Income taxes in the UK can be hard to understand. Our guide explains how the system works, who pays UK income tax, and covers the rates and deadlines.
Everyone who earns income or works in the UK will usually have to pay UK income tax. Approximately 32 million people pay taxes in the UK. However, different UK tax rules determine how income tax is collected. Tax bands in Scotland vary slightly from rates in England, Wales and Northern Ireland. The rules are also different for UK tax residents and non-residents. Specifically, residents must pay income taxes in the UK on their worldwide earnings, while non-residents are taxed only on UK-based income.
This expert guide offers information on the following topics:
- Income taxes in the UK
- Earnings subject to UK income tax
- How to file your income tax return in the UK
- UK income tax rates
- Income taxes in the UK for foreigners
- UK income tax refunds
- Tax fines in the UK
- Income tax advice in the UK
- Useful resources
Income taxes in the UK
The income tax system in the UK
In the UK, income tax falls under HM Revenue and Customs (HMRC). As the UK’s tax, payment, and customs authority, it taxes income earned in the UK as well as the worldwide earnings of anyone resident within the country.
Income may accrue from a number of different sources, including employment and benefits from your job, profits from your own business, certain state benefits, pensions, rent, income from savings, dividends or a trust, and so on.
Income taxes in the UK are collected in several ways depending on the income type and whether you’re employed, self-employed or unemployed. The different ways income tax is collected include the following:
- Pay-as-You-Earn (PAYE) for salaried employees
- Self-assessment UK tax return – usually for independent professionals or freelancers
- Deductions at source, where tax is taken from the bank/building society interest before the interest is paid to you
- In some cases, one-off payments
Who pays income taxes in the UK?
Anyone considered a resident of the UK must pay income tax within the country. For non-residents, income earned within the UK, such as rent or income from investments, automatically qualifies for UK income tax.
Under British law, you are a UK resident for the relevant tax year if you meet one of the following three 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.
Who is exempt from income taxes in the UK?
Most people in the UK get a personal allowance of tax-free income. This is the amount of income you can have before you pay tax. In addition, the amount of tax you pay can also be reduced by tax reliefs if you qualify for them.
UK tax reliefs for specific groups
There are no specific UK income tax reliefs for disabled people. However, they may be able to offset their tax bills by taking into account reliefs for equipment services and facilities, for travel from home to work, for the provision of cars and fuel, and for medical treatments. More information is available in HMRC’s Employment Income Manual.
If you’re a senior citizen, you will not pay National Insurance after you reach State Pension age – unless you’re self-employed and pay Class 4 contributions. You stop paying Class 4 contributions at the end of the tax year in which you reach State Pension age. However, if your state and private pensions combined exceed the personal allowance, you will be liable to UK income tax.
Married couples and those in a civil partnership may also be able to see some benefits. The Marriage Allowance lets you transfer £1,250 of your Personal Allowance to your husband, wife, or civil partner, reducing your tax by up to £250 each year. To benefit as a couple, the lower earner must normally have an income below their personal allowance.
Finally, many UK state benefits are subject to a full UK income tax deduction, including the bereavement allowance (previously referred to as the widow’s pension), carer’s allowance, and more. The government has a full list of applicable tax-exempt benefits on its website.
Earnings subject to income taxes in the UK
In the UK, taxable income includes any wages and earnings from employment and profits from self-employment. UK income tax is also applicable to net rental income earnings (with some conditions), most pension payments, and some state benefits. Many job-related benefits are also taxable, as is the income you receive from a trust. Some interest on savings and investment income also falls under the UK’s income tax system. Read how acquiring UK inheritance can affect you.
Taxes on income and salary in the UK
Anyone working in the UK or earning an income from British sources will need to pay UK income tax over and above the personal allowance, which most UK residents and some non-residents are eligible for.
Below is a list of sources that attract income taxes in the UK:
- Money you earn from working in the UK
- Profits you make if you’re self-employed in the UK – including from services you sell through websites or apps
- Some state benefits
- Most British pensions, including state pensions, company, personal pensions, and retirement annuities
- Rental income (unless you’re a live-in landlord and get less than the rent a room limit)
- Benefits you get from your job
- Income from a trust
- Interest on savings over your savings allowance
Taxes on employment benefits
As well as being taxed on your employment earnings, you will also be liable to pay UK income tax on benefits from your employer. Such benefits include a company car, fuel, a low-interest loan or medical insurance premiums, cost-of-living and housing allowances, reimbursements of home country taxes, school tuition, expatriation premiums for working in the UK, as well as any benefits-in-kind. You may also be required to pay tax on any tips you receive for your job. Some company benefits can be tax-free, such as childcare.
Under certain conditions, the employer’s contributions to a foreign pension plan may not be taxable and employee’s contributions may be deductible, but these are restricted to an annual allowance limit.
