Of course Brexit’s been one of the defining issues of the upcoming election. But the main parties have also been debating tax, a central issue that underpins everything the government does. With just a day to go until the general election on 12th December, you might want to weigh up their promises on personal finance.
To know the pledges each party’s making, it’s worth reading their manifestos and doing your own research. But to really understand their proposals for personal finance, there are a few financial concepts you’ll need to be familiar with first.
1. Income tax
Income tax is money you pay on your wages, after a certain amount. This amount is called your Personal Allowance and is currently £12,500, though if you earn more than £125,000 you don’t get one.
The UK tax system is based on marginal tax rates, which means you don’t pay the same amount on everything you earn. Instead, the government base your tax bill on the percentage of income you make within certain thresholds, also known as tax bands.
At the moment, in England you’ll pay:
20% in income tax on any earnings between £12,501 and £50,000 (this is the ‘basic rate’)
The higher rate is 40% on earnings between £50,001 to £150,000
If you earn more than £150,000, you’ll pay the additional rate of 45%
So, if you earned £40,000, you’d pay nothing on your first £12,500 and 20% on your next £27,500, which comes to £5,500.
There are different income tax rates for Scotland and Wales.
2. National Insurance
National Insurance is the other tax you’ll pay on your earnings if you’re an employee or self-employed in the UK. You usually pay it through the pay-as-you-earn (PAYE) system, which makes sure you qualify for certain state benefits like the State Pension and Maternity Allowance. Like income tax, the amount you pay depends on how much you earn, and your employer must also make a secondary contribution that depends on your wages.
If you’re an employee at the moment, you pay National Insurance contributions (NICs) if you earn more than £166 a week. You pay 12% of your earnings above this limit and up to £962 a week (for 2019-20), with the rate dropping to 2% of earnings over £962 a week.
So, if you earn £1,000 a week for instance, you pay
Nothing on your first £166
12% (£95.52) on your next £796, and
2% (£0.76) on the next £38
That’s a National Insurance payment of £96.28 for the week.
3. VAT
Value Added Tax – or VAT, as it’s more commonly known – is a tax the government charges on most goods and services in the UK. It’s the third biggest source of government revenue after income tax and National Insurance. The standard rate of VAT is currently 20%.
4. Capital gains tax
Capital gains tax (CGT) is a tax you pay after selling something you own that’s increased in value. The government tax you on the profit you make, rather than the total amount of money you get from the sale.
For example, if you bought a painting for £5,000 and sold it for £25,000, they’d tax you on your £20,000 profit. For higher and additional rate taxpayers, the current rate of CGT is 28% on gains from residential property, and 20% on gains from other assets. For basic rate taxpayers, the rate of CGT depends on the size of your gain, your taxable income and whether your gain is from selling residential property or other assets.
5. Inheritance Tax
Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died.
Under the current government it’s 40%, though you don’t have to pay it if the value of the estate is below £325,000 or if everything above the £325,000 threshold is left to a spouse, civil partner, a charity, or a community amateur sports club. If a home is given to children or grandchildren, the threshold increases to £475,000.
6. The Marriage Allowance
The Marriage Allowance is a tax allowance that can reduce the tax bills of couples who are married or in a civil partnership by up to £250 a year. Under the current policy, one partner must be a non-taxpayer (and earning less than the current Personal Allowance of £12,500) and the other must be a basic-rate taxpayer (earning between £12,501 and £50,000 in England, or £43,430 if you’re in Scotland).
7. Corporation tax
In the UK, corporation tax is due on profits from doing business as a limited company, a foreign company with a UK branch or office, or a club, co-operative or other unincorporated association, like a community group or sports club. The amount you pay depends on how much profit your company makes from doing business (‘trading profits’), making investments, and selling assets for more than they cost (‘chargeable gains’). Right now, the rate is set at 19%.