In short
Demystifying UK taxes—how income tax and National Insurance work with thresholds (“tax bands”), what “fiscal drag” means, plus VAT, capital gains tax (CGT), and when people must act (self-employment, CGT disclosures, tax returns).
Key claims
Income tax and NI are charged only on portions of income above set thresholds; “40%/higher rate” doesn’t mean all income is taxed at 40%. Fiscal drag happens when thresholds stay fixed while wages rise, increasing tax “by stealth.” VAT is a sales tax embedded in prices; businesses can reclaim VAT on inputs if they charge VAT on outputs. CGT applies to profits on assets sold (not your principal private residence), with an annual exempt amount and rates (18%/24%) depending on where the gain stacks into income bands.
Notable examples
£12,570 personal allowance then 20% on the next band; NI 0% then 6% then 2%. Child benefit/cliff edges around £50k and £100k. CGT example: £10k gain with £3k allowance leaves £7k taxable. ISA example: gains inside an ISA are tax-free. Spouse transfer example: no CGT between spouses, but transfers to non-spouses can trigger tax; a client’s house-sale mistake cost £75k due to principal residence rules.
Guests
No external guests—hosts are Kate and her dad Pete (Bank of Dad podcast).
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOFamily Updates and Context
0:45 to 1:15
The hosts share personal updates on family health issues that affected their lives recently.
“Which led to a night in hospital, and since then.”
Introduction to Tax Discussion
1:15 to 2:10
Setting the stage for the episode's topic, demystifying tax and its importance.
“It's got to be done, because I feel like you need to understand this.”
Wanky Word of the Week: Fiscal Drag
2:10 to 3:30
Introducing the term 'fiscal drag' and explaining its implications in tax.
“The thing is, the issues, I like his stories.”
Understanding Income Tax Basics
3:30 to 4:40
Explaining what income tax is, how it works, and its societal role.
“But one of the other things they do is we're going to talk about tax thresholds in a minute.”
National Insurance Explained
4:40 to 6:00
Discussing national insurance, its purpose, and how it relates to income tax.
“And tax isn't something to be afraid of and it's not something to resent too much because if you live...”
Tax Thresholds and Brackets
6:00 to 7:50
Explaining tax thresholds and how they affect taxation on income.
“Whereas national insurance came about specifically to provide for benefits, notably the state pension.”
Visualizing Income Tax Rates
7:50 to 10:00
Using a visual metaphor to explain how income tax rates are applied.
“And then the next one is at 50 ,270, and there's another one at 100, and another one at 125 odd, right?”
Cliff Edges and Tax Rates
10:00 to 12:20
Cautioning listeners about tax cliff edges and how they impact earnings.
“So on the first 12, 570, you don't earn anything.”
Child Benefit and Income Tax Impact
12:20 to 14:00
Discussing how income tax thresholds affect child benefit eligibility.
“So you're only paying the high rate on the bit that's over the 50 ,270 pound threshold.”
Understanding Child Benefits
14:00 to 15:30
Discussion on child benefits, eligibility, and implications for earners.
“So, yeah, free childcare is removed over 100 grand, I believe.”
Show all 24 chapters
Explaining VAT
15:31 to 17:05
An overview of Value Added Tax (VAT) and how it differs in the UK and US.
“Government makes money when you buy stuff.”
VAT in Business Transactions
17:06 to 19:24
Insights on how VAT applies to businesses and the confusion surrounding it.
“And tax rates are on, I mean, some things have VAT.”
Capital Gains Tax Basics
19:25 to 23:20
Explanation of capital gains tax and how it affects personal investments.
“or some insurance or whatever, then we haven't implemented anything.”
Maximizing Gains with ISAs
23:21 to 28:00
Discussion on how ISAs can help minimize capital gains tax on investments.
“So if you own something and sell it for a profit, you may pay capital gains tax on it.”
Understanding Capital Gains Tax (CGT)
28:00 to 29:06
Learn about what triggers CGT and its implications for investors.
“So what triggers CGT I think we covered?”
Common Misunderstandings About CGT
29:06 to 31:00
Discover frequent misconceptions regarding capital gains tax and its calculations.
“So what are some big CGT misunderstandings?”
The Importance of Seeking Tax Advice
31:00 to 33:30
Understand the importance of seeking professional advice to avoid costly mistakes.
“Even though no money's changed hands, it's a disposal.”
Self-Employment and Taxes
33:30 to 36:26
Explore how taxes differ for self-employed individuals compared to employees.
“It's the lender's fault, who shall remain anonymous, although I don't know if I've mentioned them before.”
Navigating Tax Returns and Responsibilities
36:26 to 39:51
Learn about the responsibilities of filing tax returns and the necessary steps.
“Whereas if you're self-employed, you do that once a year currently, that is changing, right?”
Exploring Income Tax and National Insurance
39:51 to 42:01
Discuss why income tax and national insurance are treated differently and tax bands.
“Because then that reduces your take home pay.”
Understanding Income Tax Bands
42:01 to 43:14
Learn about the different income tax bands and how they work in the UK.
Explaining Tax Categories Visually
43:15 to 44:24
Discover how visual aids can help explain complex tax concepts more clearly.
“No, I think we've definitely gone over this.”
Inheritance Tax and Future Q&A
44:25 to 45:07
Discuss the importance of inheritance tax and plans for a potential Q&A.
“But the best way is to drop us an email to hello at bankofdad.show.”
Resources and Feedback
45:08 to 45:54
Find out how to access resources and provide feedback for future episodes.
