The big four UK taxes and who pays them

While taxes take many forms, there are only four that really matter when it comes to government revenues. These are income tax (28%), national insurance contributions (18%), VAT (17%) and company taxes (11%). These figures, which are estimates for 2023–24, make up 74% of government revenues from taxation.

Given the importance of these taxes, it is worth examining them a bit more closely to see how they work, who pays them and what their rates are.

VAT – What is it, who pays it and when?

VAT – value added tax – is currently 20% in the UK and is payable on most goods and services. It is different from a sales tax, which is paid by the final purchaser, in that it is payable at each stage value is added to a product or service. Let’s have a look at how it works in practice.

The SuitsYou company makes menswear. The raw materials for a jacket cost £25. SuitsYou pays the government £5 in VAT for these materials. A retailer buys the jacket for £70 plus 20% VAT (£14).

SuitsYou hands over £9 to the government (as it has already paid £5).

The retailer sells the jacket for £120, handing over £6 in VAT (as it has already paid £14).

Businesses with annual taxable turnover of below £90,000 do not pay VAT. This means most UK companies do not pay VAT. The threshold is higher than that of any EU member state and the highest of countries in the Organisation for Economic Cooperation and Development, excepting Switzerland.

Input and output VAT

As can be seen, a business both pays VAT (output VAT) and receives VAT (input VAT).

Reduced rates and exemptions

Many goods and services where there is an obvious public interest in not pricing people out of access to them are zero-rated for VAT. These are some of the most important examples:

• Cultural and sporting activities
• Healthcare products and services
• Educational goods and services
• Most food and drink bought in shops, excluding alcohol
• Children’s clothes
• Publications
• Financial products such as insurance and credit
• Sales and leasing of property

Energy for domestic use is on a special 5% VAT rate.

Income tax – what is it and how do I mitigate it?

If your annual income is above £12,570 you will have to pay income tax at a rate of 20% on the income above £12,570. Income above £50,270 a year attracts higher rate income tax of 40%. Those on income of above £125,140 pay additional rate tax at 45%.

People with adjusted net income above £100,000 lose £1 of their personal allowance for every £2 they go above £100,000. Adjusted net income is income minus trading losses, charitable donations and pension contributions. The sliding scale means those with income above £125,140 lose all their personal allowance.

The best way of mitigating a higher tax bill is to contribute more to a pension. This reduces adjusted net income (taxable income) and, even better, people can withdraw 25% of pension savings tax free once they are 55 years old.

The other tried and tested method is to take advantage of employee benefits, known as benefits in kind. These can be things like cycle to work schemes, whereby an employer funds the purchase of a bicycle out of salary thus reducing adjusted net income. Childcare vouchers are the other common one. These vouchers are tax free and reduce taxable income.

Corporation Tax

Limited companies have to pay corporation tax on profits, unlike sole traders and the self-employed who pay income tax on their profits. These profits include income from investments and from selling assets.

Companies with annual profits of more than £250,000 pay 25% tax on those profits. Those making a profit of below £50,000 pay the small profits rate of 19%. A tapered increase in tax rate known as marginal relief applies to companies with annual profits between £50,000 and £250,000.

National insurance

This is paid by employers and employees at different rates. National insurance (NI) was set up in 1911 and was intended to fund benefits such as pensions, healthcare and unemployment support in exchange for regular payments out of earnings. Over the decades, the direct link between payments and benefits weakened, particularly in the 1970s, and now NI is more like an employment tax. However, workers’ access to benefits can be reduced if their contributions are not fully paid up.

Employees

For the current tax year, employees pay NI at a rate of 8% of earnings between £242 and £967 a week, which equates to between £12,584 and £50,284 a year.

Above £967 a week, a rate of 2% is payable.

Self-employed

Sole traders and the like with annual profits of between £12,570 and £50,270 must pay 6%, and 2% on profits over £50,270.

Self-employed people with earnings below £12,570 can make voluntary contributions to protect their NI record.

The four classes of NI

People’s employment status affects what sort of NI they pay.

• Class 1 is paid by company employees.
• Class 2 is paid voluntarily by sole traders whose profits are less than £6,725 a year at a rate of £3.45. This protects their NI record.
• Class 3 is for people with gaps in their NI record, for example, those who take time out of the labour market to bring up children. The current weekly payment rate is £17.75.
• Class 4 is paid by self-employed people.

Employers’ NI

This is now 15% on earnings above £96 a week or £5,000 a year. The increase in April 2025 from 13.8% dismayed many employers, especially those with larger workforces made up of lower-paid workers.

The threshold at which employers pay NI also changed in April. This is now £5,000, down from £9,100.

Employers also have to pay NI on benefits and expenses provided to employees such as company cars, health insurance and childcare.

CIS tax

The Construction Industry Scheme (CIS) is for self-employed workers in the construction industry employed by a contractor. Under the CIS rules, the contractor is required to withhold tax from workers at a rate of either 20% if they are registered or 30% if they are not.

The scheme ranges more widely than construction, covering, for example, demolition jobs, installing power systems and repairs and decorating.

CIS does not apply to those who work directly for another business or individual – there must be a contractor in between the two. Registering for the scheme is mandatory for contractors but optional for subcontracting self-employed workers.

The deductions made by the contractor are handed on to HMRC as an advance payment on the subcontractor’s tax bill.

If you have further questions about tax, doing a self assessment or any aspect of your business, please contact Finsbury Robinson. We are a full-service tax, accountancy and business advisory firm. Our friendly and highly experienced team is available on 020 8858 4303 and via email at info@finsburyrobinson.co.uk.