Overview of the UK Tax System

expat tax uk

One of the key considerations when planning your move to the UK will be taxation and whether you will have to file returns or pay tax.

In this ultimate guide to the UK tax system, we outline the main types of tax, and how the tax rules apply to expats and foreign nationals living here.

 

Do you have to pay UK taxes?

Whether you are working, studying or are retired in the UK, your tax liability will depend on a number of factors, most importantly, your residency status.

Your residency will determine which of your income comes under the UK tax regime and which is exempt.

There are several ways to determine if you are a resident of the UK for tax purposes.

An individual who is a UK resident for tax purposes will generally be taxed on their worldwide income.

Non-UK residents, on the other hand, only pay on income earned within the UK.

Allowances may be available for UK residents to avoid ‘double taxation’ from certain countries. Under such arrangements, you may be able to claim tax relief o if you have been taxed at source on income from another country. This may apply where the UK has in place a double taxation agreement with another nation, such as the USA, China, Australia and UAE, Germany and France.

 

UK taxes for non-domiciled residents

So-called ‘non-doms’ may be able to benefit from a more favourable UK tax position in relation to foreign income.

A non-dom is someone who lives in the UK but whose ‘domicile’ – ie permanent home – is a different country.

Domicile is typically recognised as the country your father considered his permanent home at the time you were born.

Domicile can change where an individual lives in a different country and does not intend to return to that original country of domicile.

Non-doms aren’t usually allowed to live in the UK indefinitely.

If you are able to establish non-dom status, you may not have to pay tax in the UK on your foreign income. Non-doms do not pay UK tax on foreign income or gains if such income is less than £2,000 in the tax year, and you do not bring it into the UK. Amounts over £2,000 must be reported to HMRC via a self-assessment tax return.

 

Taxes for short-term business visitors

You would be classed as a short term business visitor for tax purposes if you are working in the UK for less than 12 months and are in the country for less than 183 days with the relevant tax year.

As an STBV, tax will be payable on your employment income if your duties were performed in the UK. This applies even where your employer is overseas.

Double-taxation treaties may offset any taxes.

 

Automatic Exchange of Information (AEOI)

The UK is a signatory to the Automatic Exchange of Information (AEOI) mechanism, which allows the sharing of information about financial accounts and investments between tax authorities of different countries.

You will be affected by the AEOI if:

  • you open, or already hold, a bank or building society account, and;
  • if you acquire or hold investments through an insurance or investment company, are a trustee, have an interest in certain types of trusts, or receive certain payments from a charity.

If you opened your account before 1 January 2016, your account provider may contact you to confirm your tax residence status. In particular, you can expect to be contacted if you gave your bank a foreign correspondence address. It is important that you reply to any queries from your bank or building society because they might otherwise furnish incorrect information to HMRC.

Note that as part of the AEOI agreement, HMRC will share the information with the relevant tax authority in another country where you may be a tax resident, and if you’re a UK tax resident with an account outside the UK, HMRC will receive information from the relevant tax authority.

 

UK tax system overview

Taxation in the UK is administered by the central government department Her Majesty’s Revenue and Customs (HMRC) as well as local governments, called councils.

The UK tax system covers England, Wales, Northern Ireland, Scotland, most islands around the British coast and the North Sea oil drilling platforms.

The Channel Islands and the Isle of Man are not part of the UK fiscal system.

Because of Scotland’s special political status, there are some differences in the taxation regime.

Changes to the UK tax system are expected in the coming months and years as the UK reforms after leaving the European Union.

 

National insurance number

Each individual is assigned a National Insurance number. This will usually be assigned to you once you arrive in the UK, and can be found on your Biometric Residence Permit.

If you do not have an NI number, you will need to apply for one once you are in the UK and you plan to work.

 

Types of UK tax

Income tax

Income tax is levied directly on personal income.

The amount of income tax you pay depends on how much of your income is above your personal allowance and how much of your income falls within each tax band.