Taxes on savings and investments
The UK wants to encourage individuals to invest their personal funds in savings institutions. Therefore, you may be able to receive up to £5,000 of interest and not have to pay tax on it as a starting rate. However, the more you earn from other income (such as by way of your wages or pension), the less your starting rate for savings will be.
If your other income is £17,500 or more, you are not eligible for the starting rate for savings. With other income less than £17,500, your starting rate is a maximum of £5,000. Every £1 of other income above your personal allowance reduces your starting rate for savings by £1.
In addition, the Personal Savings Allowance lets you receive up to £1,000 of interest without having to pay tax on it, depending on your income tax band. This applies to a number of accounts including those in banks and building societies, savings and credit unions, and unit and investment trusts, as well as peer-to-peer lending and government or company bonds. To work out your tax band, add all the interest you’ve received to your other income.
|UK tax band||Tax-free savings income|
Income from tax-exempt savings accounts
Each year, the UK allows individuals to save for retirement in the UK through a variety of investment schemes, one of which is the Individual Savings Account (ISA). For the tax year 2020–2021, individuals may invest a maximum of £20,000 – but only if they are UK residents. If your residency status changes, you can still keep your ISA open and earn interest on the funds invested, but you cannot invest new funds.
HMRC allows individuals to receive up to £2,000 in company dividends free of income taxes in the UK. Dividend amounts above this rate are taxed at a special rate, depending on the individual’s tax band.
|UK tax band||UK income tax rate on dividends|
For example, if you earn £3,000 in dividends and earn £29,500 in wages in the 2020 to 2021 tax year, you would have a taxable income of £20,000 after the personal allowance of £12,500 is deducted. This is the basic tax rate band, so you would need to pay 20% on £17,000 of wages and only 7.5% on £1,000 of the amount earned from dividends (the first £2,000 in dividend-interest is free of UK income tax).
Taxes on rental income
If you rent out a room of your UK home or an entire property, or if you’re self-employed as a landlord, you’re entitled to a £1,000 tax-free annual property allowance. In other words, you don’t need to report this to HMRC.
However, if your rental income falls between £1,000 and £2,500 a year from letting property, you must make HMRC aware of the fact. Income between £2,500 and £9,999 after allowable expenses, or over £10,000 before allowable expenses, requires you to make a self-assessment tax return; you may then have to pay UK income tax.
How to file your tax return in the UK
Pay As You Earn (PAYE)
Most people pay income tax in the UK via the PAYE system. Employers and pension providers use PAYE to deduct income tax and national insurance contributions before they pay your wages or pension. The tax code on your payslip or income statement (and also posted to you every March) indicates how much income tax you are paying.
Self-Assessment tax returns
More than 11.5 million people in the UK filed a self-assessment tax return for the last tax year. You may need to file a self-assessment return if you:
- Are self-employed and earn over £1,000 per year
- Are in a business partnership
- Earn over £1000,000 per year as an employee or pensioner
- Claim child benefit and your income (or your partner’s income) is over £50,000
- Earned £2,500 from other untaxed income, for example from tips, property rentals, savings, investments, dividends, or foreign sources
Deadlines for self-assessment income tax in the UK
If you’re an employee or you receive a company or private pension, your employer or pension provider will pay the relevant income taxes in the UK. If you’re self-employed or need to claim additional income or tax refunds, you’ll be responsible for filling in a self-assessment tax return and paying your own UK income tax.
The deadline to register for self-assessment in any tax year is 5 October of the following year. So, if you want to be evaluated as a sole proprietor for 2020–2021, for instance, you have until 5 October 2021, to register. You must file your returns by 31 October (2021 in this case) if you are doing so on paper, or 31 January (here, 2022) if you are filing online.
31 January is also the deadline to pay the tax you owe. You may have a second payment deadline if you make advance payments, known as payments on account.
Missing a deadline incurs both a penalty and an interest payment.
Income tax forms in the UK
You can pay self-assessed income tax in the UK in one of two ways:
- On paper, by downloading and filling in form SA100.
- Online. The service also allows you to refer to previously submitted tax returns or those not yet completed, check your details, and print tax calculations. Using the service for the first time will require you to enroll for the online service, using your unique taxpayer reference (UTR) and activating it with a code sent by post.
You may also need to fill in a number of other forms – referred to as supplementary pages – when making a declaration about income tax in the UK. These include:
- Employees or company directors: SA102
- Self-employment: SA103S or SA103F
- Business partnerships: SA104S or SA104F
- UK property income: SA105
- Foreign income or gains: SA106
- Capital gains: SA108
- Non-UK residents or dual residents: SA109
Income tax rates in the UK
Income tax in the UK is calculated according to a series of bands. England, Wales, and Northern Ireland all use the same thresholds, while Scotland has its own tax bands.
