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The United Kingdom holds a prominent position as a major trading power and financial center. In the fiscal year 2022-23, the UK government collected approximately £1 trillion* in taxes to support public expenditure. Majority of this revenue was generated from income tax, national insurance contributions, and value-added tax (VAT).

This comprehensive article delves into the complexities of the UK tax regime, providing insights, strategies, and updates on the latest tax laws. Whether you’re a small business owner, a multinational corporation, or an individual taxpayer, this article aims to demystify the complexities of UK taxation and empower you to navigate the system effectively.

The UK Tax System Overview

The UK tax system encompasses various taxes imposed on businesses and individuals, including income tax, corporation tax, value-added tax (VAT), capital gains tax, and more. Each tax has its own rules, rates, and compliance requirements, making it essential for taxpayers to understand their obligations in each area. Businesses must navigate corporate tax laws, employment taxes, and VAT regulations, while individuals face income tax on earnings, capital gains tax on asset disposals, and inheritance tax on estates.

The government’s fiscal year spans from 1 April to 31 March, although many companies align their tax year accordingly, some opting for different dates. Conversely, the tax year for individuals in the UK extends from 6 April to 5 April of the following year.

The oversight of various taxes falls under different authorities:

• HM Revenue and Customs (HMRC)
• Revenue Scotland
• Welsh Revenue Authority
• Land & Property Services (Northern Ireland)
• Local governments

Recent Developments in UK Tax Laws

The UK tax landscape is subject to frequent changes due to legislative updates and government policies. Businesses and individuals need to adapt their tax planning strategies to keep up with these changes and ensure ongoing compliance.

In Jeremy Hunt’s 2024 Spring statement, he unveiled several key developments:

• Adjustments to National Insurance – Certain rates will undergo further reductions. In Autumn 2023, specific rates were already slashed, and others were eliminated.
• Property Tax Revisions – The higher rate of property tax is set to decrease, and stamp duty relief for individuals purchasing more than one property will be discontinued.
• Vaping, Alcohol, and Fuel – The government is proposing to introduce a levy on vape liquids. Additionally, duties on fuel and alcohol will remain frozen for at least another year.

Learn more about income tax changes in the UK in our detailed budget article. Click here

Who is liable to pay taxes in the UK?

In the UK, taxes are paid by individuals, companies, and trusts. Residents are taxed on their worldwide earnings, whereas non-residents are only taxed on income earned within the UK.

You are considered a tax resident in the UK if you spend 183 days or more in the country during a tax year, or if your only home is in the UK for more than 30 days. The UK offers statutory residence tests to help individuals determine which tax regime applies to them.

For expatriate residents in the UK, taxes operate largely the same way as they do for British citizens.

The UK has established bilateral automatic exchange of information agreements with numerous other countries. These agreements enable tax authorities to share information with each other automatically, aiding in the prevention of tax avoidance and evasion.

Types of Tax in the UK

There is a variety of tax in UK, some taxes, such as council tax, are levied at the local level, whereas others are collected centrally. In the UK, individuals need a tax identification number (TIN) also called as UTR number, however residents quite commonly use their National Insurance number (NINO) for tax identification purposes, as well as for employment, benefits, and other services.

Income tax

Income tax is levied on all UK residents for their worldwide earnings, whereas non-residents are only taxed on their UK income. Income subject to taxation encompasses various sources, such as salaries from employment, business profits, pensions, rental income, interest on savings and investments, dividends, and crypto assets.

In England, Wales, and Northern Ireland, tax rates range from 0% to 45%. However, in Scotland, tax rates can go up to 47%.

National Insurance

National Insurance contributions are a fundamental aspect of the UK tax system, serving to fund benefits and pensions for workers. For employees, these contributions are deducted directly from their salaries alongside income tax. As of 2024, employees contribute up to 10% of their wages, while employers’ shoulder up to 13.8% of the employee’s earnings. However, the National Insurance system comprises different classes, and your classification depends on your business income:

• If you earn more than £12,570 annually, you are required to pay both Class 2 and Class 4 contributions.
• For earnings between £6,725 and £12,570, no payments are necessary because the government deems your Class 2 contributions as fulfilled.
• If you earn less than £6,725, you are not obligated to make contributions. However, voluntarily paying Class 2 contributions can help avoid gaps in your National Insurance record.

The current rate for Class 2 contributions is set at £3.45 per week, but starting from 2024, this payment will no longer be mandatory for individuals earning over £12,570 per year. Meanwhile, the 2024-25 rate for Class 4 contributions is 8% on profits over £12,570 and 2% on profits exceeding £50,270.

Council tax

Council tax is a local government fee paid by UK residents over 18, funding services like trash collection and emergency services. The amount varies based on property value and location, typically ranging from £1,000 to £4,000 annually. Some residents may qualify for discounts or exemptions, such as a 25% reduction for individuals living alone.

