UK Tax: A Brief Overview of Taxation in the United Kingdom

Taxation in the UK

Taxes in the UK are collected at different levels. Her Majesty’s Revenue and Customs (HMRC) is the system responsible for collecting and administering taxes at the government level, while councils are responsible for collecting taxes at the local level. The UK collected £828 billion worth of taxes in the financial year 2019/20, i.e. 37% of its GDP. 

The primary taxes that uplift the state coffers are income tax, savings income tax inheritance tax, property taxes, value-added tax (VAT), and capital gains tax. To be able to pay taxes in the UK one must own a national insurance number and If you’re not a citizen of the UK, you might need to apply for an NI number if you have the relevant visa which allows you to be able to work in the UK.

England, Scotland, Wales, and Northern Ireland all fall under the ambit of the British fiscal system with some changes as per the local legal system of the devolved governments (for instance, Scotland).

Taxes Administered by HMRC

HMRC is a federal institution authorised to collect taxes of a variable nature. The taxes that are managed by the HMRC include:

• Income Tax
• Inheritance Tax
• VAT
• Capital Gains Tax
• Corporation Tax
• Insurance Premium Tax
• Environmental Taxes
• Stamp Duty
• Land and Fuel Taxes
• Climate Change Levy and Landfill Tax
• Customs Duty
• Excise Duty

• Understand Value Added Tax & VAT Returns for Businesses
• How to Avoid Inheritance Tax Legally and Save Income

Taxes Administered by Local Authorities

Council tax and business rates are significant sources of revenue for local authorities. These, along with several other fees, penalties and charges, are collected by the local authorities.

People Liable to Pay Tax in the UK

UK residents are liable to pay taxes on income earned from within the UK or abroad. A person is considered a UK resident for tax purposes if they spend at least or more than 183 days/tax year in the UK or if their home is in the UK and they have owned, rented, or lived in it for a total of 91 days, including at least 30 days in the tax year under consideration.

A non-UK resident is liable to pay income tax on income from the UK but not abroad. A person is considered a non-resident if he spends less than 16 days/tax year in the UK or less than 46 days if he/she has been classed as a non-resident for the past three years. A person can also be classed as a non-resident if he/she works abroad full-time and spends less than 91 days/tax year in the UK; of these 91 days, no more than 30 can be spent working.

The number of taxpayers in the UK is above 30 million. Generally, the taxes you pay in the UK, except VAT, are income-based, i.e. the basic computation is that you add your personal income and benefits received, subtract the amount of tax-free personal allowance, i.e. £12,570 and then pay as per the rates applicable on the remainder. 

The UK tax system treats spouses as different individuals, and both have to file their returns separately. However, they are also allowed to help each other minimise tax liability through initiatives like ‘Marriage Allowance.’ 

Personal Taxes

Personal taxes are paid against income, benefits or gains that are of a personal or individual nature. These taxes include:

• Income Tax
• Inheritance Tax 
• Council Tax

UK Income Tax

Income tax is paid against income with a few exceptions and is the largest income source for the government. Income tax is charged using progressive income tax rates, i.e. higher rates for higher income brackets. The tax is charged at what is left of income after utilising the tax-free personal allowance, i.e. £12,570 in the tax year 2021/22. The Personal Allowance goes down by £1 for every £2 of income above the £100,000 limit. It can go down to zero. The table below demonstrates the tax rates for income tax for the year 2021-22:

The following table demonstrates the rates applicable in Scotland, but you’ll pay the same tax as the rest of the UK on dividends and savings interest:

There are several income sources for which special allowances are available, and some sources are exempt from any income tax charge at all. To learn more about how much income tax you are liable to pay and exemptions that you might be eligible for, please read Income Tax and NI Basics 2020.

Inheritance Tax

Inheritance tax is paid once on the estate of a deceased person. The tax is charged at a value above an allowed threshold, i.e. £325,000 at a rate of 40%. Let’s assume that a deceased has left behind an estate worth 1,000,000; the amount that will be taxed is £675,000 (1,000,000 – 325,000). The tax charge can be reduced if a direct descendant of the deceased inherits the estate; for direct descendants, the threshold is further raised by £175,000. For a direct descendant inheriting an estate worth £1,000,000, the taxable amount will be £500,000. 

