Tax and National Insurance
Tax is a reality of life and has been for thousands of years.
Income Tax, Council Tax, Vehicle Tax, and Insurance Premium Tax are just some of the many taxes that impact people every day.
The UK utilises a progressive tax system which means people pay a higher tax rate as their income increases. HMRC are responsible for collecting taxes and making funds available for the public benefit.
The UK has a Pay As You Earn (PAYE) system that automatically deducts Income Tax and National Insurance Contributions (NIC) from a person’s monthly salary.
Here is some more information on the two most common taxes related to work:
To find out more about how National Insurance works, check out the useful guide on the Money Helper website.
Money Saving Expert have created a useful guide with information about other taxes such as Capital Gains Tax and inheritance tax.
A pension is the most tax efficient way to save for the future. Here is an example to illustrate why:
Jane earns £40,000 a year and has a tax-free allowance of £12,570. This means that she has to pay income tax at a rate of 20% on £27,430.
If Jane pays 5% of her £40,000 salary into a pension, that is the equivalent of £2,000 going into her pension savings. This £2,000 payment into her pension fund occurs before income tax is paid, which means that the amount of income that she has to pay tax on is reduced from £27,430 to £25,430. Therefore, she now pays less tax than she would have done if she had been taxed on £27,430.
If she had to pay tax on that £2,000 at 20%, the actual amount she would have received in her pay would be £1,600. Instead, she has put the full £2,000 into her pension, which means that it effectively cost her £1,600 to save £2,000. That's what is meant by the term “Tax Efficient”. See the link below for more explanation of tax relief on pensions.
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