Learn more about the UK tax system, estimate your income tax, and discover if you’ll be classed as a resident or non-resident taxpayer in the UK.
Though many sources will characterize the UK tax system as complex – it is arguably one of the longest sets of tax codes in the world – from a macro view, the British tax system for most expats is relatively straightforward. If you are living and working in the UK, or have taken up UK retirement, you will typically be liable to pay UK taxes – but what is taxed depends on your tax residency status and individual circumstances.
The UK’s departure from the European Union will see a number of different modifications in the tax code as the country seeks to maximize economic revenue. As such, the information contained in this guide may change accordingly.
This complete guide to the UK tax system includes:
- British tax system overview
- Federal taxes
- Local taxes
- Taxes on goods and services
- Who has to pay tax in the UK?
- UK tax system for foreigners
- Income tax rates in the UK
- How to file your income tax return in the UK
- UK social security taxes
- UK taxes on property and wealth
- Inheritance tax in the UK
- Company taxes and VAT rates in the UK
- UK import and export duties
- Tax refunds in the UK
- Tax advice in the UK
- Useful resources
The British tax system
HM Revenue and Customs (HMRC) is responsible for administering and collecting taxes in the UK. Tax receipts for the UK totaled approximately £627.9 billion in 2018/19, a net increase of £22.1 billion over the previous year.
Basic UK taxes include income taxes, property taxes, capital gains, UK inheritance taxes and Value Added Tax (VAT). Many of these are progressive taxes, meaning that those on higher incomes pay at a higher rate.
The British fiscal 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. Furthermore, it includes oil drilling platforms in British territorial waters, though, notably, it excludes the Channel Islands and the Isle of Man.
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.
Until the end of 2020, the UK remains a part of the EU as part of a transition status quo, so nationals of the European Economic Area do not need either of these documents at the present moment. Although the UK officially left the EU on 31 January 2020, it is unlikely that rules will change for the fiscal year 2020-21.
Read more about tax issues for expats moving to the UK.
Federal taxes in the UK
Taxes in the UK may involve payments to at least three different levels of government: central government (HMRC); devolved governments (notably, Scotland), and local governments in the form of council taxes.
HMRC administers the following central taxes:
- Income tax
- Corporation tax
- Capital gains tax
- Inheritance tax
- Insurance premium tax
- Stamp, land and petroleum revenue taxes
- Environmental taxes
- Climate change and aggregates levy and landfill tax
- Value-Added Tax (VAT), including import VAT
- Customs duty;
- Excise duties
Local taxes in the UK
Local governments are responsible for administering council tax in the UK. In addition, they levy a limited number of fees and charges, such as street parking fees.
Taxes on goods and services in the UK
Value-Added taxes (VAT) in the UK apply to almost all goods and services. These may also be applicable to goods from outside the European Union if you exceed the limits.
The standard commercial tax rate in the UK is 20%, although certain goods and services are subject to lower UK commercial tax rates. VAT exemptions are also offered on certain items, for example, long-term medical supplies.
The current UK commercial tax rates are:
|Applicable rate||UK VAT rate||What the rate applies to|
|Standard||20%||Most goods and services|
|Reduced rate||5%|| Some goods and services|
(e.g., baby car seat)
|Zero rate||0%|| Zero-rated goods and services|
(e.g., food and children’s clothes)
Can you get a refund on VAT?
Tourists and visitors to the UK can shop tax-free during the course of their stay. They are entitled to claim a refund on any VAT paid for goods bought within the country – provided they take these items with them when they leave the EU.
In most cases, the shop or refund company will charge you a fee for using tax-free shopping. Such refunds must be claimed by the last day of the third month after the month in which you bought them, and are only available to tourists, visitors and UK or EU nationals living abroad for at least 12 months.
If you belong to one of these categories, you must be able to prove this to the shop assistant and to customs when you leave the UK or EU by showing your passport, visa or other documents.