Moreover, if the estate is transferred to the spouse of the deceased, there will be no inheritance tax charged in that case. There are ways to further minimise the inheritance tax charge, but the complexity of such computations demand a professional oversight of a qualified accountant with the latest knowledge of tax laws.    

Council Tax

Local councils charge council tax to fund services provided to the local communities. It is generally paid in 10 monthly instalments followed by a 2-month non-payment period; this can also be spread across 12 months for taxpayers’ ease in some counties. The tax charge depends on three things, i.e. an individual’s circumstances, the valuation of one’s property, and the council’s needs. The services that the council funds with the council tax include:

• Provision and upkeep of the parks and sports facilities
• Police and fire brigade services
• Libraries and educational institutions
• Waste disposal and garbage collection
• Maintaining streets, i.e. cleanliness and lighting
• Maintaining records such as birth and marriage certificates, etc.

An individual can ask the authorities to reduce or waive their council tax depending upon certain conditions:

• If they have low earnings
• They are a student
• Or they live alone and are the only adult in the household
• Living off benefits, such as Income Support, Employment or Support Allowance, etc.
• They or someone related to the individual has a disability that reinforces the need to live in a bigger home.
• a care leaver, thus exempt from council tax from 18 to 26. This is in the case of Scotland and certain counties of Wales and England only.
• a member of the armed forces
• shifted to a care home or hospital
• They are in prison, and the conviction should be on crimes other than failure to pay council tax.

Video: An Overview of the Taxes in the UK

Sales Tax and Other Duties

This includes taxes charged on most goods and services purchased, i.e. VAT, excise duty and motoring tax. 

VAT

Value-added tax (VAT) is a charge that is paid on the purchase of goods and services. VAT is administered and collected by HMRC and is the third biggest income source for the government. VAT is charged at three different rates depending on the nature of products and services purchased.

You can read ‘Complete understanding of VAT for your Business’ to further analyse VAT’s implications and to mitigate the liability resulting from it.

Excise Duty

Excise duty is an indirect tax on the manufacturing, sale or use of designated goods, such as those detrimental to health, i.e. tobacco and alcohol, etc. The products on which excise duty can arise in the UK include:

• Wine and beer
• Cider and perry
• Spirits
• Low alcohol beverages
• Imported composite goods constituting alcohol
• Biofuels
• Tobacco products, etc.

Excise duty can arise on both UK-made goods or goods of non-UK origins. It occurs when goods are made available for consumption or goods imported for personal use are sold commercially.

Each product category is further divided into sub-categories. Each sub-category is assigned a different tax code and thus has different tax rates and the resulting charge or liability. 

• UK Tax Codes – What Do They Mean?

Motoring Duty

Motoring tax in the UK includes taxes associated with vehicles, i.e. London congestion charge, fuel duty and vehicle excise duty (VED).

London Congestion Charge

London congestion charge is introduced to counter the afflictions of driving on the community and help reduce congestion in central London, thus making public transport a more reliable option. Drivers have to pay a £15 daily charge if they use the congestion zone between 07:00 and 22:00 every day except Christmas Day, 25th December.

The congestion zone has also been designated as an Ultra Low Emission Zone (ULEZ), i.e. If you’re driving a car that fails to meet ULEZ standards, you’ll have to pay an extra £12.5 for light vehicles (cars, bikes and vans up to and including 3.5 tonnes) and £100 for heavy vehicles (lorries over 3.5 tonnes; buses and coaches over 5 tonnes).

ULEZ will probably expand from Central London, too, but not including the North Circular Road and South Circular Road by October 25, 2021.

Fuel Duty    

Fuel duty is a per-unit charge included in the price of petrol, diesel and other fuels used for heating. Fuels have been categorised, and different charges apply depending on the category.

• The duty on petrol, diesel, biodiesel and bioethanol is 57.95 pence/litre.
• The duty on liquified petroleum gas is 31.61 pence/kg.
• Natural gas used as fuel or biogas has a charge of 24.70 pence/kg.
• The rate for fuel oil, i.e. used for heating, is 10.70 pence/litre.

Vehicle Excise Duty (VED)

VED is a charge on every vehicle in the UK that uses public roads; it is collected against the detrimental effects of CO2 emissions by vehicles. This charge is one of the significant revenue sources for the government; its administration and collection is managed by the Driver and Vehicle Licensing Agency (DVLA). 

