Tax rates and allowances. We know, that’s not a sentence that ignites anyone’s fire, but they’re fundamental to payroll. So, we’re going to give you all the relevant info to help you understand the spider web that is the UK tax system. We’ll help you navigate it all flawlessly (and with full compliance!), without breaking a sweat.
The UK Tax system
The UK is famed for its seemingly infinite number of tax codes and rates. It’s important for your payroll department to be clued up. Incorrectly calculating tax and withholding too much or too little can cause major headaches for your organisation and your employees.
The basics
There’s a lot of jargon to swallow when it comes to the tax system…
Income Tax
This one’s pretty self-explanatory. You pay tax on what you earn. Not just from your job but other earnings too. All incomes aren’t created equally, and neither are the tax bands.
Capital Gains Tax
In the UK, when you sell something for a profit, you get taxed on that profit. The key point here is you get taxed on what you gain. For example, if you sell a family heirloom for £15,000 after having bought it for £5,000, you’d be liable to pay tax on the £10,000. Of course, it all depends on the type of asset, your personal allowance and all the other important aspects of tax calculations.
Inheritance Tax
Property, money and the belongings of a deceased person are taxed by the Government. There are certain thresholds depending on the value of the estate and whether it’s given away and if part of it is given away to a charity, for example.
HM Revenue and Customs
HM Revenue and Customs (HMRC) are the head honchos when it comes to taxes in the UK. They’re responsible for collecting, administering and enforcing taxes.
There are quite a few different kinds of taxes, but the basic ones are income tax, capital gains tax, inheritance tax and value added tax (VAT).
There’s a lot to this whole tax system, but as a general rule, the higher the amount you earn, the more tax you’re going to pay on it. Which brings us to…
Income Tax
There are a few different income tax rates in the UK. In the tax year 2024/25, before a person has to pay tax, they’re entitled to earn up to £12,570—known as the personal allowance. This isn’t a given though, and the allowance can decrease by £1 for every £2 of income above £100,000, right down to zero.
Basic tax bands
As for the basic bands: there’s a basic rate, higher rate and additional rate in England, Wales, and Northern Ireland. The income tax rates for 2024/25 are:
| 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% |
And the income tax rates in Scotland for 2024/25 are:
| 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% |
| Advanced rate | From £62,431 to £125,140 | 45% |
| Higher rate | From £31,093 to £62,430 | 42% |
| Top rate | Above £125,140 | 48% |
What about National Insurance Contributions?
It isn’t just the ins and outs of tax you need to be aware of, there’s also National Insurance contributions (or NICs). For the fully details on NICS, you can read all about it in our National Insurance rates and categories guide. But for now, here are the four different classes:
- Class 1: This is paid by employees earning over £242 a week and are under State Pension age.
- Class 1A or 1B: These contributions are paid on employees’ expenses or benefits.
- Class 2: From 6 April 2024, self-employed people with profits over £12,570 will no longer be required to pay Class 2 NICs. They can, however, choose to make voluntary contributions if they wish.
- Class 3: This is a voluntary top–up employees can opt to pay to plug any gaps in their contributions.
- Class 4: Paid by self-employed people earning more than £12,570 a year in profit. For profits between £12,570 and £50,270, a 9% contribution is applied, at over £50,270, 2% is applied.
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Capital Gains Tax
We’ve already defined Capital Gains Tax, but let’s delve a little deeper…
Individuals
For individuals who find themselves in the higher or additional rate taxpayer bracket, they’ll be looking to pay 28% capital gains tax from residential property. For other chargeable assets, it’s 20%.
For those on the basic rate of income tax, there are a few variables like:
- Taxable income
- Gain from residential property / other assets
- Size of the gain
So, it all depends really. They can do a few sums to come up with a final number, like this:
- Work out your taxable income by subtracting your personal allowance and any other income tax relief.
- Then calculate the total taxable gains.
- Subtract your tax-free allowance from total taxable gains.
- Add the result to taxable income.
If the figure falls within the basic Income Tax bracket, individuals will have to pay 10% capital gains tax, or 18% if it’s on property. And any amount about the basic tax rate, you’ll pay 20% capital gains tax, 28% if it’s on property.
