The UK Tax System An IntroductionThis guide is intended to provide an overview of the UK tax system for those arriving in the UK. It is intended to give the reader a general understanding of the UK tax system. It is not comprehensive, and as with most tax systems there are additional allowances available in certain circumstances and restrictions which apply.
The main taxes that you need to be aware of are as follows:- 1. Income Tax In general UK residents are subject to UK income tax on their worldwide income. The first £12,500 of income is tax free. Although those with income above £100,000 gradually lose their personal allowance. Thereafter the following rates apply: Band Taxable Income Tax Rate 2019/20 Personal Allowance up to £12,500 0% Basic Rate £12,501 - £50,000 20% Higher Rate £50,001 - £150,000 40% Additional Rate over £150,000 45% |
There are also tax-free allowances for savings interest and dividends. Note that dividends are taxed at different rates from most other income.
Slightly bizarrely, the financial year runs from 6 April to the following 5 April. Personal tax returns are then due by the following 31 January.
Most benefits received from an employer will be subject to both income tax and national insurance.
2. National Insurance
National Insurance is payable on earned (wages, salaries, bonuses etc) and on self employment income, but not on other types of income such as dividends, interest and rents.
It is paid by both the employer and the employee. The main rates for employed earners are:
Bourne by the Employee Bourne by the Employer
First £8,628 Nil Nil
£8,628 - £50,003 12% 13.8%
Above £50,004 2% 13.8%
UK employers are obliged to operate the PAYE (Pay As You Earn) system. Under this estimated income tax and national insurance charges are withheld by the employer and paid directly to the government. Any under or overpayments can then be settled up following the submission of a tax return.
3. Capital Gains Tax
In general when an individual disposes of an asset – typically through either gift or sale – a capital gain will arise.
Each individual is allowed to make a gain each tax year that is not taxable. The annual exempt amount is £12,000. Any taxable gain above that amount which is taxed at 10% or 20% depending on total income. (18% and 28% for residential property and carried interest).
There are various assets which are non-chargeable. The most important of these is that a gain arising on the sale of an individual’s only or main private residence is exempt from Capital Gains Tax.
4. VAT
Most goods and services sold by businesses with annual sales above £85,000 are subject to Value Added Tax. The standard rate of VAT is 20%.
The main exceptions to this are most food items (but not meals in restaurants or hot takeaway food), construction work new homes, passenger transport, children’s clothes books, newspapers and periodicals.
There is also a lower rate of VAT of 5% which applies to a number of items, the most important of which is domestic fuel and power.
Businesses are in general able to reclaim the VAT that they pay when purchasing goods and services.
In general – unless the items are clearly expected to be sold to another business - the headline price that you see quoted will be the price including VAT.
5. Inheritance Tax
Inheritance Tax is usually paid on an estate when somebody dies. It's also sometimes payable on trusts or gifts made during someone’s lifetime. Most estates do not have to pay Inheritance Tax because they are valued at less than the threshold of £325,000. If you give away your home to your children or grandchildren, this can increase to £450,000.
Married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies - to as much as £650,000 (or £900,000 if they give away their home to their children). Their executors or personal representatives must transfer the first spouse or civil partner’s unused Inheritance Tax threshold or ‘nil rate band’ to the second spouse or civil partner when they die.
5. Corporation Tax
A company resident in the United Kingdom is liable to corporation tax on its profits at 19%.
6. Pensions
In general pension contributions (within certain limits) whether made by the employee or the employer are made free from tax (and if made by the employer) are free from national insurance.
The income and any capital gains within a pension scheme are free from tax, but the eventual pension is subject to income tax in the hands of the recipient.
There are limits in terms of both the total amounts that can be paid into a pension scheme each year and the total size of the accumulated investment pot. There are also new restrictions that limit the amount of tax relief to the basic rate. These are phased in on incomes between £130,000 and £180,000 per annum.
7. Tax efficient investments
There are a number of tax efficient investment incentives. The most common of these is the Individual Savings Account (ISA). Up to £20,000 can be invested in an ISA per year. Investments held within an ISA are free from both UK income tax and UK capital gains tax, although these will be taxable for US tax purposes.
Slightly bizarrely, the financial year runs from 6 April to the following 5 April. Personal tax returns are then due by the following 31 January.
Most benefits received from an employer will be subject to both income tax and national insurance.
2. National Insurance
National Insurance is payable on earned (wages, salaries, bonuses etc) and on self employment income, but not on other types of income such as dividends, interest and rents.
It is paid by both the employer and the employee. The main rates for employed earners are:
Bourne by the Employee Bourne by the Employer
First £8,628 Nil Nil
£8,628 - £50,003 12% 13.8%
Above £50,004 2% 13.8%
UK employers are obliged to operate the PAYE (Pay As You Earn) system. Under this estimated income tax and national insurance charges are withheld by the employer and paid directly to the government. Any under or overpayments can then be settled up following the submission of a tax return.
3. Capital Gains Tax
In general when an individual disposes of an asset – typically through either gift or sale – a capital gain will arise.
Each individual is allowed to make a gain each tax year that is not taxable. The annual exempt amount is £12,000. Any taxable gain above that amount which is taxed at 10% or 20% depending on total income. (18% and 28% for residential property and carried interest).
There are various assets which are non-chargeable. The most important of these is that a gain arising on the sale of an individual’s only or main private residence is exempt from Capital Gains Tax.
4. VAT
Most goods and services sold by businesses with annual sales above £85,000 are subject to Value Added Tax. The standard rate of VAT is 20%.
The main exceptions to this are most food items (but not meals in restaurants or hot takeaway food), construction work new homes, passenger transport, children’s clothes books, newspapers and periodicals.
There is also a lower rate of VAT of 5% which applies to a number of items, the most important of which is domestic fuel and power.
Businesses are in general able to reclaim the VAT that they pay when purchasing goods and services.
In general – unless the items are clearly expected to be sold to another business - the headline price that you see quoted will be the price including VAT.
5. Inheritance Tax
Inheritance Tax is usually paid on an estate when somebody dies. It's also sometimes payable on trusts or gifts made during someone’s lifetime. Most estates do not have to pay Inheritance Tax because they are valued at less than the threshold of £325,000. If you give away your home to your children or grandchildren, this can increase to £450,000.
Married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies - to as much as £650,000 (or £900,000 if they give away their home to their children). Their executors or personal representatives must transfer the first spouse or civil partner’s unused Inheritance Tax threshold or ‘nil rate band’ to the second spouse or civil partner when they die.
5. Corporation Tax
A company resident in the United Kingdom is liable to corporation tax on its profits at 19%.
6. Pensions
In general pension contributions (within certain limits) whether made by the employee or the employer are made free from tax (and if made by the employer) are free from national insurance.
The income and any capital gains within a pension scheme are free from tax, but the eventual pension is subject to income tax in the hands of the recipient.
There are limits in terms of both the total amounts that can be paid into a pension scheme each year and the total size of the accumulated investment pot. There are also new restrictions that limit the amount of tax relief to the basic rate. These are phased in on incomes between £130,000 and £180,000 per annum.
7. Tax efficient investments
There are a number of tax efficient investment incentives. The most common of these is the Individual Savings Account (ISA). Up to £20,000 can be invested in an ISA per year. Investments held within an ISA are free from both UK income tax and UK capital gains tax, although these will be taxable for US tax purposes.