- Only 48% of Britons said they have total knowledge about how much tax they pay. Rest are still clueless about basic tax breakup.
- The Basic tax includes Income Tax, Inheritance tax, Capital Gains Tax, Corporate tax, Value added tax, property tax and Insurance premium tax.
- The best way to know how much you are paying towards income tax and national insurance is to go through your pay slip.
A recent survey by Hargreaves Lansdown has stated some shocking facts about the tax structure and awareness in Britain. As per the findings, only 48% of Britons have detailed knowledge about how much tax they pay. Rest are clueless about tax cuts and deductions.
As compared to 41% of 18-34 aged people and 59% of 55+ aged, people aged between 35 and 54 were having less or no knowledge about the tax they pay, with only 39% claiming to know how much tax they paid.
Around 63% of the higher rate taxpayers and 74% of additional rate taxpayers were more likely to know how much tax they were paying as compared to 51% of basic rate taxpayers and 44% of non-income taxpayers.
Also read: Is levying carbon tax on companies possible?
The UK’s Taxation System
In UK, HM Revenue and Customs (HMRC) is an authority for administering and collecting taxes and also collects money that pays to help individuals and families and public services with targeted financial support. In 2019/20, HMRC received tax of around £633.4 billion, an increase of 2.1% over the previous tax year.
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Image description: Your pay slip is the best way to know how much you are paying towards income tax and national insurance
The basic tax includes Income Tax, Inheritance tax, Capital Gains Tax, corporate tax, value-added tax, property tax and insurance premium tax. Many of these taxes are progressive taxes, means those with higher income have to pay higher tax.
Tax you pay
The best way to know how much you are paying as income tax and national insurance is to go through your pay slip, and if you are self-employed, go through your tax return documents.
Income tax rate is a tax that is paid on income and profit earned and it is applied after any tax-free allowances.
Income tax bands and rates for 2021/22 are:
- For income between £0 and £12,570, the tax rate is 0%
- For income between £12,571 and £50,270, the rate is 20%. This is the basic rate.
- For income between £50,271 and £150,000, the rate is 40%. This is the higher rate.
- For income over £150,000, the tax rate is 45%. This is the additional rate.
National insurance has to be paid by workers, aged 16 or over and either an employee earning above £184 a week or self-employed earning £6,515 or more in a year, to qualify for some earmarked benefits and state pension. It is mostly paid as part of their self-assessment tax bill and is calculated on gross earnings, before tax, or pension deduction above an earning threshold.
Tax on Savings
Since the introduction of saving allowance, people earn interest on their savings.
For 2021/22, the base rate is £5,000, that means till this amount the interest on your savings is tax free. But one should know that more you earn from other sources of income, lower will be your base saving allowance.
You may also get personal saving allowance of £1,000 on the basic rate taxpayers earning up to £50,270 a year. If you are a higher rate taxpayer earning up to £150,000 a year you may get personal saving allowance of £500, and if you are additional rate taxpayer earning over £150,000 a year you are not eligible for allowance.
However, with increasing inflations to 3.2% and is expected to rise to 5% or over, interest rates may increase in future, pushing more people over the threshold. So, cash ISAs may be a better option to save money on tax.
Tax on Investments
When you invest in stocks, you earn dividends and capital gain.
For the tax year 2021/22, the tax-free dividend Allowance is £2,000, and dividend received above £2000 will be taxed at 7.5%, 32.55% for higher rate taxpayers, and 38.1% for additional rate taxpayers. From April 2022, the dividend tax rate is expected to rise by 1.25% for each tax band.
Capital gain tax is payable when you sell shares or any assets that has increased in value.
For the tax year 2021/22, the tax-free capital gain allowance is £12,300 and for trusts it is £6,150. If you are a higher or additional rate taxpayer you have to pay 28% on capital gains from residential property, and 20% for other chargeable assets.
To minimize the dividend tax or capital gains tax, the most effective way is to use of ISA allowance efficiently.