Transcript
Automatic transcript. May contain errors.0:00I both feel like I understand it more and also feel more confused. So you're welcome.
0:04Pete:Me too, actually, in case you were thinking there was a big revelation coming. Yeah, just, and here is our, your steps. What? Here are my love children. That'd be weird. Hi, and welcome to the Bank of Dad podcast. I'm Kate, and this is my dad, Pete. Hello. And we're here to teach you the money lessons we were never taught at school. There's no judgment, no jargon, just real talk about how to handle your money. Here we are again. Here we are again. Been a weird couple of weeks in our family, isn't it? Oh, jeez, yeah. Medical things. It has been bonkers, isn't it? Because when we last recorded, I had the kidney stone.
0:41Pete:That was out, was it? You'd had the kidney stone. I'd had the asthma attack that had me and A &E. You'd had the kidney stone. Which led to a night in hospital, and since then. We've had, well, my grandad go in for chest pains. Thankfully, he was all cleared of all the nafties. Yeah, not cardiac in the end. And I don't even know where to begin with, saying what happened to Mark. Well, let's just say it culminated in a massive reaction to an antibiotic which put her in hospital. Yeah, not good. Not really not good, yeah. So it's been quite a few weeks, but anyway, here we are. We are definitely out the other side of it, thank God.
1:13Pete:Yes, indeed. We're here again. What were we talking about this week? Today, we're talking about tax. Oh, yay. It's got to be done, because I feel like you need to understand this. Well, yeah, I called it demystifying tax. I was trying to think of something more clever, you know. No, you don't need to be clever. that's basically what we're talking about. What is it? And making sense of it, it's something we know. It's a daily part of life. Yes. I can't remember who it was. It said there's only two things that are certain in life and that's death and taxes. Wow, that's a chirpy life. That's a great outlook on life, that.
1:46Pete:It's that really famous quote. I'll find out who it is. Love, happiness. I'll tell you what. Search it and put who said it here in post. Ding. There you go. Right, so. I want to say it's Charles Dickens, but I might be wrong. Well, which would sum it up, because his books are frigging depressing. Quite agree. He's an overrated author in English literature. Use a full stop, man. You don't need another comma. The thing is, the issues, I like his stories. Yeah, yeah, they're just painful to read. Yeah, no, exactly. Just pissed off a lot of people. So, tax and all that, Jess. Indeed. But before any of that.
2:23It's time for... Wanky Word of the Week. It's time for Wanky Word of the Week.
2:31Pete:Yes, there we go. Right. So what is this week's Wanky Word of the Week? Quite wanky, I think. Very. When I read this, I thought, yes. Excellent wanky score. Sure. And I think it's very apt as well. I was very pleased. This came from my brain. Nicely linked. Well done. Fiscal drag. Fiscal drag. What? It doesn't mean anything, does it? It's a completely meaningless phrase. Fiscal just isn't really a word that people use. Yeah, fiscal just means to do with tax, really. Well, exactly. So unless you're using it in this context, how often do you go, oh, yes, the fiscal this morning is looking lovely.
3:05Yes, exactly.
3:06Pete:Lovely fiscal this morning. Yeah, fiscal and so fiscal drag describes the premise by which more and more people are paying more tax, but kind of by the back door. So let me give you an example. So politicians will say, hey, if you vote for us and we get into the next general election, we will not put up the rate of income tax. So in other words, the percentage rate of income tax. Cool, right? And they can honor that promise. But one of the other things they do is we're going to talk about tax thresholds in a minute. If they keep those tax thresholds where they are, but wages rise, that means that more and more people will earn more money over the threshold, or jump up a band, or just earn more money, and so more of it will be taxed.
3:50Pete:And so the government takes more tax, but almost by stealth. Yeah, exactly. So it's sort of, we call that fiscal drag. So people are worse off, but the government, the politicians can say, ah, but we honoured our promise. It's a lot for a Monday morning. It's just like, yeah. It is. It's Thursday when this goes out, but hey. Yeah, it's Monday 9am for us. You're not zoned in yet. I'm not, I'm not. Okay, it's been a long few days. Right. So, okay, well, that leads us quite nicely into the main thing. So the first subsection is all about income tax and NI or national insurance. So what is income tax?
4:30Pete:So income tax is the kind of the one that most of us kind of feel every day. If you're working, if you're earning over a certain amount, you're paying income tax. It's just a fact of life, right? And tax isn't something to be afraid of and it's not something to resent too much because if you live... I was going to say, we can resent it a little bit. You can resent it a little bit, definitely. We all do. But if you live in a developed economy where you've got roads that you can drive on, schools you can send your kids to, and in our case, of course, the glorious NHS, and lots more besides policing, fire engine, teaching, nursing, all these things which are paid for essentially by tax.
5:09Pete:You can't complain about it too much if you use all those things. No, exactly. It's annoying, but we all benefit from it. We benefit, yeah, yeah. Yeah, it's an imperfect system, but that's the way it goes. And it's imperfect because it's run by imperfect people. So, you know, income tax is basically a tax that is charged by the government on your income. Not rocket science, is it? It's quite well named. But of course, there is nuance to that. It's not like all of your income is charged. It's not like all of your income is taxed. There are bans and stuff which you'll get into in just a little bit.
5:43Okay. So where does national insurance fit in and why do we have both? Because they're both something to do with, like, my income is taxed on.
5:52Pete:They're both taxes. National insurance is just a nicer name. I mean, they essentially came about for different reasons. So income tax really came about to pay for, well, things we talked about, schools, roads, the sort of general things in society. Whereas national insurance came about specifically to provide for benefits, notably the state pension. But there are other benefits as well, which are dependent on you paying national insurance. I think I always forget that pensions are a benefit. Yeah, yeah, yeah. It is because it's with the state pension is a benefit. Yeah, because there's no pot with your name on with a state pension.