Items ineligible for VAT refunds
Presently, tax-free shopping or VAT refunds do not apply to the following:
- Services of any kind (for example, hotel bills);
- Goods that you’ve used, or partly used, in the UK or EU (such as perfume or chocolates);
- Motor vehicles and boats;
- Goods over £600 in value that will be exported for business purposes (you have to use a form C88 for these);
- Goods that will be exported as freight and goods that need an export license (except antiques);
- Unmounted gemstones and bullion;
- Mail-order goods including internet sales;
Not all retailers offer tax-free shopping, so if you want to claim a VAT refund, you’ll first need to find a shop that does and ask the store for a VAT check or refund, which you’ll need to sign in the presence of the shop assistant. Present this form, together with your purchase receipts, ticket, passport and boarding card at specified UK customs offices upon your departure; most ports and airports have one.
Once the form has been validated, you can either drop it in a customs post box or take it to a VAT refund office or agency to get your money, either in cash or via a refund to your credit card.
More information on VAT refunds is available on the HMRC website.
Who has to pay tax in the UK?
Overall many of the various taxes for which a UK resident individual will be liable – with the exception of VAT – will in some way be keyed to income taxes. The basic formula for this is to add up your personal income and benefits, subtract your personal allowance, and then pay the appropriate rate on the difference.
For the 2020/21 tax year, all individuals are permitted a personal allowance of £12,500, 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.
Approximately 31 million people pay taxes in the UK.
UK tax rates are the same for everyone regardless of their residency status. However, residency status does dictate what sources of income must be included in your return. An individual who is a UK resident for tax purposes will be taxed on his or her worldwide income, with allowances to prevent double taxation from certain countries. Non-UK residents, on the other hand, only pay on income earned within the UK.
The UK does not recognize joint filings; each individual has to file their own return.
There are several ways to determine if you are a resident of the UK for tax purposes.
Automatic overseas test
The automatic overseas test classifies individuals as a non-resident in the UK if one of the following conditions applies:
- You have not been resident in the UK in any of the previous 3 tax years and will spend less than 46 days in the UK in the relevant tax year;
- Your UK residency has been for 1 or more of the previous 3 tax years and you will spend less than 16 days in the UK in the relevant tax year, or;
- You are in full-time work abroad (as defined in the legislation) in the relevant tax year, spend less than 91 days in that UK in the tax year and no more than 31 days working in the UK.
Automatic UK residence test
Alternatively, you can determine whether you are classed as UK resident for the relevant tax year if you meet one of the following three automatic UK residence tests:
- If you stay in the UK for at least 183 days during a tax year;
- Your main home is in the UK and you have owned, rented or lived in it for a total of at least 91 days, including 30 days in the tax year under consideration;
- You work full-time in the UK for any period of 365 days with no significant break of 31 days or more. At least 274 of the days must be in the tax year under consideration.
Connections to the UK test
If you do not satisfy these conditions, your connections to the UK may help determine your British tax residence status. The more ties you have with the UK, the less time you can spend onshore without becoming UK resident; the fewer ties you have, the longer you can spend in Britain before UK residency applies.
If you are in the UK for 16–45 days and you have at least four demonstrable ties, you can be considered a UK tax resident. The number of needed ties goes down depending on the length of your stay. These are evaluated as part of a test for sufficient ties, and include the following conditions:
- Family – spouse and/or minor children resident in the UK;
- Accommodation – available to you for 91 or more continuous days (even if you spend just one night there);
- Work – working in the UK for at least 40 days in the year;
- Substantial visits – spending 90 days or more in the UK in either or both of the two previous years;
- Favored country – spending more days in the UK than any other single country
HMRC has a statutory test to determine your UK residence status on its website.
Who is exempt from paying tax in the UK?
There are some ways you can file for tax exemption in the UK. For example, 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. 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 overseas.
Paying income tax in the UK as an employee
Most individuals who earn income from an employer will have UK income taxes and ‘national Insurance’ contributions (social security) withdrawn automatically from their paychecks. Your employer will use the PAYE (Pay-as-You-Earn) system to deduct all necessary from your wages before paying you. Those who retire in the UK may also be charged UK income tax on their pensions in the UK.
UK tax system for foreigners
Generally speaking, expat residents must pay British tax at the same rates as nationals. All types of remuneration and benefits such as school tuition and cost-of-living allowances are taxable. Under certain conditions, however, the employer’s contributions to a foreign pension plan may not be taxable and employee’s contributions may be deductible.