2020–2021 tax year (6 April 2020 – 5 April 2021)
|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 £12,570||0%|
|Starter rate||Over £12,570 to £14,667||19%|
|Basic rate||Over £14,667 to £25,296||20%|
|Intermediate rate||Over £25,296 to £43,662||21%|
|Higher rate||Over £43,662 to £150,000||41%|
|Top rate||Over £150,000||46%|
If you’re looking for an indication of how much income tax you may need to pay, you can manually check if your employer is deducting enough from your earnings by using the UK income tax calculators.
The self-employed can budget for their self-assessment tax bill using the government’s ready reckoner tool.
Personal tax allowance and deductions in the UK
In 2020–2021, the basic personal allowance is £12,500. This means that there is no income tax assessment on earnings up to this amount. The personal allowance is the same for everyone, but it is reduced if you earn more than £100,000. If you earn £125,000 or more, you are not eligible for the personal allowance and all your income is taxed.
Besides the allowances for married couples and blind persons, a number of other UK income tax reliefs and reductions may apply.
Work-related tax deductibles include:
- Reimbursement for business travel: 45p per mile for the first 10,000 miles and 25p per mile over after that.
- Expenses on business trips, including transport, accommodation, food and drink, or parking fees.
- Work uniform expenses: the cleaning, repair, and replacement of protective clothing and uniforms for specific occupations.
- Membership fees expenses as approved by HMRC.
- Tax relief if you work from home, including heating, lighting, and telephone costs.
Both salaried employees and self-employed professionals may claim work-related tax reliefs, which must be supported by receipts. Employees must apply online for HMRC to adjust their tax code, while the self-employed must declare business expenses and tax reliefs while filing their returns.
Personal tax reliefs in the UK
- Maintenance payments: The UK allows 10% tax relief on ongoing support to an ex-spouse or civil partner or for your children under the age of 21. This relief UK income tax relief applies up to a maximum UK tax refund of £326 per tax year under certain conditions.
- Pension contributions: You can receive automatic tax relief on private pension contributions up to 100% of your annual earnings if your income is subject to the PAYE system. In certain situations, you may need to manually apply for this UK tax if you are a high-income earner.
- Charity Contributions: For most individuals, contributions to charities are 100% tax-free, particularly if the contribution is made through Gift Aid or through payroll deductions.
UK income taxes for foreigners
An expat who is a UK resident for tax purposes will be taxed on his or her worldwide income. There are agreements to prevent double taxation with about 130 countries, including Australia, France, Germany, the Netherlands, Russia, Saudi Arabia, the United Arab Emirates, and the United States. If you’re taxed at the source on income from another country, you can usually claim tax relief to get some or all of this tax back.
There are some UK-specific differences for pensions, rental income, and certain offshore employment.
Income received from a foreign pension is taxable if you are an official UK resident, or were one within the previous five years. However, 10% of your foreign pension income is exempt from UK income tax.
There is a significant penalty – up to a 55% tax – if you receive unauthorized payments from a non-UK pension. Such unauthorized payments include:
- Attempting to receive a tax-free, lump-sum payment that is worth more than 25% of your pension balance. Generally, individuals can receive up to 25% as a tax-free lump sum and then will be taxed on the remaining 75%.
- Receiving pension payments before age 55, unless the pension plan specifically allows you to do so.
- Continuing to receive pension payments after death.
Rent from non-UK properties
Residents must declare rental income on a UK tax return from any property they let out worldwide. However, losses from one foreign property can be used to offset income from other non-UK properties to reduce your reportable foreign property rental income.
Certain offshore employment
Special rules apply to individuals who work on a ship or offshore in the gas or oil industries. Special rules also apply for individuals who work for the EU, UK government, or as a volunteer development worker.
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 fines in the UK
If you need to send a tax return and you miss the deadline for submitting it or paying your bill, you’ll have to pay a penalty fee.
First, you’ll pay a late filing penalty of £100 if your tax return is up to three months late. Then, you’ll have to pay more if it’s later or if you pay your tax bill late. Late payments also incur interest charges. However, you can appeal the penalties if you have a reasonable excuse.
Advice relating to income taxes 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.
The main professional bodies that can help you find an accountant/tax adviser are:
- Institute of Chartered Accountants in England and Wales (ICAEW)
- Institute of Chartered Accountants of Scotland (ICAS)
- Association of Chartered Certified Accountants (ACCA)
- Chartered Institute of Taxation (CIOT)
- Association of Accounting Technicians (AAT)
- Taxes For Expats
- Association of Taxation Technicians (ATT)
You may find the following list of online resources useful on matters relating to income tax in the UK: