Introduction
Understanding how money and taxes work in the UK is essential for everyday life. This guide covers the main types of tax, how they are calculated, and what you need to know to manage your finances.
Income Tax
Income tax is a tax on your earnings. It applies to:
- Money you earn from employment (salary, wages, bonuses)
- Money you earn from self-employment (profit from your business)
- Some benefits and pensions
Tax Bands (2026/27)
- Personal Allowance: £12,570 - you pay no tax on this amount
- Basic Rate: 20% on earnings between £12,571 and £50,270
- Higher Rate: 40% on earnings between £50,271 and £125,140
- Additional Rate: 45% on earnings above £125,140
Your employer automatically deducts income tax from your salary through PAYE (Pay As You Earn).
National Insurance Contributions (NICs)
National Insurance is a tax on earnings that helps fund the NHS, state pension, and other benefits.
- Employee rate: 8% on earnings between £12,570 and £50,270; 2% above £50,270
- Employer rate: 13.8% on earnings above £9,100 per year
- You need 35 years of National Insurance contributions to get the full state pension
Council Tax
Council tax is a local tax paid by households to fund local services like schools, roads, libraries, and waste collection.
- Based on the value of your property (banded A to H)
- Payable by the person responsible for the property (usually the homeowner or tenant)
- Discounts may be available for single occupants (25% off), students, or people with disabilities
- If you are the only person living in the property, you get a 25% single person discount
- Full-time students are exempt from council tax
- The average council tax for a Band D property is about £2,100 per year
Value Added Tax (VAT)
VAT is a consumption tax added to most goods and services:
- Standard rate: 20% on most goods and services
- Reduced rate: 5% on some goods (like children's car seats)
- Zero rate: 0% on most food (except takeaway food), children's clothes, and books
How to Open a Bank Account
To open a UK bank account, you will need:
- A valid passport or driving licence
- Proof of address (utility bill, bank statement, or council tax bill)
- A UK address
- Some banks accept international students or new arrivals with just a passport and visa
The main banks include HSBC, Barclays, Lloyds, NatWest, Santander, and Nationwide. You can also open accounts with digital banks like Monzo, Starling, and Revolut.
Types of Bank Accounts
- Current account - for everyday banking, bills, and salary
- Savings account - for saving money and earning interest
- Student account - special benefits for students (overdraft, railcard)
- Business account - for self-employed people or companies
The Currency
The UK uses the pound sterling (£). Key facts:
- 1 pound (£1) = 100 pence (p)
- Notes: £5, £10, £20, £50
- Coins: 1p, 2p, 5p, 10p, 20p, 50p, £1, £2
- Contactless payments are widely accepted (up to £100 per transaction)
- Chip and PIN is standard for card payments
Other Important Taxes
- Capital Gains Tax - on profits from selling assets (shares, property)
- Stamp Duty Land Tax - when buying property in England and Northern Ireland
- Inheritance Tax - on estates worth more than £325,000 (40% on the excess)
- Corporation Tax - on company profits (25% for profits over £250,000)
Financial Help and Benefits
If you are on a low income, you may be eligible for:
- Universal Credit - a monthly payment to help with living costs
- Housing Benefit - to help pay rent (now part of Universal Credit for new claims)
- Child Benefit - £27.05 per week for the first child, £17.90 for additional children
- Pension Credit - for people over state pension age on low income
Understanding money and tax is essential for managing your finances in the UK.