The UK has double-taxation agreements with more than 130 countries, making it one of the world’s largest networks. These include Australia, France, Germany, the Netherlands, Russia, Saudi Arabia, the UAE, and the USA. If you’re taxed at source on income from another country, you can usually claim tax relief to get some or all of this tax back. However, how you make your claim depends on a number of factors, including whether you’re a UK tax resident or not.
Only 90% of overseas pensions or annuities paid to UK residents, including unauthorized payments like early payments and some lump sums, are liable for tax in the UK. This means that pensions paid to UK residents will be taxed in the same way whether the scheme is based in the UK or overseas. As a rule, check with your pension provider to find out how you can be taxed.
The UK and AEOI
The UK is a signatory to the Automatic Exchange of Information (AEOI) mechanism, which allows the sharing of information about financial accounts and investments between tax authorities of different countries. You will be affected by the AEOI if:
- you open, or already hold, a bank or building society account, and;
- if you acquire or hold investments through an insurance or investment company, are a trustee, have an interest in certain types of trusts, or receive certain payments from a charity.
If you opened your account before 1 January 2016, your account provider may contact you to confirm your tax residence status. In particular, you can expect to be contacted if you gave your bank a foreign correspondence address. It is important that you reply to any queries from your bank or building society because they might otherwise furnish incorrect information to HMRC.
Note that as part of the AEOI agreement, HMRC will share the information with the relevant tax authority in another country where you may be a tax resident, and if you’re a UK tax resident with an account outside the UK, HMRC will receive information from the relevant tax authority.
Taxes for short-term business visitors (STBV)
Anyone working in the UK for less than a year in total, and spending less than 183 days in the country within the relevant tax year, will be treated for tax purposes as an STBV. Such people are liable for UK tax on their remuneration where the duties were performed in the UK, even if the employer is overseas. Double-taxation treaties may offset any taxes due in such cases.
UK taxes for non-domiciled residents
In some cases, foreigners who live in the UK but have their permanent home (‘domicile’) outside the country may not have to pay tax in the UK on foreign income. Your domicile is usually the country your father considered his permanent home when you were born, but this can change if you are now living in another country (such as the UK) and do not intend to return. Such non-domiciled people (non-doms) typically will not be able to live in the UK indefinitely.
Non-doms do not pay UK tax on foreign income or gains if such income is less than £2,000 in the tax year, and you do not bring it into the UK. Amounts over £2,000 must be reported to HMRC via a self-assessment tax return.
Income tax rates in the UK
What you owe in UK tax depends on your specific situation. Income tax in the UK is levied at progressive rates, i.e., higher rates of income tax apply to higher bands of income. Tax is charged on total income from all earned and investment sources after deductions and allowances are subtracted.
Most individuals are entitled to a personal allowance that they do not need to pay tax on. This is £12,500 in 2020/21. There is no personal tax allowance on incomes over £125,000.
The table below summarizes the British tax rate for 2020/21:
|England/Wales/Northern Ireland tax band||Taxable income||Income tax rate|
|Personal allowance||Up to £12,500||0%|
|Scotland tax band||Taxable income||Income tax rate|
|Personal allowance||Up to £12,500||0%|
UK residents have tax-free allowances for:
- Savings interest;
- Dividends, if you own shares in a company;
- The first £1,000 of income from self-employment (the so-called trading allowance);
- The first £1,000 of income from property you rent;
- A marriage allowance to reduce your partner’s tax if your income is less than the standard personal allowance.
There are a number of areas of income that are exempt from taxation in the UK. The following are exempt from UK income tax:
- Transport costs associated with relocating an employee and close family to the UK at the beginning and end of UK assignments;
- Gaming winnings from pool betting, lotteries, or games with prizes;
- Long service awards (within certain limitations);
- Individual savings accounts (ISAs) for UK residents up to £20,000, and income arising from funds invested in such accounts, such as interest or dividends;
- Certain pensions, such as those paid to war widows and dependents, as well as similar pension payable under the laws of a foreign country;
- Certain social security and state benefits, including child tax credit, housing benefit, maternity allowance, employment and support allowance, and attendance allowance.
How to file your income tax return in the UK
The UK tax year dates are set from 6 April of one calendar year to 5 April of the subsequent year. This means that the current tax year is notated as 2020/2021.
You can file your self-assessment return by post or online, although HMRC encourages people to file online. Before you do so, you will need a unique tax reference (UTR) number. This is available on previous tax returns and other documents from HMRC, or at the authority’s website.