6:28Pete:So essentially those of us who are working today are paying, our national insurance is paying for the pensions of those who have already retired. But the caveat to that is they've had to pay national insurance for how long? Exactly, and they paid for the pensions of their parents and grandparents and stuff. So yes, it is a state benefit ultimately. Some people might take me to task on that, but that's my view. Essentially, it's a state benefit because as long as you pay national insurance, you get paid it at a certain age. That's it, right? And how much you get does depend on how much national insurance you've paid.
7:00But despite the sort of nicer, more palatable name, it's national.
7:05Pete:Yes, let's be patriotic and it's an insurance. We are doing good things with our money for the future. It's basically just another income tax. Right. That's all it is. So you pay tax and national insurance, but you might as well just say, we pay a ton of tax. Great. So this thing leads on to the thresholds that you've mentioned. Yeah, brackets, some people call them. Yeah. people have especially in the meaningful money questions they use this phrase a lot and i think it's good to demystify it when people say they're in like the 40 tax bracket yeah what does that even mean does that mean like 40 of all their incomes being taxed it doesn't mean that so good it's kind of hard to describe this it's sometimes easier in a sort of visual form so let me just paint you a little picture so imagine a wall right and against the wall or on the wall are chalk marks at certain heights, right?
7:57Pete:The first one is at 12 ,570, okay? And then the next one is at 50 ,270, and there's another one at 100, and another one at 125 odd, right? Yeah. But imagine these chalk lines. Those are the thresholds. Yeah. So imagine then your income as like a cardboard box stacked against the wall, right? And let's say you earn 20 ,000 quid just for easy numbers. It's actually not that easy at all. So the first 12, it doesn't really matter, an easy number would be you earned 22 ,570. Right? So let's say you earned 22 ,570. Because it's exactly 10 grand over the threshold. Oh, right. Yeah. So let's say you earned 22 ,570 pounds, right?
8:44Pete:The first 12 ,570... It's tax free. Yeah, because that sort of, everything below that chalk mark on the wall is 0 % tax-free. Everything between that chalk mark and the next one at 50 or grand, that's at 20%. Is that what they call the basic rate tax? That's the basic rate, yeah. So between 12 ,570 and 50 ,270, that's 20%. Between 50 ,000, yep. If you're earning the 22 ,570? Yes, roughly. you don't pay any tax on anything below £12 ,570 that's right but you do pay 20 % of what you earn above that basically on the top 10 grand and that's a really important point because people think oh my god now I'm going to pay 20 % on all of it no it's 20 % of however much you earn however much is over and that's why for me at least maybe it's just the way my weird mind works that sort of picture of kind of boxes stacked and it helps because you can have different kinds of income so if you happen to own you know maybe you inherit like a property and it's rented out and you get rental income coming in that's a kind of different kind of box if you've got investments that pay you dividends or uh interest for money in a bank these are different sources of income and so they can be different boxes but they're still all on the same line yes but they are stacked in order don't need to worry about that there is an order to those but don't need to worry about that too much the point is they're stacked and depending on the height of your tower of boxes might be just you have only one box which is your income from salary yeah um you know so depending on the height of the boxes you'll pay certain level of tax but you'll only pay tax at this given rate within that band so if it's if as you say the first 12 570 is zero percent the other 10 grand in that example is 20 so if you're only earning 13 grand you're only paying tax on 430 pounds national insurance essentially works the same way, right?
10:37Pete:So the rates are different though. So on the first 12, 570, you don't earn anything. Over that, it's 6%. And then over the 50 ,270-ish, it's 2%. Right, so it's a smaller rate at higher levels. I suppose that makes sense. Otherwise, you're just paying shed loads of tax. Well, yeah, well, yeah, exactly. So I'm not sure what the reasoning is for that. But if you think national insurance is specifically for providing... Well, it's supposed to be specifically providing universal benefits. How much you earn is less of a factor. With income tax, if somebody earns more, you pay more, which I think is broadly as it should be, right?
11:18Pete:With national insurance, once you've sort of kind of paid enough to lock in your future benefits, you don't have to be paying loads more at a higher rate. So, yeah. So, thresholds, but you only pay... on how much over the threshold you are not on everything so it's annoying if you're like earning 48 grand and you get a pay rise to like 52 well hang on so if you do that let's say you're on the 48 grand so you're paying 20 % on everything over 12 ,570 then you jump to 52 are you paying nothing on the 12 ,570, 20 of the 12 ,570 to 50, and then 40 of the 50 to the 52. Yeah, so you're only paying 40 % tax on the very top little bit.
12:12In that case?
12:13Pete:Yes. So that's a lot of tax extra. But then also, no, it's not because you're only paying 20 % on most of it. Yeah, exactly. So you're only paying the high rate on the bit that's over the 50 ,270 pound threshold. It's not like once you get over, it's all 40%. But. Oh, God. I was just kidding. I know, but you've got to be aware of things like there are sometimes there are a couple of cliff edges with income tax. The most notable one is 100 grand. So that one jumps up to 60? Notionally, it's not actually 60 % rate. Over 100 grand, your 12 ,570, which is called the personal allowance, that's the tax free bit, that gets progressively removed.