VED during the first year of a car is proportional to its CO2 emissions, followed by a standard rate (SR) of £140 in the subsequent years, except for cars with zero emissions for which the standard rate is zero. Vehicles with a list price of £40,000 will attract a further £310 charge for the first five years.

Property Taxes 

Property taxes are one of the highest in the UK and contribute materially to the overall revenue generated by the tax. 

Stamp Duty Land Tax (SDLT)

SDLT is a charge on property paid if the property is purchased for a value above the threshold. Scotland and Wales have their own property tax instead of SDLT, which is only applicable in England and Northern Ireland. SDLT arises if:

• freehold property is bought
• a new or existing leasehold is bought
• a property is purchased through a shared ownership scheme
• transfer of land or property occurs in exchange for payment 

The current threshold for residential properties bought after October 1st is £125,000 and for non-residential land and properties is £150,000. For residential properties bought between 1 July to 30 September 2021, the threshold was £250,000, reduced from the previous threshold of £500,000.

From 1 July 2021, you are eligible to claim a discount or complete exemption from SDLT if you or your partner are first-time buyers and the value of the property is £500,000 or less. Discounts can also be availed if you have bought your first home before July 8, 2020.

If you’re looking forward to investing in property, you can seek help through ‘Tax Tips for Buy to Let Landlords.’

Rental Income

Income-generating from renting out a property might give rise to tax liability. If the rental property is in your name, the first £1,000 of your income will be tax-free. If the income exceeds this limit and is between £1,000 to £2,500, HMRC should be informed. The earnings should also be mentioned on a tax for Self-assessments if they are between £2,500 and £9,999 after allowable deductions and £10,000 or more before allowable deductions.

If you have a property business, you might also have to pay Class 2 National Insurance if your earnings from business are £6,515/year and if all of the following conditions are met:

• Your primary income source is being a landlord
• If you have multiple properties on rent
• You’re investing in new properties to rent out

If you’re a landlord and are looking forward to improving your operation, you might find ‘A Guide to Renting Out as a Landlord’ helpful.

Dividend Income

If you have invested in shares of a company, you might get dividend income from it. The dividend income that falls within the contours of your tax-free allowances is not taxed. Once the personal allowance is utilised, you still don’t pay tax until the utilisation of the dividend allowance, i.e. £2,000. Taxation on dividend income starts once the dividend allowance is also utilised.

Let’s suppose you get £5,000 in dividend income, and your job earnings are 30,000 in the Tax Year 2020-21. 

The total income sums up to be £35,000.

After deducting the tax-free allowance of £12,570, the taxable income left will be £22,430. The income falls in the basic rate band; thus, the tax liability will be computed as follows:

• 20% on £17,430 = £3,486
• No tax on dividends worth £2,000 as per dividend allowance.
• 7.5% on £3000 = £225

To get a fair understanding of taxation on dividends, head over to ‘Detailed Overview of How Dividends are Taxed.’

Business Taxation

This section includes taxes that businesses have to pay in the UK. This includes corporation tax which for the Tax Year 2019-20 hit the mark of £50 billion and the business rates.

Corporation Tax

A limited company, any non-UK-based company with a branch in the UK or a club, co-operative, or other unincorporated association, is liable to pay corporation tax at a rate of 19% on trading profits, investments, and realised gains on disposal of assets. The chancellor announced in budget 2021 that the corporation tax rate will be rising to 25% from April 2023.

If you run a business and face difficulties figuring out corporation tax, read ‘Understanding Corporation Tax for Businesses’.

Business Rates

You will be liable to pay business rates if you use a building or part of a building for non-domestic purposes. The relevant local council sends the business rates bill in February or March for the following year. Business rates are different for Scotland and Northern Ireland. These rates might be charged on:

• Shops
• Offices
• Pubs
• Warehouses
• Factories
• Holiday rental homes and guest houses

Places that have been designated for welfare activities are exempt from business rates.

If business expenses are a nuisance and budgeting seems like a tough job, read ‘Budgeting: An In-Depth Guide to Business Budgeting.’

Business and Personal Taxes

Business and personal taxes include the National Insurance Contribution (NIC), the second biggest revenue source for the UK government among taxes and Capital Gains Tax.

