this, there are other tax reliefs that can help reduce your tax bill.
- Capital Gains Tax (CGT) - this is a tax that is paid on any profits (known as gains) made when you sell, transfer, exchange or even give away an asset. You do not have to pay CGT on assets such as personal possessions worth £6k or less or in most cases, your home. Furthermore, you do not pay it on any betting or gambling winnings, gifts to charities or foreign currency. Profits made on sales of land, buildings/premises and shares are subject to this tax.
- Value Added Tax (VAT) - This is taxed on most goods and services provided by businesses that are registered with HMRC. It can also be charged on some goods/services that are imported to and exported from EU countries.
Like I said earlier there are lots more taxes payable such as Inheritance Tax (for wills, well essentially to do with taxing dead people and their assets), Corporation Tax (for limited companies) but the ones I mentioned are the key ones. Now, its not all take take take when it comes to taxes. In the UK, the government also gives (subject to fulfilling some conditions - defrauding the system costs money and you can never be too careful…)
- Tax Credits - These are payments made by the government. They are payable if:
- You work over 16 a week hours and earn a low wage (Working Tax Credits)
- You have children under a certain age (and pay for their childcare). The parents will have to decide who the main carer is for the children and the money will go to them. If you are a lone parent, then it goes to you.
If you receive Working Tax Credits and have children (under a certain age or with a disability), you may qualify for help with childcare costs on top of receiving Child Tax Credit.
- Child Benefit - this is a payment (not taxed - yippee!) you can claim for your child(ren). There are separate rates for each child and it is claimable whatever the income and savings of the parents. You can claim even if the children do not live with you as long as you prove as you pay towards their upkeep, someone else is not claiming for them and the amount you pay is at least the same as Child Benefit. The children must be under 16; over 16 and in full time education or is 16-17, has left education and is registered to work, be educated or trained by an approved body. A new one is Health in Pregnancy Grant which is a one off payment of about £200 to help with costs in the run-up to giving birth. It is paid per pregnancy not per baby. You have to be at least 25 weeks pregnant, you have seen a midwife/doctor and you are resident in the UK.
- Child Trust Fund - This is an investment account for children. If your child is born after September 1 2002, they get a £250 voucher to start the account. The account is in the child’s name and belongs to the child and cannot be touched until they are 18. Of course it can be added to so that when they ‘come of age’ they have a healthy balance. The only time that the money can be taken out by anyone else is if the child is terminally ill.
In addition to all of these, there are certain tax reliefs to help you both as an individual and a small business (I could go into them but I think I’ve said enough for now) But I hope that this gives you an insight into how things work here. I would love to know how it is where you are as well as taking any questions you may have.
Take care and God bless readers…
