A complete guide to UK taxes
If you're moving to the UK, find out which UK taxes you will have to pay and whether you will be classed as a resident or non-resident taxpayer in the UK.
Though many sources will declare how the UK tax system is complex – it is arguably one of the longest sets of tax codes in the world – from a macro view, UK tax for most expats is relatively straight forward. If you are living and working in the UK, you will liable to pay UK taxes – but what is taxed depends on your tax residency status.
Filing your UK tax return
Basic UK taxes include income taxes, property taxes, capital gains taxes, inheritance taxes and Value Added Tax (VAT). Many of these taxes are stratified based on the payer’s assumed ability to pay – higher income persons are assumed to be able to pay at higher rates.
The UK tax year runs from 6 April of one calendar year to 5 April of the subsequent year. Thus tax years are often notated such as 2016/17 for the current tax year.
The UK tax system applies throughout the UK – England, Scotland (though there are some specific differences owing to Scotland's unique legal system), Wales, Northern Ireland and many of the smaller islands around the British coast. It includes oil drilling platforms in British territorial waters, though, notably, it excludes the Channel Islands, the Isle of Man and the Republic of Ireland.
One interesting aspect of UK tax is that it treats spouses as separate entities and taxes them as individuals, with the exception of a small allowance for the purpose of income taxes.
Before you can pay taxes in the UK, you will need to have a National Insurance number. And, unless you are a national from the European Economic Area (Eureopan Union plus Iceland, Norway and Lichtenstein), Switzerland or from an EU member nation (at least until the UK's exit is sorted), you may also need to apply for a Tier 2 visa. Read more about tax issues for expats moving to the UK.
Your UK tax residency status: Who has to pay taxes in the UK?
In the UK, all individuals are subject to the same tax rate regardless of their residency status. However, residency status does dictate what sources of income must be included in your taxes. An individual who is a UK resident for tax purposes will be taxed on his or her worldwide income, with allowances given to prevent double taxation from certain countries. Non-UK residents, on the other hand, are taxed only on income earned within the UK.
There are several ways to determine if you are a resident of the UK for tax purposes:
Automatic rule 1: Live in the UK for most of the year
The easiest 'automatic' rule to determine residency is if you stay in the UK for at least 183 days during a tax year. If yes, then you are classed as a UK resident. If not, there are still other ways to be counted as a resident.
Automatic rule 2: Buy a house in the UK
If you own a home in the UK and stay in it for at least 91 consecutive days – 30 of which must be in the tax year under consideration – then you may be classed as a tax-resident of the UK for that year. For this rule to apply, the individual must also live in a non-UK home for fewer than 30 days in the tax year under consideration, which do not need to be consecutive to apply.
Automatic rule 3: Work in the UK
If you work in the UK for 356 days with no significant break during this time, you may be a tax-resident of the UK. At least 274 of the days must be in the tax year under consideration – and of these days, if you work more than three hours, you must do more than three hours of work in the UK.
There are, of course, ways you can automatically be discounted for the automatic rules 2 and 3. If you were a tax resident for at least one of the last three tax years and spent 16 or fewer days in the UK during the current tax year, you are not a UK resident regardless of the above rules. The same is true if you were not a tax resident for any of the last three years and spent fewer than 46 days in the UK. The window of allowable time is extended to 91 days if you worked full-time oversees.
If you don’t pass the automatic rules, you may still be a tax resident
One final way to be considered a tax-resident of the UK is if you have 'sufficient ties'. Ties are anything that forms a significant association between you and the UK, such as family, your accommodations, work or a stay of at least 90 days.
If you are in the UK for 16–45 days and you have at least four 'ties', you can be considered a UK tax resident. The number of needed ties goes down depending on the length of your stay.
What income is taxable?
Residency status determines what a person must include as 'income' when determining his or her tax band. Non-UK residents are only taxed on income earned within the UK, including capital gains, rental income and dividends. Individuals who are residents of the UK for tax purposes are taxed on their worldwide income, including foreign investments and savings interest, rental income on overseas properties and income from foreign pensions.
UK tax calculators
What you owe in UK tax depends on your specific situation. You can get an estimate of your tax liability with this calculator, and an estimate of your allowable tax credits here. Other useful UK tax calculators are available here.
Income taxes in the UK
In the UK, many of the various taxes for which an individual will be liable – with the very notable exception of VAT – will in some way be keyed to your income taxes. The basic formula for taxes is to sum your personal income and benefits, subtract your personal allowance, and then pay the appropriate rate on the difference. For the 2016/17 tax year, all individuals are allowed a personal allowance of GBP 11,000, making income below this level tax exempt. UK income tax rates are stepped depending on your income. These steps, or 'bands', are also used to determine other tax rates, such as capital gains.
UK tax on rental income
Net proceeds from renting property in the UK are included as income for both residents and non-residents. Special rules apply for renting out a single room, renting out your property for holiday purposes, and if you are an overseas landlord.
Net proceeds are determined as gross rental receipts minus allowable expenses. The UK disallows most capital expenses against rent, including the cost of buying or improving the property, depreciation and mortgage interest on your home(s).
UK self-employment tax and corporation tax
Most corporations in the UK are taxed a 20 percent rate on their net profits, and in most cases must file a separate company return. Allowable expenses include normal business operation expenses (ie. office supplies), and if operated from a designated space in a person’s home, expenses may include a prorated portion of household expenses. Individuals are also allowed a prorated amount of vehicle expenses (but not commuting expenses) if they use their personal vehicle for work purposes.
One benefit of operating certain business structures, such as a Limited Company, is the ability to take money out of the company in the form of dividends. Though certain rules apply, the tax rate for dividends are generally lower than the typical 'band' rates for income tax.
Property taxes in the UK
There are two forms of property tax in the UK. When you buy a property in the UK you must pay a Stamp Duty Land Tax (SDLT). Like income tax, the SDLT is a stepped-rate tax. Here is a UK tax calculator for the SDLT.
The other form property tax is the Council Tax. This is a local municipality tax that is stepped or banded like income tax. Each local municipality will assess the properties in their jurisdiction annually and assign the tax based on the assessed value.
Capital gains tax in the UK
Capital gains tax (CGT) is charged on the difference between the sale price and purchase price on 'chargeable assets'.
Chargeable assets include:
- Personal possessions valued at GBP 6,000 or more (excluding vehicles)
- Real estate that is not your main home
- A main home if you let it out or used it for business or it’s very large
- Shares that are not in an ISA or PEP
- Business assets.
CGT must be paid on all UK assets, whether or not you are a resident. However, if you are a resident, you may owe CGT even on your non UK asset dispositions.
CGT is added to your other taxable income. The sum of all your income from various sources determines which tax band you are in for the current tax year:
- If you total taxable income is less than GBP 43,000 – that is, you are still in the 'basic band' – your capital gains rate is 10 percent on most chargeable assets and 18 percent on your home.
- If your capital gains takes you into the next highest band then, you pay 20 percent on most of your chargeable assets and 28 percent on your home – but only on a portion of your capital gains that pushes your taxable income into the next band. For example, if your taxable income from employment is GBP 35,000 and you sold your UK home for a gain of GBP 10,000, your CGT tax will be 18 percent on GBP 8,000 and 28 percent on the last GBP 2,000 since that is the amount pushed into the next band by your capital gain.
UK tax experts for expat taxes
The materials reviewed in this article are for informational purposes only and should not be taken as tax advice for your individual situation. You should always consult your own tax expert with your specific tax issues or questions.
Need advice? Post your question on Expatica's free Ask the Expert service to see if we can help.
Comment here on the article, or if you have a suggestion to improve this article, please click here.