UK Tax Essentials

A Guide To Direct And Indirect Taxation In The UK – How To Save Money

A Guide To Direct And Indirect Taxation In The UK – How To Save Money

Introduction – A comprehensive guide to UK taxation

In a famous quotation, Benjamin Franklin (writing in a letter about the American Constitution in 1789) said “…in this world nothing can said to be certain, except death and taxes.” This guide can do nothing to answer any questions you may have about the after-life but it’s intended to be a comprehensive guide to any queries you have about the taxation system – both direct and indirect – in the UK.

Taxation – Past and present

It’s impossible to understand taxation in the UK without an understanding of how taxes were developed since they all had their origins in the Britain of their time. We’ve included a concise history of taxation in the UK but many of the other chapters also explain why a specific type of tax was introduced. You could find entertaining facts about taxation and what it has to do with the American War of Independence, 18th century smugglers and the downfall of a British Prime Minister.



Why do we have to pay taxes?

Throughout history, citizens have questioned their rulers’ right to impose taxes. It’s equally true that the reason for taxation has also changed over time. If taxes in the past were primarily raised to fund military expenditure, then nowadays modern governments need tax revenue to fund a wider range of government-run services and departments. In this guide you’ll be able to find an answer to the question about the necessity of taxation with an evaluation of UK state expenditure and where all our tax money goes. What is done with our National Insurance contributions may surprise you.

If taxes in the past were primarily raised to fund military expenditure, then nowadays modern governments need tax revenue to fund a wider range of government-run services and departments.

Income tax

For salaried employees

To reflect the importance of income tax within the British tax system, a number of chapters are devoted to this subject. There is information about understanding your payslip before we explain the way the PAYE system works and a full guide to Tax Codes and Tax Bands. There’s also advice about how the system works if you have 2 jobs and what to do if you think you’ve been given the wrong Tax Code.

Although 85% of British employees no longer have to complete a tax return because their tax is automatically deducted under the PAYE system, you will find a detailed explanation of when/how to file a tax return, which tax relief you’re permitted for work-related expenses as well as a guide to which employee fringe benefits are tax-deductible.

For state benefits and pensions

Many people are under the misapprehension that state benefits and pensions aren’t liable to income tax since they originate from the government. A full list of taxable and tax-free benefits is given as well as the tax implications for high-earners who claim Child Benefit. In which circumstances should you waive your right to this allowance for your children? Child Tax Credit and Working Tax Credit may have the word ‘tax’ in their name but what exactly are they and who’s entitled to receive them? There’s also information for the retired and how their state and/or occupational pension is taxed.

A street and houses in the UK, subject to council tax

For the self-employed

Because of the possible complexity of their finances, the income tax system for the self-employed is considered in a separate chapter. You’ll find guidance on filing your Self-Assessment tax return as well as information about which tax rebates are allowed for business-related tax-deductible expenses.

Do you work from home? If so, you can find guidelines about what tax-deductible expenses you’re entitled to as well as information about under which circumstances you must contact your local authority about paying business rates.

Business taxes in the UK

The taxes which you have to pay as a business-owner depend on a number of factors such as the nature, size and location of your business. If you own or rent premises to run your business, you will have to pay business rates while if you sell goods or services over a certain amount, you must register for VAT and file VAT returns. For owners of limited companies, payment of Corporation Tax is compulsory while National Insurance is another possible expense – both for yourself or for any employees you take on.

Property taxes in the UK

There isn’t a property tax as such in the UK but there are a number of taxes which apply to property. The old system of council rates has been replaced by a system of council tax (for domestic residences) and business rates (for commercial premises). They’re both an important source of revenue for local government but there are many ways that you can reduce the amount you pay. If you’re struggling financially, you can read about locally-run schemes: Small Business Rate Relief and Council Tax Relief.

Taxation isn’t something which stays  static but is continually being amended

If you’re buying property, then you’ll have to pay Stamp Duty Land Tax while if you’re selling property, you might have to pay Capital Gains Tax. Finally, we also consider the law regarding Inheritance Tax and how it affects both residential property and other assets.

The price of indirect taxation

Although most Britons would be aware of the income tax rate they pay, they might not know so much about the rates for indirect taxes. It’s a complex subject with many different types of duty charged on all types of different goods and services so we’ve chosen the ones that are more likely to affect the average consumer. VAT is the one to most affect your budget when you go shopping but we’ve also included other Excise Duties: Vehicle Excise Duty (or Road Tax); duties on alcohol, tobacco and fuel; Insurance Premium Tax and Air Passenger Duty.

Changes in taxation

Taxation isn’t something which stays static but is continually being amended (and unfortunately increased) both by the Budget and Acts of Parliament. The system today is totally different to how tax revenue was raised in the UK 50 years ago. In this guide, we’ve incorporated the most recent changes in taxes such as what will alter for the self-employed and their National Insurance; the change in the way newly-registered cars will be taxed as well as the increases in Excise Duties on alcohol and Air Passenger Duty.

HMRC in London, the tax authority in the UK

The future of taxation in the UK

It’s quite impossible to predict the future of taxation since a consideration of its history shows that it’s often a reaction to changes in society while in a democracy we’re also subject to the economic policies of a particular political party. However, in some chapters of this guide, you’ll find suggestions that have been put forward for the possible re-organisation of the tax system in the UK. Read about the challenges of merging income tax with National Insurance or alternatives to what some motorists see as the present injustices of VED (Road Tax).

Using this guide to taxation

As far as possible, for each tax we’ve made recommendations to ensure that you won’t pay too much in tax. Where possible, we’ve given advice on how to minimise your tax liability whilst staying within the law and not resorting to tax evasion or avoidance, which continues to be a problem – not only for HMRC but also with repercussions for the law-abiding taxpayer.



Table of Contents:

Chapter 1: History of taxation in the United Kingdom

Chapter 2: An overview of the tax system in the UK

Chapter 3: Understanding UK income tax – PAYE, tax codes and bands

Chapter 4: Calculating your UK income tax – Tax returns, tax relief and fringe benefits

Chapter 5: A Tax guide for recipients of state benefits and pensioners

Chapter 6: UK National Insurance explained

Chapter 7: The complexities of VAT in the UK

Chapter 8: The self-employed – What taxes must you pay?

Chapter 9: Business Taxes – The rates and corporation tax

Chapter 10: Council tax – Funding local government

Chapter 11: Are there property taxes in the UK?

Chapter 12: Road tax and reducing the amount you pay

Chapter 13: Indirect taxation – Excise duties on everything from wine to air travel

About the author

Thomas Henderson

Thomas worked as a consultant in personal finance in the UK for 18 years. He has found a passion in sharing his experience on familymoney.co.uk

Thomas also takes pleasure in woodworking, reading and observing stock market trends.

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About The Author

Thomas Henderson

Thomas worked as a consultant in personal finance in the UK for 18 years. He has found a passion in sharing his experience on familymoney.co.uk

Thomas also takes pleasure in woodworking, reading and observing stock market trends.

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