Business rates

Business rates are taxes paid by businesses using non-domestic properties like shops, offices, or warehouses. Your bill is based on the property’s ‘rateable value’—its annual rental cost. In England for 2024/25, properties valued under £51,000 pay a small business multiplier of 49.9p per £1, while those over £51,000 pay a non-domestic rating multiplier of 54.6p per £1. Scotland has rates ranging from 49.8p to 55.9p per £1, and Wales uses a single rate of 56.2p per £1. Relief is available for rural properties (100% relief) and certain businesses like retail, hospitality, and leisure (up to 75% relief up to £110,000).

Corporation tax

If you operate a company in the UK, you are subject to corporation tax, along with business rates and National Insurance contributions. Corporation tax applies to various entities, including limited companies, foreign companies with UK branches, clubs, cooperatives, and other unincorporated associations. It is levied on trading profits, investments, and chargeable gains (profits from asset sales). UK-based businesses are taxed on global profits, while foreign-based entities are taxed solely on UK earnings. The standard corporation tax rate is 25%, but there’s a reduced rate of 19% for businesses with profits under £50,000. Companies earning between £50,000 and £250,000 can apply for marginal relief to lower their tax liability.

Value Added Tax (VAT)

Value Added Tax (VAT) is applicable to most goods and services in the UK, with a standard rate of 20%. Certain items, such as energy-saving building materials, mobility aids, children’s car seats, and other essential goods, qualify for a reduced rate of 5%. Businesses with a taxable turnover of £85,000 or more are required to register for VAT, while those earning less can opt for voluntary registration.

Capital Gains Tax (CGT)

Capital Gains Tax (CGT) is imposed on profits from selling, giving away, or receiving compensation for items that have increased in value since acquisition. Taxable assets include personal possessions over £6,000 (excluding cars), properties other than your main residence, main homes if rented out or used for business, certain shares, investments, and business assets. The CGT rate varies based on your tax bracket. Higher or additional rate taxpayers (with taxable income over £50,271) face a 28% CGT rate on residential property gains and 20% on other gains.

Basic rate taxpayers have a more nuanced calculation: deduct the tax-free allowance (£6,000) from the total taxable gain, add this to your taxable income, and pay either 10% or 18% (for residential property) if within the basic tax bracket, or 20% and 28% (for residential property above the basic tax rate). CGT from property sales must be reported and paid within 60 days, while other gains should be recorded in your Self-Assessment tax return or ‘real-time Capital Gains Tax service’ by December 31 of the tax year following the sale.

Inheritance Tax (IHT)

Inheritance Tax (IHT) is levied on the value of money, property, and possessions left by a deceased individual in the UK. This tax is applicable if the value of the inheritance exceeds £325,000, except when the excess is left to a spouse or civil partner, a charity, or a community amateur sports club. If the deceased leaves their home to their children, the allowance increases to £500,000. The standard inheritance tax rate is 40%, and it must be settled by the end of the sixth month following the death.

Stamp Duty Tax

When purchasing property in the UK, you may be liable for additional taxes depending on your location:

• England and Northern Ireland: Stamp Duty Land Tax (SDLT)
• Scotland: Land and Buildings Transaction Tax
• Wales: Land Transaction Tax

Thresholds for these taxes vary:

• First-time buyers of residential properties up to £625,000: £425,000
• Other buyers of residential properties: £250,000
• Non-residential land and properties: £150,000

Tax rates are determined based on the property’s value:

• Up to £625,000 (first-time buyers only): 5%
• Up to £925,000: 5%
• Up to £1,500,000: 10%
• Over £1,500,000: 12%

Rates differ in Scotland and Wales. Additional considerations apply for those purchasing additional properties or non-residents buying residential properties in the UK.

Import/export Tax

Goods imported into the UK from outside are subject to tariffs and customs duties, except for specific exceptions. For individuals moving to the UK, there are specific tax rules regarding personal belongings. No tax or duty is imposed on personal use items or gifts valued at £390 or less (£270 if arriving by private plane or boat). However, commercial goods and items exceeding the personal allowance for alcohol, cigarettes, and other excise goods must be declared.

Border Target Operating Model (BTOM)

Businesses engaged in UK-international trade should be aware of the Border Target Operating Model (BTOM), which introduces new import and export rules starting in 2024. The BTOM will be implemented in phases throughout January, April, and October 2024. These changes primarily affect animal and plant products and foods from the EU, including:

• New health certification requirements.
• Implementation of checks and physical inspections.
• Relocation of checks from the destination to the UK border.
• Simplification of datasets for imports.

Transport Tax

In the UK, drivers must pay car and road tax when registering their vehicles with the DVLA (Driver and Vehicle Licensing Agency). The tax amount varies based on factors like engine size, fuel type, and CO2 emissions. Alternative fuel cars (TC59) have tax rates £10 lower than petrol (TC48) and diesel cars (TC49). Car and road tax can be paid online, and electric cars are often exempt due to their low emissions. For air travel, individuals departing from the UK are subject to an air passenger duty, included in the airfare.