12:53Pete:So over 125 ,000 quid, you don't have that. So then you're paying tax on everything. Is that just because you're rich enough, you're fine yeah it's i think it's uh regressive brutal but so notionally between earnings between 100 grand and 125 for something um you're paying notionally 60 on that they don't worry about what notionally means essentially you're paying 60 on that and then over 125 you're paying 45 on everything yeah there was a time in the 80s where the top rate of income tax was 91 I know, I think it's either 70s or 80s. So basically you kept nine pence in the pound. It was the very, very top rate.
13:35Pete:Well, yeah, it's hardly worth going to work. The very top rate, I don't know what the thresholds were back then because I was a baby. Income tax is a powerful lever, but it's probably the quickest way to get people marching on the streets if you overdo it. So I can't remember, I think somewhere on the 50 ,000 I believe. child benefit gets withdrawn so child benefit which is a state benefit it's a free benefit that you get if you have children with money it's literally a payment made to you by the government for having a child you get a certain amount for the first child lower amounts for other childs other childs other children but if you or your partner earn over if you are higher rate threshold they're like nah you can afford them yeah they start pulling it back you have to pay it back does that benefit include like the child care that's the hundred thousand pound one i believe it's been a long time since you were a child so it's so after you get earn a certain amount you can't get some free child care yeah and it's a cliff edge that so you go over a hundred thousand you don't get free child it's not tapered it's just no exactly this is a little ludicrously expensive that's expensive i can't believe how expensive it is which is why i was working a four-day week is such a massive benefit to the you know let's say there's quite a few of us have got young kids yeah quite a few of the team i have no children but yes i don't have any young children either just in case you were thinking there was a big revelation coming yeah just and here is all your steps what here are my love children oh that'd be weird um but you know that's just big quite a big group of the team have got young children so you know giving them an extra day loads of money isn't it well Exactly.
15:18Pete:Yeah, yeah. So, yeah, free childcare is removed over 100 grand, I believe. I really should know this, but this is not really my field. And then, but over 50 ,000, it's the child benefit that gets withdrawn. Wow. Okay. All right, let's move on to VAT. Oh, can we? What is it? What does the V-A-N-T stand for? Value Added Tax. It's a sales tax. Government makes money when you buy stuff. Sure. That's basically all it is. So, they'll apply a tax because, you know, by definition, we buy and sell stuff off each other it's what capitalism means essentially and the government has a slice of that but VAT is I'd say barely noticeable with daily stuff because it's just embedded it's not like we're in America no which is just freaking confusing if you've ever been to America I just added this up in my head I was like hang on $3.99 I'm like wait okay perfect so I'm going to spend about$7 perfect fantastic get there $8.8 yeah it's like$9.58 you're like what?
16:17oh taxes added after why that is beyond stupid it is beyond true i guess if you never know any different you just
16:22Pete:get really good at doing that in your head but it's bizarre isn't it because that was a real thing that we were all like when we went we were only there for a few days and new york was expensive but like you'd psych yourself up okay i know this breakfast is still is going to be 38 i've had a piece of toast and it's 38 okay it's fine right that'll be 43 75 I'm like, what? No, I've just signed myself to stay under 40. What? Yeah, no, it's a stupid system. So at least we don't notice it. At least it's, well, no, at least it's more obvious. When you buy something for$4.99, when you hold it and then scan it on your register, it's$4.99.
16:56Pete:It's$4.99 and the tax is included. Yeah. Yeah, and that's a, I think you're going to ask me about this in a minute, but that's the way we do it here. Yeah. So when you buy something, tax is included. And tax rates are on, I mean, some things have VAT. and some things don't, and VAT rates change. So, again, VAT is a lever that government can pull, the cynic in me says, to improve their popularity. So they might say, well, we're going to reduce VAT on pubs so that working people pay a bit less for their pint or food in a pub or whatever or hospitality industry. So is there any kind of rhyme or reason as to what has got VAT and what hasn't?
17:37Pete:Probably, but I don't know what it is. I mean, I'm pretty sure, I mean, it always used to be the case, like children's clothes didn't and books didn't. I don't know if it still is. I'm pretty sure they were moving quite recently. I saw this in a Costa when I was away this week and it was a sign saying that children's meals are not going to have VAT on them anymore. Okay. I thought they didn't anyway but maybe not. I think children's clothes. It was a sign on there and I remember thinking, huh, okay. Sort of makes sense. Seems odd to make children pay tax really. Well, they're not, are they? Well, no, it's their parents paying it.
18:14Pete:Yeah. Yeah, so ultimately the government decides what things have VAT on them. Is it like more expensive things to buy in will probably have VAT? No, that'd be a different thing again, I guess. No, it's entirely at the government's whim. Sure, it's all right. So, okay, we've talked about how it makes sense for us in supermarkets. You know, it's just embedded. It's not like... Yes, it's included, yeah. Why is it safe for Jackson's when we say it's going to cost X amount plus VAT? Why don't we advertise it together for businesses? Because you see it all the time in adverts as well. It's like legal costs plus VAT.
18:50All of my legal costs for buying my house are all like, it'll be this much plus VAT.
18:57Pete:So there are, I mean, in Jackson's case, this is a weird sort of rule, which isn't our rule, where advice is vatable, whereas arranging products for people is not. And so, yeah, it's a stupid rule. So we are unusual in the financial advice world in that we are happy to do sort of a one-off piece of planning for a client. Well, if that doesn't then lead to us, say, putting in place an investment for them or some insurance or whatever, then we haven't implemented anything. We've just advised them. Just advice is vatable, right? That's a bit of an aside. That's just a weird quote for us. If you went to a solicitor, because it's just advice, they are, even if they're putting in place of will or doing a conveyance for a house, it's vatable.
