A guide to the tax system

Straipsniai

A guide to the UK tax system

Find out more about the UK tax system, calculate your income tax, and find out whether you are a UK resident or a non-resident taxpayer.

Although many sources would describe the UK tax system as complex – arguably one of the largest sets of legislation in the world – from a macroeconomic perspective, many immigrants find the British tax system relatively straightforward. If you live and work in the UK or have retired in the UK, you usually have to pay local tax. However, what is taxable depends on your tax residency status and other individual circumstances.

This comprehensive UK tax system guide consists of:

• An overview of the British tax system;
• Federal taxes;
• Local taxes;
• Goods and services taxes;
• Who has to pay tax in the UK;
• Tax System for Foreigners;
• Income tax rates;
• How to file an income tax return;
• Fines and sanctions;
• Social insurance taxes;
• Property and wealth taxes;
• Inheritance taxes;
• Business taxes and VAT rates;
• Import and export customs duties;
• Tax Refund;
• Professional consultation.

The British tax system

The UK’s main taxes include income taxes, real estate taxes, capital gain taxes, inheritance taxes in the UK, and value-added tax (VAT). Many of them are progressive taxes, which means higher earners pay taxes at a higher rate.

The UK tax system applies to the whole of the United Kingdom: England, Scotland (although there are some specific differences due to the different legal system in Scotland), Wales, Northern Ireland, and many of the smaller islands around the UK coast. It also includes oil rigs in UK territorial waters but excludes the Channel Islands and the Isle of Man.

One interesting aspect of the UK tax system is that it treats spouses as separate entities and taxes them individually, except for a small discount on income tax.

You must have a National Insurance number to pay tax in the UK. You may also need to apply for a Skilled Worker visa (formerly known as a Category 2 visa). Now that the UK has left the EU, this also applies to citizens of the European Economic Area (EEA). However, EEA nationals who lived in the UK until 2021 on January 1, can use the free program for granting resident status to EU citizens.

Federal UK taxes

Taxation in the UK can involve payments to at least three different levels of government: central government (HMRC), devolved administrations (notably in Scotland), and local authorities in the form of council tax.

THMRC administers the following central taxes:

• Income taxes;
• Profit taxes;
• Capital gains taxes;
• Inheritance fees;
• Insurance premium fees;
• Stamp duty, land, and oil revenue taxes;
• Environmental fees;
• Climate Change and Quarry Tax and Garbage Collection Taxes;
• Value Added Tax (VAT);
• Duty Taxes;
• Excise duties.

Local Taxes

Local governments are responsible for the administration of municipal taxes. In addition, they may collect certain other taxes and fees, such as on-street parking fees.

Taxes for goods and services

Value Added Tax (VAT) applies to almost all goods and services in the UK. It can also apply to goods you bring into the UK from abroad if you exceed the specified quantities. In January 2021, new rules have been introduced that if you import or order goods online from outside the UK and the total amount of your purchase does not exceed £135, VAT is paid at the time of purchase.

The standard commercial rate of business tax (VAT) in the UK is 20%, although lower rates apply to certain goods and services. VAT relief also applies to certain goods, such as durable medical supplies.

The current UK Commercial Tax rates are as follows:

The tariff applies	the UK VAT rate	To what this tariff applies
Standard	20%	To most goods and services
Reduced rate	5 %	To some goods and services (e.g. child car seat)
Zero rate	0 %	Zero VAT on goods and services (e.g. food and children’s clothing)

Can you reclaim VAT?

Tourists and visitors to the UK can shop tax-free during their stay. They are entitled to a refund of all VAT paid on goods purchased domestically, provided they take the goods with them when they leave the UK.

In most cases, the store or refund office charges a fee for such tax-free shopping. You must apply for a refund of these taxes by the last day of the third month following the month in which you purchased the goods. Only tourists, visitors, and UK nationals who have lived abroad for at least 12 months are eligible for tax refunds.

If you fall into one of these categories, you need to be able to prove it when you leave the UK by showing your passport, visa, or other documents in a shop or to customs officials.

Goods for which VAT is non-refundable

Currently, tax-free shopping or VAT refunds do not apply to:

• Any type of services (e.g. hotel bills);
• Goods that you have fully or partially used (e.g. perfume or chocolate);
• Motor vehicles and boats;
• Goods valued at over £600 which will be exported for business purposes;
• Goods that will be exported as cargo and goods that require an export license (except antiques);
• Loose gems and precious metals;
• Mail-order items, including online sales.

Not all retailers offer tax-free shopping. If you want to get a VAT refund, you will first need to find a store that offers this option and ask for a VAT receipt or VAT refund receipt from the store, which you will have to sign in front of the seller. Present this form together with your purchase receipts, ticket, passport, and boarding pass at the dedicated customs counters at most seaports and airports upon departure.

Once the form is approved, you can either drop it in a customs letterbox or take it to a VAT refund office or agency and get your refund in cash or via a transfer to your credit card.

Who must pay taxes?

Taken together, many of the various taxes that a UK resident has to pay, other than VAT, are linked in some way to income tax. The basic calculation formula would be as follows: you need to add all your income and benefits, subtract the personal tax allowance (personal allowance), and pay the appropriate tax from this difference.

In the 2021/2022 tax year, all individuals are allowed £12,570 of tax-free income, so income below this amount is tax-free. Income tax rates are set in categories depending on your income. These categories or sections also regulate other tax rates, e.g. capital gains tax.

Approximately 32 million people pay taxes in the country.

Tax rates are the same for everyone, regardless of their residence status. However, residency status determines which sources of income must be included on your tax return. A person who is a UK resident taxpayer pays tax on all their income anywhere in the world, subject to certain exemptions to avoid double taxation in certain countries. Non-UK residents, on the other hand, only pay on income earned in the country.

The UK does not accept joint applications: each person must file their tax return.

There are several ways to determine whether you qualify as a UK resident taxpayer.

Automatic test for living abroad

The automatic overseas resident test will classify you as a non-UK resident if one of the following circumstances is met:

• You have not lived in the UK in the last three tax years and you will spend less than 46 days in the UK in the current tax year.
• You have lived in the UK for one or more of the previous three tax years and will spend less than 16 days in the current tax year.
• In the current tax year, you are permanently employed abroad and spend less than 91 days in the UK in that year and work in the UK for no more than 31 days.

Automatic UK resident test

In the same way, you can determine whether you are considered a UK resident taxpayer for the current tax year if you meet one of the following three automatic UK resident tests:

• If you stay in the UK for at least 183 days during the tax year.
• Your main residence is in the UK and you have owned, rented, or simply lived here for at least 91 days, including 30 days in the current tax year.
• You work full-time in the UK for any 365 days without a significant break of 31 days or more. The relevant tax year from this period must include at least 274 working days.

Test of links to the UK

If you do not meet the conditions listed above, your UK connections may help determine your domicile status concerning the UK tax system. The more connections you have with the UK, the less time you can spend in the country without becoming a UK resident taxpayer; the fewer connections you have, the more time you can spend in the UK before you are granted UK resident status.

If you are in the country for 16 to 45 days and have at least four demonstrable connections, you can be considered a UK resident taxpayer. The number of connections required decreases depending on the length of your stay in the UK. They are assessed as part of the sufficient connections test and include the following conditions:

• Family: spouse and/or minor children living in the UK.
• Accommodation: You can stay permanently for 91 days or more (even if you only spend one night there).
• Work: You work in the UK for at least 40 days a year.
• Long-term visit: you have spent 90 days or more in the UK in the last one or two years.
• Your favorite country: You spend more days in the UK than any other country.

Who can be exempted from paying taxes?

There are several ways to apply for a tax exemption. For example, if you were a resident taxpayer in at least one of the last three tax years, but spent 16 days or less in the UK in the current tax year, you are no longer a UK resident taxpayer. The same applies if you have not been a UK resident taxpayer in the last three years and have spent less than 46 days in the UK. If you have worked full-time abroad, the time you are allowed to be away from the UK is extended to 91 days.

Payment of taxes when working under an employment contract

For most people in contract employment, UK income tax and National Insurance contributions (social security contributions) are automatically deducted from their wages. Your employer uses a Pay-as-You-Earn (PAYE) system, deducting all necessary taxes before paying you. Retirees in the UK may also have to pay income tax on their pensions.

The tax system for foreigners

Taken together, immigrants must pay the same taxes at the same rates as British citizens. All types of wages and benefits are taxable, such as school tuition and social benefits. However, in certain circumstances, the employer’s contributions to the foreign pension fund may be tax-free, while the employee’s contributions may be deducted from the amount of tax payable.

The UK has double taxation agreements with more than 130 countries and is one of the largest such networks in the world. These countries include Australia, France, Germany, the Netherlands, Russia, Saudi Arabia, the United Arab Emirates and the United States. If your income is taxed in the country where you receive your salary, you can usually claim tax relief and get some or all of the tax back. However, your claim for a tax refund will depend on several factors, including whether or not you are a UK resident taxpayer.

