Home Finance Taxes The UK income tax system: Full-time employment
Last update on September 05, 2019

If you are working in the UK, your UK tax contributions will be collected in different ways, depending on your circumstances.

Everyone who earns income or works in the UK is typically liable to pay UK income tax, however, different UK tax rules apply depending on whether you are classed as a UK tax resident or non-resident. Specifically, residents must pay UK income tax on their worldwide earnings, while non-residents are taxed only on UK-based income.

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who earn income from an employer will have UK income taxes and ‘national Insurance’ contributions (social security) withdrawn automatically from their paychecks.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.

However, if you have earned capital gains (profits from a sale), distributions from a company, rental income, or have some other complicating tax factor, you will need to file a self-assessment tax return in the UK.

Paying income tax in the UK

Income tax is your contribution to the UK government’s spending on things like transport, health and education. How much UK income tax you pay depends on how much you earn.

HM Revenue and Customs (HMRC) gives you a tax code, which you’ll see on your payslip. Your employer uses your tax code to work out how much income tax to take off your wages through the PAYE system. At the end of each tax year, your employer will give you a form – your P60 end-of-year certificate – showing your total gross pay for the year and how much UK income tax you’ve paid.

If you have not previously paid income tax in the UK, you will need to register with the HMRC by 5 October. This will allow you to get your national insurance number and your unique tax registration number – both of which you need to file an income tax return in the UK.

UK income tax is 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:

  • PAYE (Pay-as-You-Earn);
  • self assessment UK tax return;
  • deducted 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.

UK tax return deadlines

If you’re an employee or you receive a company or private pension, your employer or pension provider will organize all the relevant UK income taxes. 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 employment tax.

If you file a paper UK income tax return (or self-assessment tax return), your deadline is midnight of 31 October.

Online UK tax returns can be submitted up until 31 January following the tax year; for example, the deadline for the current tax year that runs from 6 April 2018 to 5 April 2019 is 31 January 2020. All tax payments are also due by this date.

Online tax return in the UK

The government website has an online UK tax return service which can be used to send your tax return to HMRC, refer to previously submitted tax returns or those not yet completed, check your details and print tax calculations. If you are filing a UK online tax return for the first time, you will need to:

UK employment tax

UK income tax rates

UK employment taxes are deducted automatically. When you get a payslip, you’ll see:

  • your gross salary, which includes any bonuses;
  • the amount of deducted UK income tax;
  • deductions for your national Insurance contributions;
  • student loan repayments, if applicable;
  • your net salary (take-home pay).

As well as being taxed on your employment earnings, you will also be liable to pay UK income tax on benefits from your employer, including a company car, fuel, a low interest loan or medical insurance. You may also be required to pay tax on any tips you receive for your job.

UK income tax rates

In the UK, taxable income includes the 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 income you receive from a trust. Some interest on savings and investment income also fall under the UK’s income tax system. Read how acquiring UK inheritance can affect you.

Income tax rates in the UK are calculated in a series of bands. England, Wales, and Northern Ireland all use the same thresholds, while Scotland recently adopted its’ own tax bands.

2018/2019 tax year (ends 5 April 2019)

England/Wales/Northern Ireland tax band Taxable income Income tax rate
Personal allowance Up to £11,850 0%
Basic rate £11,851–£46,350 20%
Higher rate £46,351–£150,000 40%
Additional rate £150,001+ 45%

 

Scotland tax band Taxable income Income tax rate
Personal allowance Up to £11,850 0%
Starter rate £11,851–£13,850 19%
Basic rate £13,851–£24,000 20%
Intermediate rate £44,274–£150,000 41%
Higher rate £13,851–£24,000 20%
Top rate £150,000+ 46%

2019/2020 tax year (6 April 2019 – 5 April 2020)

England/Wales/Northern Ireland tax band Taxable income Income tax rate
Personal allowance Up to £12,500 0%
Basic rate £12,500–50,000 20%
Higher rate £50,001–150,000 40%
Additional rate £150,001+ 45%

 

Scotland tax band Taxable income Income tax rate
Personal allowance Up to £12,500 0%
Starter rate £12,501–14,549 19%
Basic rate £14,549–24,944 20%
Intermediate rate £24,944-£44,430 21%
Top rate £150,000+ 46%

Income tax calculations

To provide an example of income tax calculations, if your total taxable income was £143,000 in England, Wales, or Northern Ireland, your base income tax liability (before applying tax refunds and allowances) would be calculated as:

UK tax bands and rates UK income tax
£11,850 x 0% £0 The £11,850 is exempt from income tax
£34,500 x 20% £6,900 Basic band covers £34,500 of income above personal exemption
£96,650 x 40% £38,660 Higher band covers the remaining amount of income
Total UK income tax £45,560

UK income tax calculators

You can check how much income tax you have paid by using the following income tax calculators in the UK:

What is exempt from UK income tax?

Income tax calculator UK

When filing your tax return in the UK, there are certain sources of income or specific amounts, based on the individual’s total taxable income, that may be exempt from UK income tax.

UK tax refunds can typically be applied to the following sources of income, depending on the individual circumstances.

