Tax is money that you pay to the government to help provide and maintain services used by the public. For example, roads, schools and hospitals. Get a better understanding of why we pay tax and what that money goes towards in our article.
There are lots of different taxes that you may already pay or may come across at some point. It can help to be aware of what these are and how you pay them. Read on for more information about these.
Income Tax
Scottish Income Tax is a tax on money that you earn. You pay this if your main home is in Scotland and it applies to the income you make from:
- Employment
- Profits from self-employment (including from sole traders and partnerships)
- Rental profits
- Pension (including the state pension)
- Taxable benefits
It does not apply to savings income and dividend income.
There are different rates that you have to pay depending on how much income you have each year. These rates are set by the Scottish Parliament and change from year to year. You are allowed to earn up to a certain point each year without having to pay any income tax, any money you earn above this point will be taxable.
You can find information about the current rates and bands on the UK Government’s website.
Her Majesty’s Revenue and Customs (HMRC) are the body responsible for collecting income tax.
There are two ways to pay income tax, through a PAYE scheme with your employer or through self-assessment.
Pay As You Earn (PAYE)
PAYE is a way for you to pay income tax automatically when your employer pays you. You will be given a tax code based on how much you earn that lets your employer work out what you owe and send it to HMRC each time you get paid.
Self Assessment
If you’re self-employed and live in Scotland, you pay income tax for the previous year through a process known as a self-assessment tax return. You will not usually need to send a return if your only income is from your wages or pension.
You need to complete a tax return if in the last tax year (for example, 6 April 2023 to 5 April 2024), you were:
- self-employed as a ‘sole trader’ and earned more than £1,000 (before taking off anything you can claim tax relief on),
- a partner in a business partnership.
You may need to send one if you have any other untaxed income, such as:
- money from renting out a property,
- tips and commission,
- income from savings, investments and dividends,
- foreign income.
You can also choose to fill in a tax return to:
- claim some income tax relief,
- prove you’re self-employed, for example, to claim Tax-Free Childcare or Maternity Allowance.
If your income (or your partners, if you have one) was over £60,000, you may need to send a return and pay the High Income Child Benefit Charge.
If you need to complete a tax return for 2024/25, it must be submitted by January 2025.
National Insurance
National Insurance is another tax you pay on your income. It is different from income tax as it is used for different things and there are different rates that apply to it.
Council Tax
Council Tax is a tax set by your local council. The money collected from council tax payments helps to pay for local services such as rubbish and recycling collection and local area maintenance.
Value Added Tax (VAT)
VAT is a tax you have to pay when you buy goods or services. It is built into the price that you see on most things that you buy, so you may not even realise that you’re paying it.
The standard rate is 20%, which is what everyone pays on most goods and services. There is also a reduced rate of 5% for some things such as children’s car seats and home energy, and there is a zero rate of 0% for things like most foods and children’s clothes.
Inheritance Tax (IHT)
Inheritance Tax is a tax on the estate of someone who has died. Their estate includes all property, possessions and money.
You do not have to pay IHT if:
- the value of the estate is below £325,000,
- everything above the £325,000 threshold is left to a spouse, civil partner, charity or community amateur sports club.
If the person who has died leaves their home to their children or grandchildren, the threshold can increase to £500,000.
The standard rate is 40% which is charged on anything above the tax-free threshold of £325,000.
You can read more about Inheritance Tax on the Money Helper site.
Non-domestic rates (business rates)
Often known as ‘business rates’, these are a tax on non-domestic properties to help pay for local council services such as education, social care and waste management.
Businesses, charities and public sector organisations have to pay for this. If you’re the owner, tenant or occupier of a non-domestic property, you will be responsible for paying this tax. This includes:
- Shops
- Offices
- Pubs and hotels
- Warehouses
- Factories
You also may need to pay them if you use part of a house for business purposes. For example, if you work from home or let out a room.
There are some exemptions for places which don’t need to pay, including:
- Agricultural land and buildings
- Fish farms
- Public parks
- Rural premises with Automatic Telling Machines (ATMs)
- Oil and gas pipelines
- Overseas armed forces premises in the UK
To pay business rates, contact your local council when you start a business or move into a business premise.
Find out more about business rates on the Scottish Government website.
Land and Buildings Transaction Tax (LBTT)
Land and Buildings Transaction Tax is something you might have to pay if you buy a residential property or piece of land in Scotland.
You do not pay this on properties that cost you up to £145,000. Anything more than this will be subject to LBTT, how much you pay will be based on the value of the property.
If you’re buying a second home, you might need to pay an additional dwelling supplement of 6% based on the total purchase price of properties costing more than £40,000.
Find out more about Land and Buildings Transaction Tax on the Money Helper site.