Finance · Topic 5 of 19
Other Taxes
Theory
While Income Tax and National Insurance are deducted automatically from a person's payslip, there are several other taxes that individuals must manage and pay themselves, either regularly or on an occasional basis.
1. Value Added Tax (VAT)
VAT is a tax applied to the purchase of most goods and services.
- The standard rate of VAT in the UK is 20%. Some essential or child-related items have a reduced rate (e.g., 5%), while others have no VAT at all.
The Classic Exam Trap:
To find a price before 20% VAT was added, you cannot simply subtract 20% from the final price. The final price represents 120%. You must divide by 1.20 to work backwards.
2. Property Sales Taxes
When purchasing a property, the buyer must pay a tax to the government. It can amount to many thousands of pounds.
- In Scotland, this is called LBTT (Land and Buildings Transaction Tax).
- In the rest of the UK, it is called SDLT (Stamp Duty Land Tax).
- Like Income Tax, property taxes are calculated using a progressive band system depending on the purchase price of the house.
3. Council Tax
This is a tax paid by residents to their local council to fund services like rubbish collection, street lighting, schools, and libraries.
The amount you pay depends on your property's "Band", which is bizarrely based on what the property was valued at on the 1st of April 1991.
- Discounts: If an adult lives entirely alone, they are legally entitled to a 25% discount on their council tax bill. Full-time students are often exempt from paying.
- Payment Schedules: Unlike most bills which are spread over 12 months, many councils divide the annual council tax bill into exactly 10 monthly payments (typically from March to December).
4. Vehicle Tax
This is an annual tax paid to keep a vehicle on the road.
- When a car is first registered, the tax can be anywhere from £10 to nearly £6,000 depending entirely on the vehicle's CO2 emissions.
- In subsequent years, most standard cars revert to a flat annual rate (e.g., £195).
Worked examples
Example 1
Example 1: Reversing VAT (Working Backwards)
A couple purchases a new washing machine for £432. This price includes the standard UK VAT rate of 20%.
Calculate the price of the washing machine before the VAT was added.
Because VAT has already been added, the £432 represents 120% of the original price.
To find the original price (100%), we divide by the multiplier:
£432 ÷ 1.20 = £360.
Example 2
Example 2: Council Tax Discounts and Schedules
Liam moves into a Band C flat in Perth. The standard annual council tax charge for a Band C property in his area is £1,340. Liam lives alone, meaning he is entitled to a 25% single-person discount. The council requires the bill to be paid over 10 equal monthly instalments.
Calculate the amount Liam must pay for his council tax each month.
Calculate the discounted annual bill:
If he gets a 25% discount, he pays 75% of the bill. £1,340 × 0.75 = £1,005.
(Alternatively: 1340 × 0.25 = 335. Then 1340 - 335 = 1005).
Calculate the 10-month instalment:
£1,005 ÷ 10 = £100.50 per month.
Example 3
Example 3: Property Tax Terminology
Morag is buying a new 3-bedroom house in Edinburgh for £285,000. Her sister, Chloe, is buying an identical house for £285,000 just over the border in Carlisle, England.
State the exact name of the property tax that each sister will be legally required to pay.
- Morag (buying in Scotland) will pay LBTT (Land and Buildings Transaction Tax).
- Chloe (buying in England) will pay SDLT (Stamp Duty Land Tax).