Residents are required to notify HMRC of any changes to their tax status by 5 October following the relevant tax year-end. The deadlines for submitting UK tax returns are as follows:
- 31 October for paper returns;
- 31 January, if the return is filed online
Fines and penalties
A fine of £100 applies on returns filed up to three months after the deadline. Over the following three months, a daily penalty of £10 may be charged. If the failure continues for more than 6 months after the filing date there is a further fixed penalty of either £300 or 5% of the tax liability (whichever is the greater). Further penalties apply for returns filed 12 months after the deadline – in some cases up to 200% of the tax liability.
If you don’t have all the information you need for your UK tax return, you may provide provisional figures in order to meet the deadlines. You should replace any provisional figures with the final ones as soon as you know them.
For more information, read our guide to frequently asked questions about UK taxes for expats.
Social security taxes in the UK
If you’re working in the UK, both you and your employer will need to make National Insurance Contributions (NICs), unless these are exempted by a reciprocal agreement or under the EEA rules. There is no ceiling to such contributions and they are not deductible from compensation for income tax purposes.
Here is a brief outline of NIC regulations (via KPMG):
- Primary Class 1 NIC is payable by the employee at 12% for earnings between the Primary and Upper thresholds (£183 per week and £962 per week respectively) and at 2% thereafter;
- Secondary Class 1 NIC is payable by employers at 13.8% on total compensation over the earnings threshold (£169 per week for the 2020/21 tax year);
- Class 1A NIC (at the same rate) is paid by the employer only on most payments/benefits-in-kind, such as rent, car, school fees, and so on. The benefit subject to Class 1A National Insurance is the same as computed for tax purposes.
The social security rules in respect of individuals currently covered by the European Social Security regulations may change due to Brexit.
UK taxes on property and wealth
Property taxes in the UK
According to OECD statistics, the UK has the second-highest property taxes in the developed world, after the United States. UK property tax revenue accounts for more than one-tenth of total taxes (around 12.5%) from the use, transfer and ownership of property in the UK.
There are two forms of property tax in the UK. When you buy a property in the UK over a certain threshold you must pay Stamp Duty Land Tax (SDLT). SDLT only applies to residential properties valued more than £125,000, or to non-residential land and properties bought for more than £150,000.
Stamp duty is payable in England and Northern Ireland; Scotland has its own Land and Buildings Transaction Tax and Wales operates a Land Transaction Tax. Each country also operates surcharges for people buying buy-to-let investment properties and second homes.
Like income tax, the SDLT is a stepped-rate tax; you can use an online calculator to see how this tax works. You must send your SDLT return to the HMRC and pay the tax within 30 days of completing the sale. There are certain exemptions that allow lowering your UK property tax, for example, if you buy multiple properties.
The other form of UK property tax is Council Tax. This local municipality tax is stepped or banded just like income tax. Each municipality assesses the properties in their jurisdiction annually and determines applicable taxes based on the assessed value. A number of conditions affect the council tax rate.
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 some mortgage interest.
UK dividend tax
If you own shares in a UK company you may get a dividend tax payment. You are not required to pay UK dividend tax on the first £2,000 of dividends you receive in the tax year.
Dividend tax rates in the UK are as follows:
|Tax band||Tax rate dividends over £2,000|
Wealth taxes in the UK
Wealth taxes, such as capital gains and inheritance tax, account for about 4% of GDP as of 2019, and are relatively under-represented in Britain, as compared to France and Spain.
Capital gains tax in the UK
Capital gains tax (CGT) is charged on the difference between the sale price and purchase price on a number of different assets. You pay CGT on the gain you receive from these assets, not on the entire sale price. CGT may arise from the sale of a business, shares, an heirloom or a property.
Chargeable assets include:
- Personal possessions valued at £6,150 or more (excluding vehicles);
- Real estate that is not your main home;
- Your main home if you let it out, use it for business or it’s very large,
- Shares that are not in an ISA or PEP;
- Business assets;
- Cryptoassets (in certain cases)
You’re obliged to pay CGT 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 only payable on your overall gains above your tax-free allowance (called the Annual Exempt Amount). The CGT-free allowance for 2020/21 is:
- £6,150 for trusts
How to calculate Capital Gains Taxes in the UK
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 your total taxable income is less than £50,000 – that is, you are still in the basic band – your capital gains rate is 10% on most chargeable assets (not including residential property) and 18% on your home;
- If your capital gains take you into the next highest band then, you pay 20% on most of your chargeable assets and 28% on your home – but only on a portion of your capital gains that pushes your taxable income into the next band.
