A complete guide to the UK tax system

A complete guide to the UK tax system

Home Finance Taxes A complete guide to the UK tax system
Last update on January 22, 2019

Learn more about taxes in the UK, 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 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, 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.

This complete guide to the UK tax system includes:

The UK tax system

Basic UK taxes include income taxes, property taxes, capital gains taxes, UK 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 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.

The UK tax year

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 2018/19.

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.

Exemptions

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.

UK Tax

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.

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 or a UK pension for those retiring in the UK.

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 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 2018/19 tax year, all individuals are allowed a personal allowance of £11,850 (rising to £12,500 in the 2019/20 tax year), 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 some mortgage interest, though the amount that can be claimed is currently being reduced.

Property taxes in the UK

According to OECD statistics, the UK has the second highest property taxes in the developed world, after the USA. 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. Here is a UK tax calculator for the SDLT. You must send your SDLT return to the HMRC and pay the tax within 30 days of completing the sale. There are certain tax exemptions that allow to lower your UK property tax, for example, if you buy multiple properties; see conditions here.

The other form of UK property tax is the Council Tax. This is a local municipality tax that is stepped or banded like income tax. Each local municipality assesses the properties in their jurisdiction annually and assign the tax based on the assessed value. A number of conditions affect the rate of applicable council tax, explained here.

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’. CGT is payable on the profitable sale of a range of assets, whether you sell a business, shares, an heirloom or a property.

Chargeable assets include:

  • Personal possessions valued at £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 £46,350 – that is, you are still in the ‘basic band’ – your capital gains rate is 10% on most chargeable assets and 18% on your home.
  • If your capital gains takes 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. For example, if your taxable income from employment is £35,000 and you sold your UK home for a gain of £15,000, your CGT tax will be 18% on £11,350 and 28% on the last £3,650 since that is the amount pushed into the next band by your capital gain.

See the government’s website for a list of capital gains tax rates in the UK.

UK inheritance tax

Inheritance tax in the UK is a one-off 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%. If you give more than 10% of your inheritance 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 an UK inheritance tax bill. Should you wish to pass on your assets before you die, you can gift them to your partner.

Find detailed information in our guide to UK inheritance tax, law and wills.

Car and road tax 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. A table of UK car and road tax rates can be found here, 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 on the government website. 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.

UK tax system: UK taxes

UK self-employment tax and corporation tax

Individuals who are self-employed must register with the HMRC. Most corporations in the UK are taxed a 20% rate on their net profits, and in most cases must file a separate company tax 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.

The applicable UK corporate tax rate depends on the level of company profit, applicable to profits from doing business as a limited company, as a foreign company with a UK branch or office, or if you are a club, co-operative or other unincorporated associate (sports club or community group). Read more in our complete guide to self-employment tax and corporation tax in the UK.

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.

UK dividend tax rates are as follows:

Tax bandTax rate dividends over £2,000
Basic rate7.5%
Higher rate32.5%
Additional rate38.1%

Commercial tax in the UK

Commercial tax in the UK is referred to as VAT (Value Added Tax) or sales tax, and is applicable to almost all goods and services. UK commercial tax can also be applicable to goods from abroad, 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
Standard20%Most goods and services
Reduced rate5%Some goods and services
(eg. baby car seat)
Zero rate0%Zero-rated goods and services
(eg. food and children’s clothes)

Filing your UK tax declaration

If you are an employee in the UK, your employer will make regular contributions for your income tax liability and National Insurance contributions. However, if you are a resident of the UK and need to declare worldwide income, you will need to file a self-assessment form, which can be done online here, once you have a unique tax reference number.

The deadline for submitting your UK tax declaration by post is 31 October, or 31 January the following year if submitting online. The UK tax office (HMRC) uses a system called ‘Self-Assessment’ to collect income taxes in the UK. Most tax is automatically deducted from your salary, however, if you have any additional sources of income, including foreign earnings, you’ll need to report it at the end of the tax year (5 April). You can determine if you need to send a tax declaration here.

Filing US taxes from the UK

Despite the fact that every US citizen and green card holder is required to file a tax return with the IRS even when living abroad, many expatriates still fail to do so. Many are unaware of these obligations, thinking that as an expat they do not need to pay or file tax returns in the US. You do! For more information and help filing your US tax returns from the UK, contact Taxes for Expats and see our Guide to taxes for American expats.

Self-assessment tax in the UK

You will need to file a self-assessment if you have any sources of income not subject to employer PAYE contributions (for example, rental income from a property you own), or if you are in the higher or additional rate income tax bands. You can settle your self-assessment tax bill through a variety of means as delineated here.

If you purchased property and need to file and pay the stamp duty tax, your solicitor, agent or conveyancer will usually file the return and add the payment to their fees. However, if you need to do so, you can file the SDLT return here, and settle the liability through a variety of approved methods.

You can pay local municipality council tax online via the HRCM gateway.

Tax refunds in the UK

You can be entitled to UK tax refunds (rebate) on the basis of 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. If you claimed personal expenses on your tax return, you may also receive a tax refund in the UK.

If your P800 tax calculation says you can claim a tax refund online, you can do so here (service only available 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 avoidance in the UK

A tough new penalty for tax avoidance in the UK as of July 2017 means certain tax dodgers could be fined up to 100% of the sum they avoided.

If you submit your UK tax return late (up to three months) you will be fined £100. You can estimate your penalty for late self-assessment tax returns and payments online.

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.

Compare taxes in the UK to other countries

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