19:46Pete:So your question is, why don't they just give you the, including that price? Because some people, and more notably businesses, can claim back the vat. So at Jackson's, if we buy something and there's vat on it, either a thing or a service from a solicitor, say, we can offset that against the VAT that we charge. So what... Why? So that there's only kind of one lot of VAT going on in the system. So... Why? Well... What's the benefit of that? That's a good question. You buy stuff with VAT, you sell stuff with VAT, thus they kind of negate each other. Why do you get to... Why do you get the benefit of claiming it back?
20:33Pete:sorry make this sound quite accusatory but why why i gotta say i've been in finance for 30 years i find vat mystifying you ask uh steve hockin our controller at jackson's i just like no i still don't get it that's my accountant a million times to just explain it to me and i just don't understand it mostly because inputs and outputs are the opposite you talk about input that that's the the money you pay out. I'm like, no, no. No, that's stupid. No, I can't get my head around that at all. Exploded rain. So let's just say, I don't know why. But you just do. But I can claim back some of the VAT that I pay as a business.
21:16Pete:And if you're self-employed. Is that just a perk you think was to make you be a business owner? I'm not sure it's a massive perk because I have to pay a lot of that as well. So it's... Yeah, I don't really feel sorry for you there. No, no, nobody's crying for business owners. but they they should do we aren't taxed to hell and bang yeah you are you are and we give people jobs but hey I'm not bitter about that yeah no that's fine that's fine I wish I understood that more but we just need to get understand the fact that it's payable on pretty much everything not exactly everything but most things and businesses can claim it back but that doesn't really yeah but only if you also charge it yes so what if like a little business so I don't charge VAT for or your house of colour stuff yeah Because your turnover would need to be 90 ,000 a year.
22:03No way.
22:04Pete:All right. So basically you become a vatable business and have to start charging vat on what you sell to people. So that's why. Over 90 grand a year. Right, so then I'd have to increase my prices to account for that and all of that. Yeah, so essentially your price would be this, but then suddenly it would be plus vat, 20 % more. So that's a big jump in cost for the person buying. but they oh so it's really a marketing thing that they don't say the full price but they say the cheaper amount plus VAT well yeah well maybe a little bit but the thing is you've got to pay the VAT but if you're a business you know you can claim it back so if I as a business I'm looking at say a laptop yeah and you know let's just say easy figures it's 1 ,250 well I know in my mind I can claim the 250 quid VAT back and so it's only a thousand Yeah.
22:58Okay.
22:59Pete:I hate that with every fibre of my being. I was going to say, I both feel like I understand it more and also feel more confused. So you're welcome. Me too, actually. I feel like I'm less on top of it than I was when we started this conversation. But that does that to me. I just accept it as a fact of life and pay an accountant to understand it for me because I'm sure I don't. All right, capital gains tax. You do know this one. This I understand. Okay. What is it? What is it? Capital gains tax, again. is well named. It's a tax on any capital gains. So what does that mean? So if you own something and sell it for a profit, you may pay capital gains tax on it.
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23:38Pete:Now there are some things which are not included. Notably, your home. Oh, thank God for that. Or strictly speaking, your principal private residence. Your home. Home is fine. Well, it's the house that you live in. Because if you've got multiple houses, there was a lot of scandal. Politicians were doing this a few years ago. they were what's called flipping so you can you can nominate which property is your principal private residence so you'd make the cheap one well or the more expensive one wouldn't you the one that you've gained a load more oh yeah you say actually that's my actual home that one over there yes that I've spent two days a year in my you know summer mansion yeah but I've made a massive gain on it I'm going to nominate that as my private residence sell it not pay CDT and then oh I see because you've made the big you don't pay CDT Crack down a little bit on that, rightly so.
24:29Pete:Yeah, good. So you don't pay CDT on your home if you sell it. But pretty much anything that you could consider investment, if you sell it for a gain, you could pay capital gains tax. So it's tax on the gain? It's tax only on the gain, yeah. So let's just say you buy some shares in Tesla, right? Or whatever, or Apple, Amazon, whatever. You buy some shares and you spend 10 grand on those shares. They've done really well and you sell them for£20 ,000, where you've gained£10 ,000. Well, firstly, everybody gets an annual allowance of£3 ,000, so you can gain£3 ,000 in any one year. A capital gains tax allowance.
25:06Pete:It's called an annual exempt allowance, yeah, capital gains allowance. So if you've gained£10 ,000 on selling those shares, the first£3 ,000 is tax-free. So it's only£7 ,000 you're taxed off. That's called your chargeable gain. Yes. So you only pay capital gains tax on the£7 ,000. So the gain above the exempt amount. Yep. Right? Rates are different. remember our boxes stacked against the wall well if you make a gain in that case of say£7 ,000 that's the very top most box alright it gets added to your income but only for determining what rate you pay alright you need to pay this back why is£7 ,000 the top of what?
25:43Pete:just remember our stacked boxes so let's say you have your salary oh you mean the top of all of your different incomes yeah yeah so let's say you have salary let's say you have a house that you're renting out and you've had a bit of interest, you've got three boxes stacked and you've made a seven grand gain by selling some shares. That seven grand is a little box on top of your stack. But you don't pay income tax rates on it. It's only there to determine what rate of capital gains tax you pay. So if, let's just say, you... I am following you just. Let's just say you earn$48 ,000. Yeah. Right? And you gain seven grand.
26:22Yeah.