There are various rates of capital gains tax in the UK.
Inheritance taxes in the UK
Inheritance tax in the UK is a one-time payment paid on the value of a deceased’s estate if above a set threshold, currently £325,000. Any value higher than the threshold is taxed at 40%. For example, your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).
If you leave more than 10% of the net value of your estate to charity, however, the rate is reduced to 36%. There are other ways to reduce your UK inheritance tax liability. If you are married or in a civil partnership, your partner can inherit your entire estate without facing a UK inheritance tax bill. Should you wish to pass on your assets before you die, you can gift them to your partner.
Company taxes and VAT rates in the UK
Businesses operating in the UK must pay corporation tax on any profits accrued. For the year 2020/21, the normal rate of corporation tax is 19%. A lower rate of 10% is applied when the profits can be attributed to the exploitation of patents, while specific corporation taxes apply in certain cases.
In general, companies operating in the UK will also need to charge and pay VAT at 20%, although there are some exceptions. VAT returns must be filed every month or every three months, depending on the size of the company.
On the other hand, non-resident companies are subject to UK corporation tax only on profits accrued from and connected to trade through a permanent establishment, or in developing UK land. With effect from April 2020 however, non-resident companies are liable to UK corporation tax (rather than income tax) on income received from UK property.
Consult Expatica’s guide to UK corporate taxes for further information.
Self-employed income tax in the UK
If you’re living in the UK as a self-employed owner of a limited company, you will be liable to pay UK corporation taxes, although what you are taxed on depends on whether you are classified as a resident or non-resident taxpayer in the UK. In general, the same UK corporation tax rates and rules apply to both residents and non-residents; residents pay taxes on their worldwide income while non-residents are only taxed on their UK-based income.
Import and export taxes in the UK
Goods imported into the UK from outside the EU are subject to customs duties. The rates at which such duties are paid are provided by the EU’s Common Customs Tariff and vary widely. Exporting to the EU until the end of 2020 attracts no duties, aside from VAT levied by the destination country.
Information about duties payable when exporting to the EU from January 2021 will be available on the HMRC website. In addition, most goods to countries outside the EU are zero-rated for VAT, but some duties may apply depending on the destination.
Car, road and airport taxes in the UK
If you drive in the UK you will need to pay car and road tax, including when you register your car with the DVLA (Driver and Vehicle Licensing Agency). The amount varies per vehicle type, with car and road tax in the UK based on factors such as the size of the engine, type of fuel used and CO2 emissions. Consult a table of UK car and road tax rates, where you’ll see payment rates for alternative fuel cars (TC59) are £10 lower than for petrol (TC48) and diesel cars (TC49).
You can pay your car and road tax online. It should be noted that electric cars are exempt from certain UK car taxes based on their low-emission output. The British use the metric system (km/h); read more on UK road rules.
Individuals leaving the UK by air are also obliged to pay a duty, which is typically included in the cost of the air ticket.
Tax refunds in the UK
You can be entitled to British tax refunds (rebates) for several reasons, for example if you are employed and had too much tax taken from your pay, if you stopped working, if you took out a pension or life annuity plan, or if you live in one country and have income in another. Moreover, if you claimed personal expenses on your tax return, you may also receive a tax refund in the UK.
Some P800 tax calculations dictate that you can claim a tax refund online (only once your tax has been calculated, which happens between June and October). Once you submit your UK tax return application, you should receive the money within five to six weeks.
Tax advice in the UK
The materials reviewed in this article are for informational purposes only and should not be taken as tax advice for your individual situation. Therefore, you should always consult your own tax expert with your specific tax issues or questions.
Head over to the HMRC website for information on British taxes, social security contributions and other related questions for the constituent countries of the United Kingdom. The authority also runs a self-assessment helpline.
The British tax charity TaxAid advises people on low incomes whose problems cannot be resolved with HMRC.