About 90% of foreign pensions or annuities paid to UK residents include payments not approved by HMRC, e.g. early retirement benefits or certain types of lump sum payments are taxed in the UK. This means that pensions paid to UK residents are taxed the same whether the pension is paid in the UK or abroad. Our advice would be to speak to your pension fund managers about whether you will be charged.

UK and automatic exchange of information

The UK has signed up for the Automatic Exchange of Information (AEOI) system, which allows the exchange of data on financial accounts and investments between tax authorities in different countries. The AEOI system will be relevant to you if:

• You open or already have a UK bank or credit union (building society) account and;
• If you purchase or already manage investments through an insurance or investment company, are a trustee, have an interest in certain types of funds, or receive any benefits from charities.

If you opened an account before 1 January 2016, the account manager may contact you to confirm your residency status. If you have given your bank a foreign correspondence address, you can also expect to be contacted. You must answer all questions from your bank or credit union, otherwise, they may give incorrect information to HMRC.

Under the AEOI arrangement, HMRC shares information with the relevant tax authority in the country where you may be a taxpayer. If you are a UK taxpayer and have an account outside the UK, HMRC will still receive information from the tax authority of the other country.

Taxes for temporary workers in the UK (STBV)

Anyone who works in the UK for less than a year and spends less than 183 days in the country in the relevant tax year will be treated as a temporary worker for tax purposes. If employed in the UK, such individuals must pay tax on their wages even if the employer is registered abroad. In such cases, double taxation agreements can offset any taxes due.

Taxes for non-UK residents

In some cases, foreigners who are resident in the UK but have a permanent home (domicile) outside the country may be able to avoid paying UK tax on their overseas income. Your domicile is usually the country your parents considered their permanent home when you were born. However, this may change if you now live in another country (e.g. the UK) and do not intend to return. Such non-domiciled persons generally do not have the right to live in the UK indefinitely.

Non-residents don’t pay UK tax on foreign income or profits if that income is less than £2,000 in a tax year and you don’t bring that money in. Amounts above £2,000 must be reported to HMRC at the time of your tax return. There are separate rules for students coming to study in the UK.

Income tax rates

How much tax you have to pay depends on your particular situation. Income tax is collected using progressive rates – higher income tax rates apply to higher income categories. The tax is collected on all income, earnings, and investments, minus deductions and tax-free allowances.

Most people are entitled to personal tax relief on which they do not have to pay tax. This is £12,570 for 2021-2022. Income above £125,000 does not qualify for personal tax relief.

Tax year 2021-22 (6 April 2021 – 5 April 2022)

England/Wales/Northern Ireland Tax Group	Taxable income	Income tax rate
Personal tax relief	up to £12,570	0%
Base rate	£12,571-£50,270	20%
Higher rate	£50,271-£150,000	40%
Additional rate	£150,001	+45%

Scottish Tax Group	Taxable income	Income tax rate
Personal tax relief	£12,570	0%
Base rate	over 12,571 * – £14,667	19%
Scottish Basic Rate	over £14,667 – £25,296	20%
Average tariff rate	over £25,296 – £43,662	21%
Higher rate	over £43,662 – £150,000**	41%
Top rate	over £150,000**	46%

* based on the assumption that individuals benefit from standard UK personal tax relief.

** for those earning over £100,000, personal tax relief will be reduced by £1 for every £2 earned over £100,000.

Tax year 2020-21 (6 April 2020 – 5 April 2021)

England/Wales/Northern Ireland Tax Group	Taxable income	Income tax rate
Personal tax relief	iki 12 500 GBP	0 %
Base rate	12 500 –50 000 GBP	20 %
Higher rate	50 001–150 000 GBP	40 %
Additional rate	150 001 GBP	+ 45 %

Scottish Tax Group	Taxable income	Income tax rate
Personal tax relief	12 500 GBP	0%
Base rate	over 12,501 * – £14,585	19%
Scottish Basic Rate	over £14,586 – £25,158	20%
Average tariff rate	over £25,159 – £43,430	21%
Higher rate	over £43,431 – £150,000**	41%
Top rate	over £150,000**	46%

* based on the assumption that individuals benefit from standard UK personal tax relief.

** for those earning more than £100,000, personal tax relief will be reduced by £1 for every £2 earned above £100,000.

Tax benefits

UK residents get tax benefits on:

• Savings interest;
• Dividends, if you have company shares;
• The first £1,000 of income from self-employment (business relief);
• The first £1,000 of rental income;
• Marriage allowance to reduce your partner’s tax burden if your income is less than the standard personal tax allowance.