26:23Pete:right? So that little box at the top would straddle our 50 ,270 band, wouldn't it? If you earn 48 and you add seven on top of that, the first two of that will be below that line and then the rest will be over. So the lower rate of capital gains tax is 18%, the higher rate is 24%. So it only gets added to your stack of boxes to determine how much tax you pay. It's nothing to do with income tax. Hang on, where's the 18 and 24 come from? You tell me. No, as in like, what, so the 2 above the 48 but below the 50? Is it 18 %? Because that's the lower rate of capital gains tax. Because it's a lower general tax band.
27:05Pete:Yeah. And then because it's over the next threshold, that goes up to 24. 24. So basically the amount of money you have gained gets added to your income to see what rate of tax you pay. That's all. So if it takes you into a high rate band, you're going to pay 24%. If when you add your gain to your income, you're still below 50 grand, you're only going to pay 18. So you're on 98 grand. Yeah. You make a five grand gain. There's no change of threshold at 100 grand. There's only two rates with capital gains, 18 and 24. So below 50, 18. Yes. Above 50, 24. When the gain is added to your income, if that whole figure is below 50, 270, then you're paying the low rate of capital gain status.
27:54Pete:If it's over that, you're paying the higher. On the bit that's over it. Yes. It's a lot easier to do than it is to explain, honestly. So what triggers CGT I think we covered? Just literally a sale or something. How does it affect people when investing? Did we cover that? Well, basically, yeah. So anything, this is one of the key benefit of ISAs, which I know is a question that's coming, but we'll just deal with it now. Okay. Hey, Pete, how does ISAs help? Well, Kate, since you asked, any gain you make within an ISA is tax-free. So if you invest in an ISA, let's say you put 20 grand in an ISA and you have a really great return and it becomes 100 grand, it doesn't matter.
28:35Pete:If you sell that and you take it out and spend it, because it's within an ISA, it's tax-free. It's one of the key benefits of ISAs. Yeah, right. Right. But of course you can't put a rental property in an ISA. No. So that's why property investment is very tax inefficient. You're going to pay a lot of tax at the other end when you sell out stuff. So yeah, that's the main thing you can do to reduce capital gains tax. It's really important that you use your ISA for you. Okay. So what are some big CGT misunderstandings? Common ones. Where do people make, you know, goals? Well, it's been a long time since this is the case, but it used to be when calculating capital gains tax, you could use something called tapering.
29:19Pete:So if you'd held something for a certain number of years, the amount of tax would reduce. Or some people think, well, I divide the gain by the number of years that I've held it, don't I? Well, that's a totally different calculation for a totally different thing. One thing that is really kind of misunderstood, there is no capital gains tax. if you transfer something between spouses. Let me preface this. Specifically spouses, married. Or civil partner. Yeah. Yeah. So it's got to be legal, right? You can't just shack up with somebody and then give them your shares. Shack up. Shack up. Horrible friends.
29:56Pete:So I'm not sure whether it's muddying the waters a little bit, but technically capital gains tax is payable on disposal of an asset. By sharing it with your partner, you've not disposed it because legally Hold that thought. With spouses, there's never any capital gains tax. But if I was, let's say I had 100 grand of Tesla shares, right, but which cost me 20 grand to buy, so I've got a massive gain in there, 80 ,000 quid worth of gain. If I give those shares to you, even though you've paid me nothing for them, I still have to pay the capital gains tax because it's a disposal. That doesn't seem fair, does it?
30:30Pete:I haven't received any money for those shares. I've given them to you, but I have to pay a tax. Why? Because them's the rules. So our friend with the staffie down the road from us, he gave a property that he inherited, he gave it to his daughter. Even though she didn't pay him anything for it, he'd made a gain on it. He had to pay the tax on the gain. So not only did he give her the house, he had to find the money to pay the tax. So that's a disposal. Even though no money's changed hands, it's a disposal. That's quite important. And if I gave your mom, my wife, my Tesla shares. I don't have Tesla shares, by the way, just an example.
31:11Pete:But if I did, because she's my spouse, there's no tax there. That's not a disposal. In theory. It's a transfer between spouses. And because in theory you're meant to share? Don't matter. It's just, we live in a small C, conservative country, right? So, so many of our tax rules are based on, you know, marriage, weekly, a family, all that sort of thing, right? So, basically, no tax between spouses which can be quite useful so if I wanted to sell my Tesla shares I could give half of them to your mum and I get her£3 ,000 allowance as well because she's got her own allowance I've got my own allowance if I sell all the shares I've only got one£3 ,000 tax free allowance I can use if I give someone shares to her but if we, if you two share sell them because you've spread them across the both of you £6 ,000 is it exactly so that's quite an obvious one but it can get complicated and I'll give you an example great story okay so I had a client couple they married late in life okay right he'd never married she was on she was married and divorced and so it was second marriage for her second marriage okay so he they lived in Cornwall right but he had a bachelor pad down in Surrey so when he was unmarried he used to live down in southeast and he kept it and rented it out yeah eventually they decided to get rid of it right and without seeking advice mind you he didn't ask me and he didn't ask his accountant they thought, ah, I can put half my house in my wife's name and get her capital gains tax allowance as well.
32:41Does it not count for houses?
