UK taxes

Taxes are higher in the UK, but they are fairly straightforward compared to the dog's breakfast in the US.

The vast majority of Britons are covered under the Pay As You Earn (PAYE) system, whereby the employer withholds a certain percentage of your salary and sends it to the taxman instead. (Your bank does the same with any interest you earn.) At the end of the year, you're done--you don't have to fill out a tax form, file for a refund, or anything like that. And there are just two tax rates:

• 20% on the first £37,400
• 40% over that

They introduced a third tier this year to "punish" the bankers, which is 50% over £150,000.  (If you make £200,000/year, that's an extra £5,000 in taxes.  That'll show 'em.)

In addition, you pay a National Insurance tax, which is 11%  on the first £44,000 and 1% after that. That goes to fund your pension (social security to you) and jobseekers allowance (unemployment).

When you leave a job, your employer gives you a P-45 form which you must give to your next employer to avoid overpaying taxes for the year.  P-45, then, is the equivalent of "pink slip" over here.  (If you file for unemployment benefits, you get a UB-40 form--some of you may get the reference to a popular band.)


Have a child?  Then you file for a child claim benefit at birth, and you automatically get a weekly payment deposited to your bank account depending on how much you earn, whether or not you're married, how many kids you have, etc.  (You will also get a voucher for £250 to set up a trust fund for the child.) In April, Her Majesty's Customs will review your circumstances and automatically adjust your payment for the year.  And when the child turns 18, they will automatically stop payments.

Give to charity?  You can't claim it as a tax exemption, but you can 'gift aid' it, which means the charity gets the basic rate instead, which is an extra 20% on top of your contribution.

Saving for retirement?  You can make pre-tax contributions to a company pension plan up to £250,000 per year, and you can take out a tax-free personal savings account up to £10,000 per year. (You can even withdraw the savings penalty-free at any time; you just lose any future tax benefit.)

Of course, there's a multitude of additional taxes:

• In lieu of a sales tax they have a value added tax (VAT), which is 17.5%, but more interestingly it is paid along the entire supply chain.  That is, in the US, the consumer pays the entire tax based on the purchase price, but in the UK if you buy something wholesale at £1 and sell it to a retailer for £2, you pay 17.5 pence to the taxman.  If the retailer then sells it for £3 (ie £1 profit) then he owes 17.5 pence to the taxman as well.  (VAT is always included in the retail price, so you don't know what the retail markup is.)
• Stamp duty is due on real estate deals, with a sliding scale so the first £125,000 is free, and anything above £500,000 is 4%. (They've temporarily increased that to £250,000 for first time home buyers.)
• Capital gains are charged a flat 18% and cover everything you buy and sell except for your car and main home.
• Inheritance tax is 40% on any amount above £325,000.  Interestingly, you can make a gift of any amount tax-free, but any gifts made within seven years of your death are considered part of your estate.  (The Royal Family is exempt from inheritance taxes.)
• Council tax (property tax to you) is collected by the local government.
• There's the usual sin taxes excise duty on alcohol, cigarettes, gambling, motor vehicles, airline flights, and petrol.  (The TV license is effectively a tax, but it goes entirely to fund the BBC.)

Fortunately for me, the UK has a reciprocal tax arrangement with the US, such that as long as I'm paying UK taxes, I don't have to pay US taxes (up to £90,000 or so).  Similarly, if you live outside the UK, you don't have to pay UK taxes -- although that can be a slippery slope, and an important case was decided this year against a man who claimed to be "non-domiciled" in the UK but since he owned a home in the UK, a business in the UK, and his family still lived in the UK, the government ruled he was still liable for UK taxes. (I know that shouldn't seem like a big surprise, but the ruling actually affects thousands of people.)

Income and outgo