Trusts
If the person in question is a trustee of someone’s estate, they’ll pay 28% CGT on property and 20% on other chargeable assets.
What about exemptions, reliefs or allowances?
The Capital Gains tax-free allowance is
There are circumstances where you can make your tax bill a tad bit smaller. For example, if you make a loss on an asset that would usually be taxed, reporting this to HMRC will make your total taxable gains smaller (this is known as an “allowable loss.”)
An individual may benefit from not having to pay CGT when selling their home if the following criteria applies:
- They had one house and lived it in as their main residence for the whole period they’ve owned it
- They’ve never let out part of their residence
- They’ve never used part of their exclusively for business use
- The grounds of the home are less than 5,000 square metres
- They didn’t buy the house solely to profit from it
So, if all those boxes are ticked, the homeowner(s) won’t have to pay any CGT. This is known as Private Residence Relief.
Thankfully some assets are exempt from CGT. If you make gains from:
- ISAs,
- PePs
- UK Government gilts
- Premium Bonds
- Lottery, pools or betting winnings
There’ll be nothing to pay!
Inheritance Tax
Inheritance Tax can be a bit of a controversial topic. A whopping £7 billion worth of inheritance tax was collected by HMRC this past year. Whatever your opinion on the matter though, it’s not going to change for the foreseeable.
How does inheritance tax work?
When somebody dies and the value of their estate is over £325,000, they’ll be taxed. This is known as inheritance tax. If the deceased’s property, belongings and money come to less than £325,000, they won’t be liable to pay inheritance tax. Additionally, should any amount above that £325,000 be left to a spouse, civil partner, charity or community sports club, no tax will need to be paid either.
There are a few other rules that apply to inheritance tax. If the individual gives their home to children or grandchildren, the inheritance tax threshold rises to £500,000.
For married folks (or those in a civil partnership), with an estate that doesn’t quite meet the threshold, the amount left over can be added to the spouse’s threshold when either one dies.
What about the rate?
The base rate for inheritance tax is no small figure at 40%. This 40% is applied to anything over £325,000. If 10% (or more) of the net value of the estate is bequeathed to charity, inheritance tax can be reduced to 36%.
Reliefs and exemptions
If a person gives a gift to somebody else while they’re still in the land of the living, it may be taxed after their death. It’s not all doom and gloom though, as “taper relief” means that any inheritance tax charged on the gift falls under 40%. They’re a generous lot at HMRC!
Any other types of relief?
Business relief means some assets may be passed on free of inheritance tax or with a reduced bill.
Agricultural relief may be an option for those who leave behind an estate that includes a farm or woodland.
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 (or VAT) is used by VAT-registered businesses and applied to products and services sold by the same businesses.
As of 1st April 2024, a business has to have turned over more than £90,000 in the last 12 months to register for VAT.
The standard rate for VAT is 20%, which applies to the majority of goods and services. There’s a reduced rate of 5% applied to certain goods, like energy costs at home. There’s no VAT on “zero-rated” goods and services, for example on the majority of food and children’s clothes.
Tax Credits
Help is at hand for some! Tax credits are a form of benefit paid by the Government to people on low incomes, families and those with disabilities as a boost to their income, to help with the everyday costs of living.
There are two types of tax credits:
Child tax credit: These are for people with children, regardless of whether they’re in work or not. The amount a person can get depends on a couple of things: how many children they have at home and what their income is.
Working tax credit: For people who work, but are on low income, whether they’ve got kids or not.
Tax doesn’t have to be complicated
Here at Cintra, we know how tricky it can be to get income tax right, that’s we’ve put in the time and effort to design an innovative, compliant and connected suite of software and services that means you don’t have to do all your payroll alone.
Whether you want payroll software that can easily manage tax deductions with automated calculations and RTI reporting, or a fully managed payroll service, where our CIPP-qualified experts become your partners in payroll, we’ve got a solution for you.
Get in touch to find out more.
Payroll Legislation Guide
The facts, figures, thresholds and allowances for 2024/25 spanning tax, National Insurance, pensions, statutory payments and more.