32:44Pete:She had never lived in that house, right? If you sell a house that you lived in and rented out, so he'd lived in it. And then subsequently rented it. Yeah, rented it out. He got a kind of relief. In other words, he didn't pay tax for all the years that he lived in it. She had never lived in it. that one thing because they never saw advice it cost them 75 grand in capital gains tax not a good day for them shit nothing they could do about it and that's the sort of the problem with tax and the reason people like me and accountants and solicitors have jobs is because it's our job to know these nuances yeah he thought well I can pass my spouse put it in joint names we sell it we get some benefit actually it ended up costing him 75 grand because she had never lived it yeah yeah that's shit so that's a pretty it's a rubbish day for them yeah and they were like fair cop you know we should have sought advice now as it happens I was able to do something to wipe it out for them with an investment but hey that's my job right but you know it's a little bit of knowledge can be dangerous so be careful especially with tax now most of our audience is not a little bit of knowledge but thinking you've got a lot of knowledge is dangerous yeah it's overconfidence bias I think we talked about that a couple weeks ago I mean this is probably not things we're talking about yet as you know my but I mean some of your generation some people listening will be inheriting houses maybe from you know relatives and then maybe selling them on so it's surprising I do not the one I'm living in so you're not having that you can have my one which we're hoping oh nearly there hopefully might be making progress been a long time coming the mortgage offer has taken what were we in seven weeks in 20th of May I put in my offer and got it accepted so we're about 10th of August.
34:31Pete:Yeah, it's a long time. Anyway, it's my fault, basically. No, it's not your fault. It's the lender's fault, who shall remain anonymous, although I don't know if I've mentioned them before. Well, they're the only lender that will do this particular thing for you. So I can't piss them off, because I am grateful that they're doing the whole JBSP thing and affordable housing thing and all of that. Yeah, but the complexity is the way... Good Lord, they're asking for everything but the kitchen. Well, no, they're even asking for the kitchen sink at this point. Yeah, they are, really. but it's because of the way my income is structured that's made it more complicated and they just keep asking for more stuff but it takes them two weeks.
35:04Pete:So one example is they did a credit search on me, you know, which given what I do for a living, my credit score is perfect and it should be, right? It would be an issue if it wasn't. Right, exactly. So I have a perfect credit score but they couldn't see that. They said it was locked and yet it is unlocked and after six weeks they basically said, oh, we'll just try a different way and they found it not poor. Did that need take six? weeks anyway here we go especially when mortgage advisor Gary King Gary love you was like oh yeah I had to do a mortgage advice I did a mortgage offer thing with the same company and it came back in 24 hours no an hour oh an hour yeah you're right he did it at 10 to 2 it came back at 10 to 3 here we are 10 weeks later still going it'll be worth it it'll be worth it let's bring it together shall we yes let's so pulling it all together which taxes do most people automatically pay without needing to do anything.
35:57So that's got to be VAT.
35:59Pete:VAT because it's just on the price of stuff you pay. Income tax. Income tax. If you're earning a salary, we really haven't talked about self-employed, perhaps we ought to just deal with that super quickly. Because if you're employed, tax and national insurance are taken out of your money. Automatically. It's on your payslip. You get the net amount after tax amount. If you're self-employed, you have to keep money aside for tax. And that's why you have to do your tax return. Yeah, tax return is simply you have to tell the government how much you've earned. So if me, so I employ you, right? So when you get paid, there's an electronic submission, goes straight to HMRC, the revenue, and tells you how much they've earned, how much tax we've taken off you, how much we are paying to them and all that sort of stuff.
36:41Pete:So the government knows it's instant. Whereas if you're self-employed, you do that once a year currently, that is changing, right? So you have to obviously disclose it. And if you're self-employed, you can offset certain things to reduce your profit. So you might earn this much, but if you, you know, are using a room in your house or you've bought equipment or whatever, you can reduce the profit and you pay tax on the profit, really. So it's a bit more complicated to think. But the numbers are the same. You know, the tax rates. Yeah, they've just got to manually do it themselves rather than it just being automatically done by your employer.
37:17Pete:So for me, rule of thumb, it'll be probably you'll save too much, but better that than have an unnecessary tax bill. I would put 30 % away. So basically every pound of profit, every pound that you make, I will put 30p. I mean, it's better to have too much. Oh, I've got more than I thought. I've saved 10 grand and my tax bill's only 8. That's a nice day. I've saved 6 grand and my tax bill's 10 or 8. That's not a good day. No, you've got to find that. Okay. That's good. All right. I'm glad we remembered to say that. Yeah, well done. So which taxes do you have to take action yourself? Yeah, capital gains tax, you have to disclose that.
37:52Pete:So if you sell something for a profit, that goes on your tax return too. if it's property you have to disclose to sell my
38:02I don't know shares and I take an earning from that
38:07Pete:a profit a gain yeah you disclose that on your tax return there's a special page for capital gains so it's good to write down what you earn yeah write down the difference well yeah so I mean the great thing these days about like platforms and stuff like that if you own shares or funds or whatever, they'll give you that information at the end of the tax year. But still, you should keep good records for sure. That's just a sort of... General rule of thumb. Keep good records, be intentional. Capital gains tax, yes. And if you're self-employed, you definitely have to take action. Well, that leads into our next question.
38:43Do I need to do a tax return?
38:45Pete:The government will tell you if you do, for the most part, right? If you go self-employed, you have to tell them. Do you remember doing that? All right. So you have to sort of register. So they know to keep an eye on you. So gov.uk, just Google, you know, tell the government I'm self-employed or something like that. Yeah, it will be the top side. Yeah, right. And so you would have to have a government gateway account anyway and just inform them. Because you can pay manual sort of regular national insurance as well to just make sure you're paying on the go. So you have to tell the government you're self-employed and they will send you a notice to complete a tax return.
