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3 Types of Taxes and How They Work

We take a look at three of the most common taxes paid by most people in the UK and how to distinguish them from each other.

Posted: 1st December 2020 by
Finance Monthly
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Taxes have always been a bit of a confusing matter for many people – now more than ever, due to the impact of COVID-19 on tax. There are so many things that can be overwhelming when it comes to taxes, such as which bracket you fall into, whether you need a UTR number, and many more.

One of the main things that confuses people is the fact that there are so many different types of tax. It can be hard to know whether you need to pay tax, and even once you know that, you may be unclear on what type of tax you need to pay.

There are various lesser-known types of tax, such as tax when you travel, or tax for gambling winnings, but in this post, we’ll be focusing on three of the most common types of tax: income tax, consumption tax, and property tax.

Income tax

This is the type of tax that tends to cost people the most. As the name suggests, income tax refers to compulsory money you need to pay to the government for any income earned. Keep in mind that this doesn’t just refer to money you earn form your business or job, but other forms of income as well.

There is usually a minimum income required in order for you to have to pay taxes, so if your income falls below this threshold, you might be exempt from paying. There are also various income brackets, which means the more you earn, the more taxes you’ll need to pay.

Consumption tax (VAT)

Consumption tax, also known as VAT, is the tax we pay on most of the products or services we buy. This varies from place to place. In the UK, the standard rate for consumption tax is 20%. This is the type of tax we encounter most often, since most people will pay VAT on nearly a daily basis.


While the majority of goods and services will require you to pay consumption tax, there are a few that are exempt. These differ depending on where in the world you live. Some places don’t charge VAT on what is viewed as basic necessities, and instead only charge for items viewed as luxuries. In the UK, for instance, insurance is exempt from VAT.

Property tax

Property tax refers to money that is levied on real estate. The way that property tax works is dependent on where you live. In some areas of the world, you only need to pay property tax on a property when you buy it and it is over a certain value. Generally, property tax is taxed annually.

Property tax is the responsibility of the owner of the property, which means that renters are not liable to pay property tax, although a portion of their rent will probably be used towards it. If you don’t pay your property tax, your house could get taken away from you, so it’s important that you pay the amount that you should, and that you pay it on time.

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