Interest on savings

The UK wants to encourage individuals to invest their personal funds in savings institutions. In order to encourage individual savings, the HMRC allows a certain amount of savings interest to be excluded from UK income tax (based on your income tax band):

UK tax band Tax-free savings income
Less than £16,850 £5,000
Basic rate £1,000
Higher rate £500
Additional rate £0

Income from tax-exempt savings accounts

Each year the UK allows individuals to save for retirement through a variety of investment schemes, one of which is the Individual Savings Account (ISA). In the 2018–2019 tax year, individuals can 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.

Dividends

The UK allows individuals to receive up to £5,000 in company dividends free from UK income tax. 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
Up to £2,000 0%
Basic rate 7.5%
Higher rate 32.5%
Additional rate 38.1%

For example, if an individual was placed in the Higher UK tax band and received £12,000 in dividends, they would need to pay UK income tax on £10,000 at the rate of 32.5%.

UK tax refunds on state benefits

Many UK state benefits are subject to a full UK tax deduction, of which there is a considerable amount of tax-exempt benefits.

Lottery winnings

Lottery winnings in the UK are not considered as income and are therefore tax exempt. However, this does not necessarily mean you will not pay tax once it is banked. If it becomes part of your estate assets and pushes the value above the tax-free threshold, you could be liable for UK inheritance tax.

Rental income taxes

If you rent out a room of your UK home or you operate a bed-and-breakfast or guest house, you can opt to exclude up to £7,500 of rental income. If your rental income is less than this amount, the exclusion is automatic; if not, you will need to complete an UK self-assessment tax return.

To claim this UK tax refund on your rental income, you must first exclude any associated expenses.

For example:

  • Your gross rental income was £12,000 and you had expenses of £2,000;
  • Without the exclusion, your net rental income was £10,000;
  • Applying the UK tax refund, your gross rental income becomes £12,000 – £7,500 = £4,500.

If you claim the UK tax refund, you must also exclude a prorated amount of the expenses. In this case, the amount of excluded expenses is (£7,500/£12,000) X £2,000 = £1,250. This leaves £750 of claimable expenses against the rental income.

Net reportable rental income with the exclusion in this example is then £4,500 – £750, or £3,750.

In this example, the applicant would need to file a self-assessment tax return (SA100) since the net reportable rental income exceeds £2,500.

Personal allowance

Every individual is allowed a personal allowance of up to £11,850. There is no income tax assessment on earnings up to this amount.

UK tax refunds

The UK encourages personal contributions in certain opportunities, such as an individual pension or charitable giving, through allowing individuals to either reduce their tax liability or receive a UK tax refund.

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. High-income individuals may need to complete a self-assessment tax return to take advantage of all the UK tax refunds available.

Maintenance payments

The UK allows 10% tax relief on ongoing support to an ex-spouse or civil partner up to a maximum UK tax refund of £326 per tax year.

Business expenses

Particularly for self-employed individuals, deducting business expenses from gross earnings may significantly reduce the amount of taxable income.

Employee business expenses

Employees who must spend unreimbursed personal funds for work-related expenses may be able to deduct a portion of their expenses relative to their income tax rate. For example, if you are positioned in the basic UK tax band (20% rate) and you had a total of £1,000 of business expenses, you can receive tax relief in the amount of 20% x £1,000 = £200 from your UK income tax liability.

Filing a self-assessment tax return in the UK

Most individuals have their UK income tax and national insurance payments deducted directly from their employment wages through the Pay-as-You-Earn (PAYE) UK tax system. If, however, you have income from sources not subjected to the PAYE system or which are of a more complex nature, you will need to fill out the UK self-assessment tax return (form SA100).

UK income tax

You can file a tax return in the UK either online or through filing a paper return once you have a unique tax reference number. There are a number of ways that you can settle your self-assessment tax bill. Supplemental information and schedules may be necessary.

The following situations will trigger an obligation to fill out form SA100 for the last tax year:

  • you were self-employed;
  • you received £2,500 in otherwise untaxed income, such as from letting out your home;
  • your gross savings/investment income was £10,000 or more;
  • you sold a chargeable asset for a gain and need to pay UK capital gains tax;
  • you were a company director, with the notable exception of being a director of a non-profit organization while not receiving any pay or taxable benefits;
  • you or your partner had taxable income of more than £50,000 and one of you claimed a child benefit;
  • you had foreign income which you need to declare;
  • you lived abroad and have UK income to declare;
  • you received dividends and you’re in a higher or additional rate band;
  • your income was more than £100,000;
  • you were a trustee of a trust or a registered pension plan;
  • you were a religious minister;
  • you received a P800 from the HMRC stating that you didn’t pay enough UK taxes last year.

Typically, individuals with self-employment income, income from rental properties, or other sources of income from which tax contributions are not made through the PAYE system will need to file a self-assessment form.

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.

Income tax in the UK for foreigners

For UK income tax purposes, most foreign income is taxed in the same way as UK-based income. However, there are differences for pensions, rental income and certain offshore employment.

Foreign pensions

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 – typically 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

UK income tax advice

Employers make income tax payments and national insurance contributions on behalf of their employees through the PAYE system. Employees can manually check if their employer is deducting enough from their earnings by using the UK income tax calculators.

If you pay too much tax, you can claim this money back. If you think you’re paying too little tax on your income or pension payments, you need to contact HMRC to change your tax code.

If you need help understanding your UK tax liabilities or reporting obligations, you can contact the HMRC. To find your nearest tax office for more advice, use the locator.