39:21Pete:usually comes on like the 8th or 9th of April, straight after the tax year. Yeah, I've got one for this year. Notice to complete. I've got to complete it by January, and it's got to be up at... It's March 24 to 5? 5 to 6. The one you've just had. 5 to 6, yeah. Yeah, so 25 to 26, you have to complete by 31st of January, 27. Not a lot is the answer in my case. I don't turn very much. Right, so have I got it? this is deep we've covered a lot of ground here I don't know that I have got it to be honest yeah I kind of get that I feel like we could maybe potentially come back to some of these or maybe if people have got questions obviously we can't give tax advice right so don't ask us to advise you but if there's any sort of clarification because this is pretty technical tax is a fact of life if you're employed it's mostly looked after for you which is a good thing But if you're approaching that 50 ,270 threshold or I know it's hard to cry for people, if you're approaching the 100 ,000 pound threshold, there are things you can do to reduce your tax.
40:31Pete:Like pay into a pension is the classic. Because then that reduces your take home pay. Essentially, it reduces your earnings or technically extends your basic rate band. But let's not get into that. Nope, I can feel my head exploding already. so do you want to ask Kate Goddard or so why are income tax and national insurance different shit this is hard income tax why are they different or how are they different why do we just lump them all together it's because of the way they were incepted in the first place you can say I don't know incepted started oh okay so is it because how national insurance was more to do with paying for state benefits.
41:20Yes. Whereas income tax was more for paying just general for everything else. Yeah.
41:27Pete:So describe to me what a tax bracket is. You don't have to give me numbers. A tax bracket is like a set. If you earn so much. I'm trying to find a better way. How would I visualize brackets?
41:43I've only got your vision in my head now. But like that, I kind of, when you said the line on the wall, I was thinking about the height of measuring a child's height growing. It's like sections where it's worth a certain amount. So zero to however much you pay X amount of tax.
42:04Pete:Or zero. Zero to 12 ,570, you pay no tax. What's that called? That band? It's not basic rate. It's your annual, no. Personal. exemption allowance personal allowance close that's your personal allowance oh what's the exemption allowance that's capital gains tax annual exempt allowance personal allowance is your general you don't pay tax on that first 12 ,570 of your earnings then 12 ,570 to 50 ,270 that is your next subsection group bracket band well it's hard to I shouldn't use the word bracket to explain the word bracket true band we would call on the basic rate tax band yeah and that's basic rate you pay 20 % on however much you earn over the 12, 5, 70 once you hit over 50 you reach the higher rate tax 40 % and over 125 something you're in the this sucks tax bracket and you pay 60 between 100 and 125 it's 60 125 and a bit it's 45 % that's the additional rate of income tax so that's what bands are it's quite hard to explain that without numbers really but it's like groups categories it's like tax categories yeah okay if you like it's kind of it's really hard to explain good thank you I've been doing this 30 years and it's still kind of hard to explain I find tax much easier to explain visually actually despite the fact that I'm an auditory learner I find it much easier to explain so if I'm sitting with a client I would literally draw the bands like that and stack boxes next to them.
43:41I hope that makes sense.
43:43Pete:Has Kate got it? Who knows? I'm not sure I've got it, to be honest. No, I think we've definitely gone over this. Certainly the key bits that people are going to need. I think explaining what income tax is and national insurance were the main ones, I think, because those are the ones that people get, and VAT, the ones that people are affected by most. Yeah. There is a glaring omission. We haven't talked about inheritance tax, and that's with good reason. We're not assuming that anyone's at that stage of life. yeah because inheritance tax is paid by the estate of people who died and so our target audience here is you know young enough not to be thinking about dying God willing but we didn't want to kind of make it more complicated and add more stuff than is necessary if you want to hear about it we can talk about it I was going to say if you've got any questions I do so you know about this why don't we do like we could potentially do a tax Q &A yeah well that requires having enough questions it does so So if you have any questions, tax or otherwise, drop us an email or leave it in the comments if you want.
44:42But the best way is to drop us an email to hello at bankofdad.show. And you can put podcast question or something in the subject line. And that just will, if there's loads of tax ones, tax specific ones, we'll do a tax Q &A. If not, we'll just drop it into the next Q &A.
44:59Pete:Sounds good. Which will be far away. No, we've got the next few episodes planned, but we can drop a Q &A in whenever. Exactly. Brill that it then yep I don't think we've used any links no probably for the best I tell you what we may I've got some tax videos no no I've got some tax videos maybe we'll put some links to those okay fairly recent-ish ones on explaining how income tax works and stuff because it might just help those who are a bit more visual a bit shorter than this as well but other than that if this is helpful you know what to do if you're watching on YouTube then like the video subscribe to the channel if you're not already that really really helps and if you're listening to this on podcast you've probably got the option to leave a rating or a review so please do that as well, it really helps and thank you in advance Yeah, I don't think you actually said there to find those videos they'll be in the show notes which you'll find at bankofdad.show forward slash episode 29 So I think that's everything Well, I hope you feel somewhat more in the know Probably all got migraines Yeah, and I don't even know what we're talking about next week We are talking about habits the power of habit how to sort of embed good ones and break bad ones marvellous it's lighter than what we've just done right have a lovely week and we will see you in the next one cheers
From the publisher
In this episode of Bank of Dad, Pete and Kate demystify the main UK taxes most people encounter, including income tax, National Insurance, VAT and Capital Gains Tax. They explain how tax bands really work, why earning more does not mean all your income is taxed at a higher rate, and when you may need to take action yourself, such as reporting gains or completing a tax return. If you want a clear, practical introduction to the UK tax system without the jargon, this episode will help you understand what you pay, why it matters, and how tax wrappers like ISAs can make a difference.
Shownotes: https://bankofdad.show/episode29/