 

Annual personal allowance

A personal allowance is applied each year to every individual. This means on an annual basis, part of your income will be tax-free. The personal allowance levels are set each year, for the 2020/21 tax year, everybody has a personal allowance of £12,500. income below this threshold is tax-free.

 

Income tax rates

Irrespective of residency status, UK residents and expats are taxed at the same rates.

Tax rates are structured into tiers that increase in line with income levels:

 

Income tax rate Amount
Personal allowance 0% on income up to £12,500
Basic rate 20% on income from £12,501 to £50,000
Higher rate 40% on income between £50,001 to £150,000
Additional rate 45% on income over £150,000

 

These tax bands are also used when calculating liability for other taxes, such as capital gains.

The current tax year is from 6 April 2021 to 5 April 2022.

 

PAYE

Most UK-based employees are taxed automatically under the PAYE (Pay-as-You-Earn) scheme. Under this system, income tax and national insurance are deducted from the employee’s salary payment before it is paid to the employee.

Benefits and reward packages are also taxable for UK-based employees.

Other deductions businesses may need to make include student loan repayments or pension contributions.

Businesses need to register as an employer with HM Revenue and Customs to get a login for PAYE Online or authorise an agent such as an accountant.

Employers are legally responsible for completing all PAYE tasks even if an agent is getting paid to do them.

A non-resident company can’t set up a standard payroll scheme until it has business premises in the UK.

Businesses must pay the PAYE bill to HM Revenue and Customs by the 22nd of the month for all the salaries paid the previous month. A month is defined not as a calendar month but as a period between the 6th date of the month and the 5th date of the following month.

Small employers paying under £1,500 a month can arrange to pay quarterly. Payment reports must be sent to HMRC before any payments to employees are made.

 

Pensions income

If you are retired and living in the UK, income from pensions or annuities such as lump-sum payments may also be subject to income tax.

You may be able to claim income tax reliefs, which mean you pay less income tax. The GOV.UK website has more information on claiming income tax reliefs.

Different tax rates apply to dividend and savings income.

 

National insurance

Anyone over 16, earning £157 or more each week, or is self-employed and has a profit of more than £6,025 a year is expected to pay National Insurance.

If you’re working in the UK, both you and your employer will need to make National Insurance Contributions (NICs), unless these are exempted by a reciprocal agreement. There is no ceiling to such contributions and they are not deductible from compensation for income tax purposes.

You only pay National Insurance contributions (NIC) between the ages of 16 and state retirement age.

There are different National Insurance classes, and not everyone pays the same amount. Your employment status and your earnings are key factors, and if you have any gaps in your National Insurance record.

 

Class 1 National Insurance thresholds

Employers and employees pay Class 1 National Insurance depending on how much the employee earns.

  • Class 2 and Class 4 National Insurance (self-employed): There are 2 types of National Insurance for people who work for themselves, depending on their profits. If you are self-employed, you pay two different classes of NIC – Class 2 and Class 4.
  • Class 3 National Insurance (voluntary): You can pay voluntary National Insurance to fill or avoid gaps in your record.

 

Inheritance tax

Inheritance tax in the UK is a one-time payment paid on the value of a deceased’s estate.

In the tax year 2020/21 the inheritance tax nil rate band, also known as the inheritance tax threshold, for individuals is £325,000. This nil rate IHT band is transferable to a spouse or civil partner on death resulting in a total nil rate band of £650,000 for couples

Any value higher than the threshold is taxed at 40%.

There are other ways to reduce your UK inheritance tax liability. If you are married or in a civil partnership, your partner can inherit your entire estate without facing a UK inheritance tax bill.

 

Corporation tax

Limited companies and foreign companies with a UK branch or office must pay corporation tax on taxable profits. Taxable profits include trading profits, investments and chargeable gains from selling assets. A UK limited company pays corporation tax on all its profits from the UK and abroad. A foreign company with an office or branch in the UK pays corporation tax on profits from its UK activities.

This is tax on company profit to pay if:

  • A limited company
  • A foreign company with a UK branch or office
  • A club, co-operation, or other unincorporated association e.g. a sports club

The normal rate of corporation tax is 19% for 2020/2021.

You don’t get a bill for Corporation Tax. There are specific things you must do to work out, pay and report your tax.

On the other hand, non-resident companies are subject to UK corporation tax only on profits accrued from and connected to trade through a permanent establishment, or in developing UK land. With effect from April 2020 however, non-resident companies are liable to UK corporation tax (rather than income tax) on income received from UK property.

If you’re living in the UK as a self-employed owner of a limited company, you will be liable to pay UK corporation taxes, although what you are taxed on depends on whether you are classified as a resident or non-resident taxpayer in the UK. In general, the same UK corporation tax rates and rules apply to both residents and non-residents; residents pay taxes on their worldwide income while non-residents are only taxed on their UK-based income.

A limited company must file annual accounts with Companies House 9 months after the company’s financial year ends at the latest. A limited company with profits up to £1.5 million normally must pay corporation tax 9 months and 1 day after the company’s accounting period ends and file a company tax return 12 months after the company’s financial year ends. Four equal instalments are normally required for profits exceeding £1.5 million.

A lower rate of 10% is applied when the profits can be attributed to the exploitation of patents, while specific corporation taxes apply in certain cases.

 

VAT

VAT is a consumption tax found on most goods and services, with the standard VAT rate being 20%
In general, companies operating in the UK will also need to charge and pay VAT at 20%, although there are some exceptions.

There’s a reduced rate of 5% levied on children’s car seats, electricity, gas, heating oil and solid fuel, and mobility aids for the elderly, among other things. The zero rated products include books, meat and poultry, fruit and vegetables, and household water, etc. There are other goods and services that are exempt from VAT or are outside the system.

VAT returns must be filed every month or every three months, depending on the size of the company.There are three rates of VAT: standard rate (20%), reduced rate (5%) and zero rate (0%). In addition some goods and services are exempt from VAT or outside the VAT system.

The compulsory registration threshold for businesses is £83,000 of non-VAT exempt income per financial year. Registration threshold for distance selling into the UK is £70,000. Businesses may want to register voluntarily in order to reclaim VAT on purchases made before the VAT registration threshold is passed. There is a time limit for reclaiming VAT that was paid before registration. The time limit is 4 years for goods and 6 months for services purchased before the date of the VAT registration.

VAT returns are submitted every three months; those periods are called “VAT accounting periods”. These quarterly VAT returns should only be submitted online. Businesses can choose their VAT accounting period when registering for VAT with HM Revenue & Customs. It is possible to file VAT returns online although it is safer to let qualified accountants do it.

The filing and payment deadline of quarterly returns is 1 calendar month and 7 days after the end of a VAT accounting period. One must be aware that the 7th date of the second month after the end of the VAT accounting period is the deadline for the HMRC to receive the payment and not to make the payment.

 

Can you get a refund on VAT?

Tourists and visitors to the UK can shop tax-free during the course of their stay. They are entitled to claim a refund on any VAT paid for goods bought within the country – provided they take these items with them when they leave the EU.

In most cases, the shop or refund company will charge you a fee for using tax-free shopping. Such refunds must be claimed by the last day of the third month after the month in which you bought them, and are only available to tourists, visitors and UK or EU nationals living abroad for at least 12 months.

If you belong to one of these categories, you must be able to prove this to the shop assistant and to customs when you leave the UK or EU by showing your passport, visa or other documents.

 

Items ineligible for VAT refunds

Presently, tax-free shopping or VAT refunds do not apply to the following:

  • Services of any kind (for example, hotel bills);
  • Goods that you’ve used, or partly used, in the UK or EU (such as perfume or chocolates);
  • Motor vehicles and boats;
  • Goods over £600 in value that will be exported for business purposes (you have to use a form C88 for these);
  • Goods that will be exported as freight and goods that need an export license (except antiques);
  • Unmounted gemstones and bullion;
  • Mail-order goods including internet sales;
  • Not all retailers offer tax-free shopping, so if you want to claim a VAT refund, you’ll first need to find a shop that does and ask the store for a VAT check or refund, which you’ll need to sign in the presence of the shop assistant.
  • Present this form, together with your purchase receipts, ticket, passport and boarding card at specified UK customs offices upon your departure; most ports and airports have one.
  • Once the form has been validated, you can either drop it in a customs post box or take it to a VAT refund office or agency to get your money, either in cash or via a refund to your credit card.

 

Customs & Excise duties

These are charged on things such as alcohol, tobacco, betting, and vehicles as well as the producer of these goods being charged. Excise duties are usually imposed in addition to an indirect tax such as VAT and in the UK, a separate tax form from the VAT one must be filled in. The excise tax is included in the final sale price of the product, meaning that the consumer pays indirectly.

Excise is used as a deterrent towards three broad categories of harm:

  • Health risks from abusing toxic substances e.g. tobacco or alcohol
  • Environmental damage e.g. fossil fuels
  • Socially damaging/morally objectionable activity e.g. gambling or soliciting
  • Import and export taxes in the UK
  • Goods imported into the UK from outside the EU are subject to customs duties. The rates at which such duties are paid are provided by the EU’s Common Customs Tariff and vary widely. Duties payable when exporting to the EU from January 2021 may apply depending on the destination.

 

Capital gains tax

Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value. It’s the gain you make that’s taxed, not the amount of money you receive.

Some assets are tax-free. You also do not have to pay Capital Gains Tax if all your gains in a year are under your tax-free allowance.

Capital gains tax (CGT) is charged on the difference between the sale price and purchase price on a number of different assets. You pay CGT on the gain you receive from these assets, not on the entire sale price. CGT may arise from the sale of a business, shares, an heirloom or a property.

Chargeable assets include:

  • Personal possessions valued at £6,150 or more (excluding vehicles);
  • Real estate that is not your main home;
  • Your main home if you let it out, use it for business or it’s very large,
  • Shares that are not in an ISA or PEP;
  • Business assets;
  • Cryptoassets (in certain cases)

You’re obliged to pay CGT on all UK assets, whether or not you are a resident. However, if you are a resident, you may owe CGT even on your non-UK asset dispositions.

CGT is only payable on your overall gains above your tax-free allowance (called the Annual Exempt Amount). The CGT-free allowance for 2020/21 is:

  • £12,300;
  • £6,150 for trusts

 

How to calculate capital gains tax in the UK

CGT is added to your other taxable income. The sum of all your income from various sources determines which tax band you are in for the current tax year:

  • If your total taxable income is less than £50,000 – that is, you are still in the basic band – your capital gains rate is 10% on most chargeable assets (not including residential property) and 18% on your home;
  • If your capital gains take you into the next highest band then, you pay 20% on most of your chargeable assets and 28% on your home – but only on a portion of your capital gains that pushes your taxable income into the next band.

There are various rates of capital gains tax in the UK.

Business rates

Business rates are based on the Local Government Finance Act 2012 and other acts. Business rates, which are also called non-domestic rates, are a kind of a property tax introduced in England and Wales in 1990. It is a tax on the occupation of non-domestic property and it has increased by 7% since 2010. Tenants such as offices and shops usually pay this directly to the local council if it is not part of the rent paid to the landlord.

All non-domestic property occupiers should register with their local council even if the business rates are included in the rent. Business rates are based on property occupation and don’t reflect the turnover or profits of the business. If a foreign company plans to have business premises in the UK, it is important to consider it in financial planning.
Properties are in a national rating list by rateable value (also RV). This is a valuation of their annual rental value on a fixed valuation date based on assumptions. It is not the current market price or the price agreed in the tenancy agreement. The next revaluation date was postponed to 2017 by the government and currently the valuation data is based on the 2010 assumptions.

For the 2016/17 financial year the national small business rate relief (SBRR) multiplier was 48.4% (0.484) and the standard rate multiplier 49.7% (0.497). Local councils can set a special levy (also called business rate supplement or BRS) on top of the national rates. In Greater London area the BRS is 2% (0.020).

Business rates payments are calculated by multiplying the rateable value by the business rates multiplier, which is set by the government. For example, a small business with a rateable value of £10,000 in England must pay £4840 or 48.4% of the rateable value as a local tax each year.

The local council will send an invoice to businesses registered for business rates in February or March of each year. The invoice is for the following tax year. Businesses might be able to pay their bill in 12 instalments.

A small business is a business occupying a property or properties with rateable value below £18,000 (£25,500 in Greater London). Businesses may also be able to get further business rates relief when their rateable value is below £12,000. Sometimes this is automatic, but businesses may need to apply through the local council.

If you are a small business owner, you might be eligible for rate relief through the government’s Small Business Rate Relief Scheme (SBRR).

In England, you can get a small business rate relief if you only have one property with a rateable value of less than £12,000 (Year 2016/17). If your property has a rateable value of £6,000 or less you will be get 100% relief from business rates. The percent figure will gradually decrease from 100% for properties with a rateable valued between £6,001-£12,000.

You can still qualify as a small business if your property has a rateable value of below £18,000 or £25,500 for greater London. In this case your business rates will be calculated using the small business multiplier instead of the standard multiplier. The standard multiplier for small business in England for 2016-17 is 49.7% (0.497).

Households pay a similar tax called council tax. Anybody over 18 years old and not a full-time student, renting or owning a home in the UK, must pay council tax. Council tax is a tax on domestic property collected by your local council. The money is used to pay for local services such as schools, rubbish collections, road and street lighting.

Stamp duty

The Stamp Duty Land Tax (SDLT) has to be paid if you buy a property or land over a certain price in England, Wales, and Northern Ireland. Currently, the SDLT threshold is £125,000 for residential properties and £150,000 for non-residential land and properties. If you’re purchasing your first home, you could be entitled to a discount or even pay no tax at all if:

  • You complete your purchase on or after 22nd November 2017
  • The purchase price is £500,000 or less
  • You, or anyone you’re buying with, is a first-time buyer

For those in Scotland, the SDLT no longer applies. In its place in the Land and Building Transaction Tax, which you pay when purchasing a property.

When you buy a property in the UK over a certain threshold you must pay Stamp Duty Land Tax (SDLT). SDLT only applies to residential properties valued more than £125,000, or to non-residential land and properties bought for more than £150,000.

Stamp duty is payable in England and Northern Ireland; Scotland has its own Land and Buildings Transaction Tax and Wales operates a Land Transaction Tax. Each country also operates surcharges for people buying buy-to-let investment properties and second homes.

Like income tax, the SDLT is a stepped-rate tax; you can use an online calculator to see how this tax works. You must send your SDLT return to the HMRC and pay the tax within 30 days of completing the sale. There are certain exemptions that allow lowering your UK property tax, for example, if you buy multiple properties.

Council tax

The other form of UK property tax is Council Tax. This local municipality tax is stepped or banded just like income tax. Each municipality assesses the properties in their jurisdiction annually and determines applicable taxes based on the assessed value. A number of conditions affect the council tax rate.

These are locally administered taxes, payable to the local council used to fund local services and infrastructures.

UK tax on rental income

Net proceeds from renting property in the UK are included as income for both residents and non-residents. Special rules apply for renting out a single room, renting out your property for holiday purposes, and if you are an overseas landlord.
Net proceeds are determined as gross rental receipts minus allowable expenses. The UK disallows most capital expenses against rent, including the cost of buying or improving the property, depreciation and some mortgage interest.

UK dividend tax

If you own shares in a UK company you may get a dividend tax payment. You are not required to pay UK dividend tax on the first £2,000 of dividends you receive in the tax year.