Non-taxable income

There are several areas of income in the country that are exempt from taxation. The following are exempt from income tax:

• Transport costs relating to the relocation of the employee and close family members at the start and end of their postings in the UK;
• Winnings from betting, lotteries, or prize games;
• Awards for long service (with certain restrictions);
• Individual savings accounts for UK residents up to £20,000 and income from funds invested in such accounts, such as interest or dividends;
• Certain pensions, such as those paid to widows and dependents of war veterans, and similar pensions paid under the laws of a foreign country;
• Certain social security and state benefits, including child benefits, housing benefits, maternity benefits, unemployment and social support benefits, and carer’s allowance.

How to submit an income tax return

Tax year dates are from April 6 of one calendar year until April 5 of the following year. This means that the current tax year is noted as 2021/2022.

You must have a Unique Taxpayer Number (UTR) to file your annual income tax return. It can be found in previous tax returns or other HMRC documents, as well as on the HMRC website.

Residents must notify HMRC of any changes in their taxpayer status by 5 October after the end of the relevant tax year. The deadlines for filing UK tax returns are as follows:

• October 31 (when the paper version is submitted);
• January 31 (when submitted online).

Penalties and sanctions

Returns submitted up to three months after the due date are subject to a £100 penalty. A fine of £10 per day may apply over the next three months. If a return is not submitted more than six months after the due date, an additional fixed penalty of £300 or 5% of the estimated tax liability (whichever is greater) applies. Returns submitted 12 months after the due date are subject to additional penalties, in some cases up to 200% of the estimated tax liability.

If you don’t have all the information you need to file your UK tax return, you can submit provisional figures to avoid the deadlines. Once you have all the information, you will be able to change the preliminary numbers to the final ones.

Social security taxes

If you work in the UK, both you and your employer are likely to pay social insurance contributions (NIC). These contributions have no “ceiling” and cannot be included in the list of reimbursable expenses when submitting tax returns.

Here is a brief description of the NIC rules (based on KPMG):

• An employee pays an initial Class 1 NIC contribution of 12% of their earnings if earnings are between the first and second categories (i.e. £184 per week and £967 per week) and 2% thereafter.
• Class 1 secondary NIC is paid by employers at 13.8% of wages above the wage threshold (£170 per week for tax year 2021-22).
• Class 1A NIC (at the same rate) is only payable by the employer on some benefits in kind such as rent, car, school fees, etc. A Class 1A national insurance subject meets the same requirements as in the case of income taxes.

If you come to work in the UK from the EU, Norway, or Switzerland, you will only have to pay into one country’s social security system at a time. It will most likely be in the UK. However, if you are only a temporary worker, you may be exempt.

Property and property taxes

Property taxes

According to the OECD, the UK has the second highest property tax rate in the developed world after the US. UK property tax revenue accounts for more than one-tenth of all taxes (around 12.5%) on the use, transfer, and ownership of property in the UK.

The UK has two types of property tax. If you buy property in the UK above a certain threshold, then you must pay Stamp Duty Land Tax (SDLT). SDLT only applies to residential property valued at more than £125,000 or non-residential land and property purchased for more than £150,000.

Stamp duty is payable in England and Northern Ireland; Scotland has its own land and building tax, while Wales has a land tax. All countries also impose additional taxes on the purchase of investment properties and second homes.

Like income tax, SDLT is a progressive rate tax; you can use an online calculator to see how this tax works. You must send your SDLT return to HMRC and pay the tax within 30 days of the closing of the sale. Certain exceptions allow you to reduce your property tax, for example, if you buy multiple properties.

Another form of property tax is council tax. This local council tax is graded or grouped in a similar way to income tax. Each municipality annually evaluates the property under its jurisdiction and adjusts the applicable taxes based on the determined value. The municipal tax rate depends on many conditions.

Tax on rental income

Net rental income is considered income for both permanent and non-domicile UK residents. Separate rules apply when renting a single room, renting a property for holiday purposes, and if you are a rental property owner living abroad.

Net income is the gross rental income minus allowable expenses. In most cases, the UK tax system prevents capital expenditure from rental income, including the cost of buying or repairing property, depreciation, and some mortgage interest.

Tax on received dividends

If you own shares in a company in the UK, you may have to pay tax on the dividends you receive. You don’t have to pay dividend tax on the first £1,000 you receive in the current tax year.

Tax category	Dividend tax rates above £2,000
Base rate	7.5%
Higher rate	32.5%
Additional rate	38.1%

Property taxes

Property taxes, such as capital gains and inheritance tax, in 2019 accounted for about 4% of GDP and are relatively poorly reflected in the British economy compared to France and Spain.

