How much tax do you pay each year? Too much is probably your reflex response, but few people actually realise just how high their annual tax bill really is.It's not just a simple matter of adding income tax and National Insurance (NI); we're taxed far more than that. Whether you're putting petrol in your car, doing some impulse clothes shopping or even setting money aside for a rainy day, almost every time you open your wallet the government's coffers swell.When you add it all up, you could be paying one pound to the government for every three you earn.
It's easy to overlook other taxes, but they can make a big difference to our wealth. If you move house, for example, you could be hit with a hefty bill for stamp duty. Let's say you are buying a house for £200,000. You would pay stamp duty land tax at 1%, or £2,000. A home with a purchase price of £400,000 would land you with a tax bill of £12,000, while you'd have to hand over £24,000 in tax if you bought a propertyworth £600,000. The taxman could also grab 40% of any inheritance above the tax-free threshold of £325,000, said Gary Heynes of accountants Baker Tilly. "Don't forget capital gains tax, leviedat a flat rate of 18% on the profit from sales of assets such as shares."
What about other duties? The tax on cigarettes and alcohol went up by 2% in the Budget in April, adding 13p to a bottle of spirits, 1p to a pint of beer and 4p to a bottle of wine. It brings the total tax on a bottle of wine to 51% of the retail price. If you buy a bottle of spirits, 77% of the price will go to the taxman, according to the Wine and Spirit Trade Association.Smokers are similarly penalised by the tax system. The increase in duty announced in the Budget pushed up the price of a packet of 20 cigarettes by 7p. For a £5 packet of 20 cigarettes, about £4.50 now goes to the government in tax.
Now that we have run through the various taxes, let's take a look at how this would apply to a specific couple.Chris King, 34, is a typical MSN Money reader. He's a teacher and earns £30,000 a year. That means he's entitled to a tax-free allowance of £6,475, bringing his taxable income to £23,520. He pays income tax of £4,704 and National Insurance of £2,671, adding up to a total of £7,375. Chris bought an Audi A4 last year and pays £215 for his road tax. He drives about 1,200 miles a year, so his fuel duty bill adds up to £756. He has been to Spain and to visit relatives in Australia, handing over £50 in air passenger duty. His wife, Jane (29), is a GP and earns £45,000 a year. If we take off her personal allowance, her taxable income is £38,525. She pays income tax of £7,930, plus National Insurance of £4,209, to give a total bill of £12,139. Jane recently splashed out £11,000 on a new Volkswagen Polo, which landed her with a VAT bill of £1,435. Her road tax costs £125 a year, she drives 9,000 miles and pays £504 in fuel duty. She also spent £50 on air passenger duty. The couple does not have any children and enjoys a lively social life. They also treat themselves to some regular shopping trips.They spend around £20,000 a year between them on clothes, shoes, make-up, haircuts, eating out and entertainment, which means a hefty VAT bill of £2,608, or £1,304 each. If you add up all the figures, Chris's total tax bill is £9,700. Jane pays a total of £15,557. In other words, about a third of their joint income goes to the taxman. Scary, isn't it?
What are your most hated taxes? Share your thoughts on the forum
Let's start with the basics
Income tax is the biggie for most people and the more you earn the more tax you pay. This can only get worse as the government is keen to squeeze even more income tax out of higher earners.
Check you're paying the right amount of tax on your salary
National Insurance on the rise
NI also takes a sizeable bite out of our earnings - and that's on the increase, too.
It's easy to overlook other taxes, but they can make a big difference to our wealth. If you move house, for example, you could be hit with a hefty bill for stamp duty. Let's say you are buying a house for £200,000. You would pay stamp duty land tax at 1%, or £2,000. A home with a purchase price of £400,000 would land you with a tax bill of £12,000, while you'd have to hand over £24,000 in tax if you bought a propertyworth £600,000. The taxman could also grab 40% of any inheritance above the tax-free threshold of £325,000, said Gary Heynes of accountants Baker Tilly. "Don't forget capital gains tax, leviedat a flat rate of 18% on the profit from sales of assets such as shares."
Protect your savings from the taxman with an ISA
Tax, but by another name
Then there are the various duties, which are basically taxes by another name. Motorists will probably be familiar with the tax on cars, the most obvious being vehicle excise duty.
What about other duties? The tax on cigarettes and alcohol went up by 2% in the Budget in April, adding 13p to a bottle of spirits, 1p to a pint of beer and 4p to a bottle of wine. It brings the total tax on a bottle of wine to 51% of the retail price. If you buy a bottle of spirits, 77% of the price will go to the taxman, according to the Wine and Spirit Trade Association.Smokers are similarly penalised by the tax system. The increase in duty announced in the Budget pushed up the price of a packet of 20 cigarettes by 7p. For a £5 packet of 20 cigarettes, about £4.50 now goes to the government in tax.
Invest on the stock market tax-free with an equity ISA
Travellers beware
Watch out if you go on holiday, too. The government will even tax you when you take off from a UK airport. There are currently four rates of air passenger duty (APD), depending on your destination and the class you travel.
It means if you travel to Spain, you will pay duty of £11 in economy class. But if you venture to Australia, it will cost you £55. The rates are again doubled if you select a higher class.
We can look forward to some hefty increase in 2010-11. The Band D price, for example, will jump from £55 to £85.
Yet more taxes
VAT is similar to the various duties because it is a so-called indirect tax. In other words, it is usually implicit in the price of the goods or services, but it can bump up our overall tax bill.
Some good news...
So, do we get any tax breaks? Some families and pensioners on low incomes are entitled to tax credits. The government also uses tax incentives to encourage savings.
Now that we have run through the various taxes, let's take a look at how this would apply to a specific couple.Chris King, 34, is a typical MSN Money reader. He's a teacher and earns £30,000 a year. That means he's entitled to a tax-free allowance of £6,475, bringing his taxable income to £23,520. He pays income tax of £4,704 and National Insurance of £2,671, adding up to a total of £7,375. Chris bought an Audi A4 last year and pays £215 for his road tax. He drives about 1,200 miles a year, so his fuel duty bill adds up to £756. He has been to Spain and to visit relatives in Australia, handing over £50 in air passenger duty. His wife, Jane (29), is a GP and earns £45,000 a year. If we take off her personal allowance, her taxable income is £38,525. She pays income tax of £7,930, plus National Insurance of £4,209, to give a total bill of £12,139. Jane recently splashed out £11,000 on a new Volkswagen Polo, which landed her with a VAT bill of £1,435. Her road tax costs £125 a year, she drives 9,000 miles and pays £504 in fuel duty. She also spent £50 on air passenger duty. The couple does not have any children and enjoys a lively social life. They also treat themselves to some regular shopping trips.They spend around £20,000 a year between them on clothes, shoes, make-up, haircuts, eating out and entertainment, which means a hefty VAT bill of £2,608, or £1,304 each. If you add up all the figures, Chris's total tax bill is £9,700. Jane pays a total of £15,557. In other words, about a third of their joint income goes to the taxman. Scary, isn't it?
By Naomi Caine, exclusive to MSNAugust 05 2009