National Insurance Contributions (NIC)

National Insurance Contribution is charged by the state against benefits like State Pension or Maternity Allowance. NIC is mandatory for an individual who is 16 or above and is either an employee with earnings above £184 a week or self-employed with a profit of £6,515 or more. A National Insurance number is granted to every individual who is liable to pay NI, and the payment is deducted against it. 

If your earnings fall between £120 and £184, your contributions are treated as paid to safeguard your NI record.

National Insurance is divided into four classes, i.e. Class 1,2,3 and 4. Class 1 is applicable for employees who are under the state’s pension age and earn more than £184/week; it is deducted automatically by the employer. Class 2 covers self-employed people making profits of £6,515 or more per year. Class 3 covers voluntary contributions, which one might pay to fill gaps in one’s NCI record and Class 4 covers self-employed people earning £9,569 or more per year.

National Insurance Contribution is paid for a number of state benefits listed in the table below.

Capital Gains Tax (CGT)

Capital gains tax is the tax charged on any gains made while disposing of an asset. No tax is charged if the gain falls within the capital gains tax allowance of £12,300 and £6,150 for trusts. Let us assume you sell a gun for £30,000, which was earlier bought for £10,000. This means that a gain of £20,000 has resulted from this transaction. Capital Gains Tax will be charged at £20,000- £12,300, i.e. £7,700.

Disposing of an asset includes selling, swapping, giving it away as a gift or getting insurance compensation against it. Capital gains tax is exempt for assets that you give or sell to your spouse or civil partner and those given away as gifts to charity.

You can further explore the topic for your ease by reading ‘Capital Gains Tax.’

Tax System for Foreigners

Automatic Exchange Information Agreement (AEIA)

AEIAs are agreements that the UK has signed with several countries facilitating the flow of information between HMRC and the tax authorities of the respective countries. Financial institutions in the UK, such as banks and insurance companies, are obliged to share information of non-UK residents with HMRC, which will, in turn, share information with authorities of the concerned countries. Similarly, the UK gets information about its residents having overseas financial accounts or investments.

Short Term Business Visitors (STBVs)

You will be treated as a short-term business visitor for tax purposes if you have been working in the UK for less than a year and have lived in the UK for fewer than 183 days in the relevant tax year. These STBVs will be charged tax on their wages for work carried out in the UK. These taxes can be offset by double taxation treaties, provided there is one between the UK and the country of the concerned individual.

Taxes for Non-domiciled Residents

Non-domiciled persons may not have to pay tax on income from sources based outside the UK if the income is below £2,000 and kept outside the UK. However, if the income is above £2,000, this should be reported to HMRC through a self-assessment tax return.

A person who is not UK-domiciled but is a resident of the UK is liable to pay inheritance tax on any estate within the UK. Similarly, if a person is domiciled in the UK, he will be liable to pay inheritance tax on all the properties owned in the UK or abroad.

Taxes for International Students in the UK

International students who come to the UK from countries with double taxation agreements with the UK usually do not have to pay tax on tuition fees and living expenses such as accommodation, food, and study material. However, if your living costs other than the tuition fee exceeds £15,000, HMRC might ask you to account for that.  

International Students might be liable to paying tax:

• if their country doesn’t have a double taxation agreement with the UK, 
• if they have other income that they don’t bring to the UK or 
• if they do bring the income to the UK and use it on expenses besides the living costs or course fees and 
• if they permanently plan to stay in the UK.

Taxes on Imports and Exports

All the goods imported from abroad will be subjected to taxes and tariffs in the UK. All such products have been categorised and assigned different codes for tax computation purposes. The taxes on these commodities can be calculated by using an online tool. Similarly, commodity codes and duties have been specified for export goods, and now, if you’re trading with the EU, you might have to register for IOSS. 

Tax Refunds

You might be able to apply for a tax refund if you have paid more tax than owed to the HMRC. This can be done online through the government website in a step-by-step procedure leading to the submission of an application. Generally, the refund application takes 4 to 6 weeks to process.

Conclusion

Taxation is a crucial source of income for the UK government and helps to fund a number of welfare services and the state building its resources. The taxation process in the UK is very intricate and requires deep insight and years of experience, as practice leads to perfection. The number of taxes that have been implemented and the bifurcation of individual taxes into various income tax bands and rates reinforce the importance of a qualified accountant overseeing the complex process and saving you money through the right tax relief claims.