Dividend tax rates in the UK are as follows:

Tax band Tax rate dividends over £2,000
Basic rate 7.5%
Higher rate 32.5%
Additional rate  38.1%

 

Road tax

If you drive in the UK you will need to pay car and road tax, including when you register your car with the DVLA (Driver and Vehicle Licensing Agency). The amount varies per vehicle type, with car and road tax in the UK based on factors such as the size of the engine, type of fuel used and CO2 emissions. Consult a table of UK car and road tax rates, where you’ll see payment rates for alternative fuel cars (TC59) are £10 lower than for petrol (TC48) and diesel cars (TC49).
You can pay your car and road tax online. It should be noted that electric cars are exempt from certain UK car taxes based on their low-emission output. The British use the metric system (km/h); read more on UK road rules.
Individuals leaving the UK by air are also obliged to pay a duty, which is typically included in the cost of the air ticket.

How & when to pay UK taxes

Tax year, financial year, accounting period and personal tax year

These all are the different terms a foreigner encounters when starting a business in the UK. The tax year is different for businesses and persons. The financial year in the UK runs from 1 April to 31 March. Government budgeting and tax regulations follow the financial year. The accounting period of a company can be the financial year or the calendar year or any given 12-month period. An accounting period in the UK is normally a 12-month period for which corporation tax is calculated. The personal tax year runs from 6 April to 5 April. The tradition goes back to medieval times and it was originally based on the church year.

The UK tax year dates are set from 6 April of one calendar year to 5 April of the subsequent year. This means that the current tax year is notated as 2020/2021.

You can file your self-assessment return by post or online, although HMRC encourages people to file online. Before you do so, you will need a unique tax reference (UTR) number. This is available on previous tax returns and other documents from HMRC, or at the authority’s website.

Residents are required to notify HMRC of any changes to their tax status by 5 October following the relevant tax year-end. The deadlines for submitting UK tax returns are as follows:

  • 31 October for paper returns;
  • 31 January, if the return is filed online

The UK does not recognize joint filings; each individual has to file their own return.

Tax returns

If you plan to register as a self-employed sole trader, a partner in business partnerships or act as a company director, you will have to file an annual self-assessment tax return with HMRC.

Those registered for self-assessment should receive notification from HMRC in April requesting the tax return to be completed and submitted by either 31 October for paper tax returns or the following 31 January for online returns.

The final payment of any tax due is on the last day of January.

You have to file the return even if you are not liable to pay any tax for that year.

Tax allowances & exemptions

UK residents have tax-free allowances for:

  • Savings interest;
  • Dividends, if you own shares in a company;
  • The first £1,000 of income from self-employment (the so-called trading allowance);
  • The first £1,000 of income from property you rent;
  • A marriage allowance to reduce your partner’s tax if your income is less than the standard personal allowance.

There are a number of areas of income that are exempt from taxation altogether in the UK:

  • Transport costs associated with relocating an employee and close family to the UK at the beginning and end of UK assignments;
  • Gaming winnings from pool betting, lotteries, or games with prizes;
  • Long service awards (within certain limitations);
  • Individual savings accounts (ISAs) for UK residents up to £20,000, and income arising from funds invested in such accounts, such as interest or dividends;
  • Certain pensions, such as those paid to war widows and dependents, as well as similar pension payable under the laws of a foreign country;
  • Certain social security and state benefits, including child tax credit, housing benefit, maternity allowance, employment and support allowance, and attendance allowance.

Tax refunds in the UK

You can be entitled to British tax refunds (rebates) for several reasons, for example if you are employed and had too much tax taken from your pay, if you stopped working, if you took out a pension or life annuity plan, or if you live in one country and have income in another. Moreover, if you claimed personal expenses on your tax return, you may also receive a tax refund in the UK.

Some P800 tax calculations dictate that you can claim a tax refund online (only once your tax has been calculated, which happens between June and October). Once you submit your UK tax return application, you should receive the money within five to six weeks.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.

Before acting on any of the information contained herein, expert legal or other advice should be sought.

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