Understanding UK Tax
There are four types of taxes you will need to pay when living and working in the UK. These are VAT, Income Tax, National Insurance and Council Tax. Let’s jump in!
How do UK taxes work?
The tax rate in the UK is set and collected by His Majesty's Revenue and Customs (HMRC). This organisation is responsible for calculating the tax rate and collecting taxes. HMRC is also responsible for providing funds for UK public services such as child benefits, housing benefits, and income support.
Income Tax
This is payable on any money you earn above your personal allowance (a threshold set by the UK government). The UK uses a progressive tax system - this means that you pay a higher tax rate the more income you make. Any income above your personal allowance is taxed at 20%, and the next portion is taxed at a higher rate, and so on. As you earn more income, the tax rate becomes progressively higher. To find out how much your personal allowance will be, please visit HMRC’s website.
The amount of tax you pay can be reduced by tax relief if you qualify.
Your employer will deduct your tax payments directly from your wages through PAYE (Pay As You Earn). However, you may need to submit a tax return to HMRC if you collect rent on an overseas property. Again, HMRC will be able to help you.
National Insurance
National Insurance contributions (NICs) are also deducted from your wage through PAYE by your employer and are used to fund pensions, Jobseekers’ Allowance, maternity/paternity benefits, bereavement support and the NHS. The NIC is set up similarly to the income tax, where three income brackets determine how much you must pay monthly.
You will not need to pay National Insurance if either of the following apply:
You have a Portable Document A1, E101 or E102 that proves you pay National Insurance in another European Economic Area (EEA) country.
You have a certificate from a country with a bilateral social security agreement with the UK.
Council Tax
This is payable directly to your local council, which funds local services such as waste collection and road management. It is payable whether you own or rent your home.
You will need to pay your council tax each month directly, usually by direct debit, although there are cash options too. Your bill will tell you how much to pay, how it has been calculated and when the payment deadlines are.
Council tax bills are usually based on two adults sharing a property, and the price you pay will depend on your property’s tax band. If you live alone or are a single parent with a child, you will receive a 25% reduction. More information about council tax valuation bands can be found online.
Value Added Tax (VAT)
As you settle in the UK, you may notice the letters VAT – this stands for Value Added Tax and is a tax payment on goods and services. VAT is usually charged at 20%, although some goods and services may be as low as 5% or even 0%. Typically, VAT is included in the price that you see within shops.
VAT Rate | % of VAT | What it applies to |
Standard Rate | 20% | Majority of goods and services. |
Reduced Rate | 5% | Some goods and services like child car seats or home energy like heating. |
Zero Rate | 0% | Some goods and services like children's clothing and most food. |
Goods deemed essential such as food and children’s clothing are exempt from these taxes to keep prices as affordable as possible. Other services that are still necessary but not as essential or more broadly affect the population, like heating, are subject to the reduced rate.
Key things to remember
The UK tax rate is set by an organisation called HMRC, which is responsible for collecting taxes to fund public services.
The four main takes in the UK are income tax, National Insurance, Council Tax, and value-added tax.
The UK uses a progressive tax system, meaning you will pay a higher tax rate as your income rises.
The UK uses a PAYE system that automatically deducts income tax and national insurance from your monthly wage.
Start your journey today
Whether you’ve only just started to think about moving to the UK or simply haven’t found the right job yet, register with Sanctuary to find out how we can help. We look forward to hearing from you!