Capital gains tax

Capital Gains Tax (CGT) is levied on the difference between the sale and purchase price of several different units of property. You pay CGT on the profit you make on this asset, not on its full sale price. CGT may become payable on the sale of a business, shares, inheritance, or property.

Taxable assets are:

• Personal property worth £6,150 or more (excluding vehicles);
• Real estate that is not your primary residence;
• Your main residence, if you rent it, use it for business, or is very large;
• Shares that are not included in an ISA or PEP;
• Assets owned by the business;
• Assets in cryptocurrencies (in certain cases).

CGT is payable on all assets held in the UK, whether or not you are a permanent resident. However, if you are a UK resident, you may also have to pay CGT on assets that are located in another country.

CGT is only payable on your total profits above the tax-free minimum (annual personal tax allowance). 2021/2022 A personal tax benefit that is exempt from CGT is:

• £12,300;
• £6,150 for savings funds.

How to calculate capital gains taxes

CGT is added to your other taxable income. The total of all your income from various sources will determine which tax bracket you belong to for the current tax year:

• If your total taxable income is less than £50,000, that is you are still in the basic bracket, your capital gains tax rate is 10% on most taxable property (except residential property) and 18% on your residential property.
• If your capital gains fall into the next, highest bracket, you would pay 20% on the bulk of your taxable property and 28% on your residential property, but only on the portion of the capital gains that would bring your taxable income into that bracket.

Inheritance taxes

Inheritance Tax is a one-off charge on the value of a deceased person’s estate if it exceeds a set amount, which is currently £325,000. If this amount is exceeded, the property is taxed at 40 percent tax. For example, if your estate is worth £500,000, inheritance tax will be 40% of £175,000. If you pass on your main residence to a direct descendant, then an additional inheritance tax threshold of £175,000 applies. This makes it easier for direct descendants to inherit the family home.

There are other ways to reduce inheritance tax. For example, if you leave more than 10% of your net worth to charity, the tax rate drops to 36%. Also, if you are married or in a civil partnership, your partner can inherit all of your assets without paying inheritance tax. If you would like to pass on your property before you die, you can gift it to your partner.

Business taxes and VAT rate

Companies operating in the UK must pay corporation tax on all the profits they make. In 2021/2022 the standard corporate tax rate was 19%. A lower rate of 10% is applied when the profit obtained can be attributed to the use of patents, and also, in certain cases, specific profit taxes are applied.

Taken together, companies operating in the country must also pay 20% VAT, although there are some exceptions to this. VAT declarations must be submitted monthly or every three months, depending on the size of the company.

Companies incorporated outside the UK, on the other hand, are only subject to corporation tax on profits accruing and relating to trade through a permanent establishment or carrying on business in the UK. However, from April 2020, non-UK registered companies must pay UK corporation tax (rather than income tax) on income derived from their UK-held assets.

Income tax of self-employed.

If you are a self-employed, limited company owner, you will have to pay UK corporation tax, but the amount of tax you pay will depend on whether you are considered a UK resident or not. Taken together, both permanent and non-domicile residents are subject to the same UK corporation tax rates and rules: permanent residents pay tax on all their worldwide income, while non-domiciles are only taxed on their UK income.

Import and export taxes

All goods imported from outside the UK are subject to tariffs and duties, with a few exceptions.

Car, road, and airport taxes

If you drive a car in the UK, you will need to pay car and road tax, including registering your car with the Driver and Vehicle Licensing Agency (DVLA). The amount paid varies by vehicle type, with UK car and road tax depending on factors such as engine size, type of fuel used, and CO2 emissions. Check out the UK car and road tax rates table where you’ll see that alternative fuel cars (TC59) have tax rates £10 lower than petrol (TC48) and diesel cars (TC49).

Tax Refund

You can claim back UK tax (get tax credits) in several situations, for example, if you are working and have had too much tax deducted from your wages, if you have stopped working, if you have purchased a pension or life annuity plan, or if you live in one country and you receive income in another. Also, if you’ve claimed personal expenses on your tax return, you can get a tax refund.

Some tax amounts calculated on Form P800 allow you to claim your tax online (only after your taxes are calculated, which is between June and October). After you’ve applied for your UK tax refund, you should receive your money within five to six weeks.

Professional consultation

The material reviewed in this article is intended as general information only and should not be considered tax advice. Specialists should always be consulted in a specific case. Aldus Ltd has been providing accounting and business services to individuals and legal entities since 2000, so we can properly answer your questions. So, give us a call!