London

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Taxes

Introduction to understanding income taxes, VAT, and council tax regulations in London.

Sections

How It Works

  • Tax-Free Allowance: Most individuals are entitled to a tax-free personal allowance, which is ยฃ12,570 for the 2023/24 tax year. Income above this threshold is taxed.
  • Tax Bands:
    • Basic Rate: 20% on income between ยฃ12,571 and ยฃ50,270.
    • Higher Rate: 40% on income between ยฃ50,271 and ยฃ125,140.
    • Additional Rate: 45% on income above ยฃ125,140.
  • Non-Residents: Non-residents are taxed only on income earned in the UK.

How to Pay

  • Employees: Income tax is deducted automatically through the Pay As You Earn (PAYE) system by your employer.
  • Self-Employed: You must register with HM Revenue & Customs (HMRC) and file a Self-Assessment tax return annually. Taxes are paid in two installments (January 31 and July 31).
  • Immigrants: If you move to London, you may need to register for a National Insurance Number to work and pay taxes.

Local Considerations

  • London has a high cost of living, so ensure you account for income tax when budgeting.
  • If you are a student or earning below the personal allowance, you may not need to pay income tax.

2. Council Tax

Council tax is a local tax paid to the local authority (borough council) to fund public services such as waste collection, schools, and emergency services. It is specific to the property you live in.

How It Works

  • Who Pays: The person living in the property (owner or tenant) is responsible for paying council tax.
  • Tax Bands: Properties are assigned to one of eight bands (A to H) based on their value in 1991. The amount varies by borough and property band.
  • Costs in London: Council tax rates differ across London boroughs. For example:
    • Band D in Westminster (2023/24): Approx. ยฃ912 per year (one of the lowest in London).
    • Band D in Croydon (2023/24): Approx. ยฃ2,239 per year (one of the highest in London).

Discounts and Exemptions

  • Single Occupancy: 25% discount if you live alone.
  • Students: Full-time students are exempt.
  • Low-Income Households: May qualify for a reduction or exemption.
  • Empty Properties: Some exemptions apply for unoccupied properties.

How to Pay

  • Payments are typically made monthly via direct debit, standing order, or online through the local councilโ€™s website.

Local Considerations

  • Check the council tax rate for your specific borough as it can vary significantly.
  • Notify the council if you move in or out of a property to avoid overpayment.

3. Value Added Tax (VAT)

VAT is a consumption tax applied to most goods and services in the UK. It is not specific to London but is relevant for anyone purchasing goods or services in the city.

How It Works

  • Standard Rate: 20% on most goods and services.
  • Reduced Rate: 5% on certain items like energy bills and childrenโ€™s car seats.
  • Zero Rate: 0% on essential items like most food, childrenโ€™s clothing, and books.

Who Pays

  • Consumers pay VAT when purchasing goods or services.
  • Businesses with a turnover above ยฃ85,000 must register for VAT and charge it on their sales.

Refunds for Visitors

  • Non-UK residents may be eligible for a VAT refund on goods purchased in the UK if they take them out of the country. However, the VAT Retail Export Scheme was discontinued after Brexit, so check current rules.

Local Considerations

  • London is a shopping hub, so be aware of VAT-inclusive prices when budgeting.
  • Businesses operating in London must ensure compliance with VAT regulations.

4. National Insurance Contributions (NICs)

NICs are payments made by workers and employers to fund state benefits like pensions and healthcare.

How It Works

  • Employees: NICs are deducted automatically through PAYE.
  • Self-Employed: You pay Class 2 and Class 4 NICs based on your profits.
  • Rates:
    • Class 1 (Employees): 12% on earnings between ยฃ12,570 and ยฃ50,270, and 2% on earnings above ยฃ50,270.
    • Class 2 (Self-Employed): ยฃ3.45 per week.
    • Class 4 (Self-Employed): 9% on profits between ยฃ12,570 and ยฃ50,270, and 2% on profits above ยฃ50,270.

Local Considerations

  • Immigrants must apply for a National Insurance Number to work legally in London.

5. Stamp Duty Land Tax (SDLT)

Stamp duty is a tax on property purchases in England, including London.

How It Works

  • Threshold: No stamp duty is paid on the first ยฃ250,000 of a propertyโ€™s value.
  • Rates:
    • 5% on the portion between ยฃ250,001 and ยฃ925,000.
    • 10% on the portion between ยฃ925,001 and ยฃ1.5 million.
    • 12% on the portion above ยฃ1.5 million.
  • First-Time Buyers: Exempt on the first ยฃ425,000 for properties up to ยฃ625,000.

How to Pay

  • Your solicitor or conveyancer will handle the payment as part of the property purchase process.

Local Considerations

  • Londonโ€™s property prices are high, so stamp duty can be a significant cost.

6. Capital Gains Tax (CGT)

CGT is a tax on the profit made from selling assets like property, shares, or investments.

How It Works

  • Exemptions: No CGT on the sale of your primary residence.
  • Rates:
    • Basic Rate Taxpayers: 10% on gains.
    • Higher/Additional Rate Taxpayers: 20% on gains.
    • For property: 18% (basic rate) or 28% (higher rate).

How to Pay

  • Report and pay CGT through HMRCโ€™s online system.

7. Other Taxes

  • Inheritance Tax: 40% on estates above ยฃ325,000 (with exemptions for spouses and charities).
  • Air Passenger Duty: Tax on flights departing from UK airports, varying by destination and class.
  • Congestion Charge: ยฃ15 daily charge for driving in Central London (Monday to Friday, 7:00 am to 6:00 pm).

Tips for Residents, Visitors, and Immigrants

  1. Register with HMRC: If you are self-employed or earning income in the UK, register with HMRC promptly.
  2. Keep Records: Maintain accurate records of income, expenses, and tax payments.
  3. Use Tax Reliefs: Explore tax reliefs and allowances, such as pension contributions and charitable donations.
  4. Seek Professional Advice: Consider consulting a tax advisor, especially if you have complex financial circumstances.
  5. Stay Updated: Tax rates and rules can change annually, so check HMRCโ€™s website for the latest information.

By understanding these taxes and their procedures, you can better navigate the financial landscape of London and ensure compliance with local regulations.