Tax rates are the foundation of payroll. Understanding these rates is pivotal for effective payroll management.
That’s why we’ve created this blog, to guide you through the intricacies of the UK tax system.
Key tax terms
Getting to grips with the UK tax system involves navigating through a plethora of terminology and jargon:
- Income tax: Income tax is what you pay on your earnings, encompassing more than just your job income. Not all incomes are equal, and the tax bands reflect that diversity.
- Capital gains tax: In the UK, when you make a profit from selling something, you’re taxed on that gain. The critical factor is the tax applies to the profit you’ve earned. For instance, selling a family heirloom for £15,000 after a £5,000 purchase means you’re taxed on the £10,000 gain. The specifics depend on the asset type, your personal allowance, and other crucial elements in tax calculations.
- Inheritance tax: The government imposes taxes on property, money, and the assets of a deceased individual. Specific thresholds apply based on the estate’s value, considering factors such as gifts and charitable donations.
- HM Revenue and Customs: HM Revenue and Customs (HMRC) holds the reins in the UK tax landscape, overseeing the collection, administration, and enforcement of taxes. Among the various types, the fundamental taxes include income tax, capital gains tax, inheritance tax, and value-added tax (VAT).
While the tax system is complex, a key principle is that the more you earn, the higher your tax liability.
Income tax rates
In the UK, there are several income tax rates. For the tax year 2024/25, you have an entitlement to earn income up to a certain threshold before tax becomes applicable. This is called a personal allowance, and currently stands at £12,570—meaning you don’t pay income tax on the first £12,570 that you earn.
Basic tax bands
Concerning the basic bands: there’s a basic rate, higher rate and additional rate:
| Tax band | Taxable income | Tax rate |
| Basic rate | Up to £37,700 | 20% |
| Higher rate | From £37,701 to £125,140 | 40% |
| Additional rate | Above £125,140 | 45% |
Wales and Northern Ireland adhere to the same tax bands as England. However, individuals residing in Scotland encounter distinct tax bands:
| Tax band | Taxable income | Tax rate |
| Starter rate | Up to £2,306 | 19% |
| Basic rate | From £2,307 to £13,991 | 20% |
| Intermediate rate | From £13,992 to £31,092 | 21% |
| Higher rate | From £31,093 to £62,430 | 42% |
| Advanced rate | From £62,431 to £125,140 | 45% |
| Top rate | Above £125,140 | 48% |
What are National Insurance Contributions?
It’s not just about understanding the intricacies of tax; National Insurance contributions (NICs) are also in the mix. For a detailed breakdown of NICs, visit our National Insurance rates and categories guide.
Here’s a brief overview of the four classes:
Class 1: Paid by employees earning over £242 a week and under State Pension age.
Class 1A or 1B: Contributions for employees’ expenses or benefits.
Class 2: From 6 April 2024, self-employed people with profits above £12,570 will no longer be required to pay Class 2 NICs. While not abolished entirely, the contributions are no longer mandatory, and all eligible workers can continue to make voluntary contributions.
Class 3: A voluntary top-up for employees to fill gaps in their contributions.
Class 4: Paid by self-employed individuals with profits over £12,570 a year. For profits between £12,570 and £50,270, a 9% contribution is applied, and for profits over £50,270, a 2% contribution is applied.
Key capital gains tax terms
- Individuals
For individuals falling into the higher or additional rate taxpayer bracket, the capital gains tax on residential property stands at 28%, while for other chargeable assets, it’s 20%.
Basic rate taxpayers need to consider factors such as taxable income, gains from property or other assets, and the size of the gain. The process involves:
- Calculate taxable income by subtracting personal allowance and any tax relief.
- Determine total taxable gains.
- Subtract the tax-free allowance from total taxable gains.
- Add the result to taxable income.
If the resulting figure falls within the basic income tax bracket, individuals will pay 10% capital gains tax (or 18% for property). Any amount exceeding the basic tax rate incurs a 20% capital gains tax (or 28% for property).
- Trusts
Trustees of someone’s estate face a 28% capital gains tax on property and a 20% rate on other chargeable assets.
- Exemptions, reliefs and allowances
Capital gains tax exemptions: Specific assets or circumstances that are not subject to capital gains tax when sold, resulting in no tax liability on the gains.
Capital gains tax reliefs: Special provisions or deductions provided by tax laws to reduce the amount of capital gains tax owed, often applied in specific situations or for certain types of assets.
Capital gains tax allowances: The predetermined threshold or limit set by tax authorities, allowing individuals to earn a certain amount of capital gains before being liable for capital gains tax.
What is inheritance tax and how does it work?
Inheritance tax kicks in when an individual’s estate surpasses £325,000 upon their demise. No inheritance tax is levied if the property, belongings, and money amount to less than £325,000.
Furthermore, leaving an amount exceeding £325,000 to a spouse, civil partner, charity, or community sports club results in no tax obligation.
Additional rules apply; for instance, if the deceased bequeaths their home to children or grandchildren, the inheritance tax threshold increases to £500,000.
For married couples or those in civil partnerships, if the estate falls short of the threshold, the surplus amount can be added to the spouse’s threshold upon the death of either partner.
What is the base rate for inheritance tax?
Inheritance tax carries a substantial base rate of 40%, applicable to amounts exceeding £325,000.
However, if 10% or more of the net estate value is left to charity, the inheritance tax rate can be reduced to 36%.
Are there any reliefs or exemptions?
When a person bestows a gift during their lifetime, it might face taxation upon their demise.
The bright side is “taper relief,” ensuring that any inheritance tax on the gift is capped at 40%, thanks to the generosity of HMRC.
Business relief opens the door for certain assets to be transferred without incurring inheritance tax or with a diminished tax bill.
For those leaving behind an estate featuring a farm or woodland, agricultural relief could be a viable option.
Corporation tax
If a person is operating a business, they must pay tax on any profits made and if they’re:
- A limited company
- A foreign company with a branch or office in the UK
- A club, co-operative or other unincorporated association (e,g, a community group or sports club).
Corporation tax has to be carefully worked out and reported, because there isn’t a bill sent for it.
Value added tax
Value Added Tax (VAT) is employed by businesses registered for VAT, levied on the products and services they sell. Businesses are mandated to register for VAT if their turnover exceeded £90,000 in the last 12 months.
The standard VAT rate is 20%, applicable to the majority of goods and services. Some goods, like home energy costs, are subject to a reduced rate of 5%. Additionally, certain goods and services, such as most food and children’s clothes, fall under the “zero-rated” category, exempt from VAT.
Tax credits
Tax credits serve as a government benefit for individuals with low incomes, families, and those with disabilities, providing additional financial support to cope with everyday living expenses.
The two types of tax credits are:
Child tax credit: Available to individuals with children, irrespective of their employment status. The amount depends on the number of children in the household and the individual’s income.
Working tax credit: Geared towards employed individuals with low incomes, whether or not they have children.
Tax doesn’t have to be too taxing
At JPS, we understand the challenges of getting income tax right. That’s why we’ve dedicated time and effort to develop an innovative, compliant, and interconnected suite of software and services.
With us, you don’t have to tackle payroll alone.
Whether you seek payroll software for seamless tax deduction management, automated calculations, and RTI reporting, or prefer a fully managed payroll service where our CIPP-qualified experts collaborate with you, we have a solution tailored to your needs.
Contact us to learn more.