The UK tax system

If you are new to the country, the UK tax system may seem quite complex at first glance. Here is an introduction to the basic types of UK taxes with tips on how to calculate and pay them.

‍HM Revenue and Customs (HMRC) is responsible for administering and collecting taxes in the UK.HMRC administers the following central taxes:

• Income tax
• Property taxes
• Capital gains
• Inheritance tax
• Value Added Tax (VAT)
• Corporation tax
• Insurance premium tax
• Stamp, land, and petroleum revenue taxes
• Environmental taxes
• Climate change and aggregates levy and landfill tax
• Customs duty;
• Excise duties

Many of these are progressive taxes, meaning that those with higher incomes pay a higher rate. UK tax rates are the same for everyone regardless of their residency status. However, a UK resident is taxed on their worldwide income, with allowances to prevent double taxation from certain countries, whereas Non-UK residents only pay on income earned within the UK.

The British fiscal system applies throughout the UK: England, Scotland, Wales, Northern Ireland, and other British territories, including the islands around the coast and oil drilling platforms in territorial waters.

Before you can pay taxes in the UK, you need a National Insurance number. The NI number acts as your own personal account or tax number. It is also used to pay National Insurance contributions to qualify for certain benefits and the State Pension. You can apply for a National Insurance number if you live in the UK and have the right to work in the UK.

You can find your National Insurance number:

• on your payslip
• on your P60
• on letters about your tax, pension or benefits
• in the National Insurance section of your personal tax account

If you do not already have the NI number, you need to apply for one when you start working. You can start work without a National Insurance number if you can prove you have the right to work in the UK.

Now, let’s talk about the main types of taxes. Basic UK taxes include income taxes, property taxes, capital gains, UK inheritance taxes, and the value-added tax (VAT). We will also touch upon the corporation tax.

The income tax is your contribution to the UK government’s spending on things like public transport, the healthcare and education system, etc. The amount of taxes depends on how much you earn. For the 2021/22 tax year, all individuals making income below £12,570 are exempt from paying the income tax.

The income tax falls under HM Revenue and Customs (HMRC) which taxes income earned in the UK as well as the worldwide earnings of any UK resident.

You pay tax on:

• money earned from your employment
• profits you make if you’re self-employed — including from services you sell through websites or apps
• some state benefits
• grants and support payments made to you or your business because of coronavirus
• most pensions, including state pensions, company/personal pensions, retirement annuities
• benefits you get from your job
• income from a trust
• rental income
  

Income taxes are collected in different ways depending on the type of income and whether you’re employed, self-employed or unemployed:

• For salaried employees — Pay-as-You-Earn (PAYE). If you’re on the payroll of the company where you work, the income tax you owe will automatically be taken off your salary before you receive it.
• For independent professionals or freelancers — Self-assessed UK tax return
• Deductions at source, where tax is taken from the bank/building society interest before the interest is paid to you
• In some cases, one-off payments
  

You can estimate how much income tax you should pay for the current tax year here.

This calculator tells your take-home pay if you do not have any other deductions (e.g. pension contributions or student loans).

You can get an estimate online if:

• you’re a pay as you earn (PAYE) taxpayer
• you have an income other than from your self-employment or state benefits, such as State Pension
• you don’t contribute to a pension scheme through your employer
• you don’t have a student loan to pay
  

For independent professionals or freelancers

You can pay self-assessed income tax in the UK in one of two ways:

• By downloading. printing and filling in form SA100.
• Online. The service also allows you to refer to previously submitted tax returns or those not yet completed, check your details, and print tax calculations. You will have to enroll for the online service, using your unique taxpayer reference (UTR) and activating it with a code sent by post.

You may also need to fill in other forms — so-called supplementary pages:

• Employees or company directors: SA102
• Self-employment: SA103S or SA103F
• Business partnerships: SA104S or SA104F
• UK property income: SA105
• Foreign income or gains: SA106
• Capital gains: SA108
• Non-UK residents or dual residents: SA109

There are two forms of property tax in the UK.

1. Stamp Duty Land Tax (SDLT)

You pay SDLT when you buy a property in the UK over a certain threshold. Starting from 1 October 2021 the threshold is £125,000. If you’re buying your first home (starting from 1 July 2021) you do not have to pay SDLT if the property is £300,000 or less. Stamp duty applies in England and Northern Ireland; Scotland has its own Land and Buildings Transaction Tax and Wales operates a Land Transaction Tax. Each country also surcharges for 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 much you need to pay. The tax must be paid within 30 days of completing the sale by sending your SDLT return to the HMRC. There are certain exemptions that allow lowering your UK property tax, for example, if you buy multiple properties.

2. Council Tax

You’ll usually have to pay Council Tax if you’re 18 or over. A full Council Tax bill is based on at least 2 adults living in a home. Spouses and partners who live together are jointly responsible for paying the bill.

Before paying, you’ll need to know 3 things:

• the valuation band for your home in England and Wales or in Scotland
• how much your local council charges for that band
• whether you can get a discount or exemption from the full bill
  

The cost is usually split into 10 monthly payments. You can pay your Council Tax online or make cash payments at post offices, banks, newsagents and convenience stores.

Capital gains tax (CGT) is calculated from the difference between the sale price and purchase price on a number of different assets. It’s the gain you make that’s taxed, not the amount of money you receive.

Chargeable assets include:

• Personal possessions valued at £6,150 or more (excluding cars)
• Real estate other than 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)
  

Non-residents must also pay CGT on all their UK assets. However, if you are a resident, you may owe CGT even on your non-UK asset dispositions.

You only pay CGT on your overall gains above your tax-free allowance (the Annual Exempt Amount). The CGT-free allowance for 2021/22 is:

• £12,300
• £6,150 for trusts
  

The CGT is added to your other taxable income. To calculate the CGT, you’ll need to determine which tax band you are in for the current tax year:

• If your total taxable income is less than £50,000 (basic band) — your capital gains rate is 10% on most chargeable assets (except residential property) and 18% on your home.
  

• If your total taxable income is more than £50,000 (the next highest band) — 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).

The inheritance tax (IHT) is a tax on the value of a deceased’s estate, including all property, possessions and money. The tax needs to be paid if the estate is above the £325,000 threshold. Any value higher than the threshold is taxed at 40%.

So, for example, if the estate is worth £600,000 and the tax-free threshold is £325,000, the inheritance tax will be 40% of £275,000 (£600,000 minus £325,000).

There is no need to pay the IHT if:

• the estate is valued below the £325,000 threshold (the nil rate band)
• you leave everything above the threshold to your spouse/partner, or an exempt beneficiary (e.g. a charity)

The threshold can increase to £500,000 if you give away your property to your children or grandchildren.

Value-Added tax (VAT) applies to almost all goods and services. You may also need to pay the VAT for the goods that you bring to the UK if you exceed the set limits: if the total of imported/ordered from outside the UK items does not exceed £135, you pay VAT at the point of sale.

The standard VAT rate in the UK is 20%, although certain goods and services are subject to a reduced rate. The GOV.UK lists children’s car seats and home energy as examples of items that are taxed at 5%. VAT exemptions are also available on certain items — long-term medical supplies, postage stamps, financial and property transactions, etc.

Corporation tax is levied on profits from doing business as:

• a limited company
• any foreign company with a UK branch or office
• a club, co-operative or other unincorporated association, eg a community group or sports club

Taxable profits include trading profits, rental income from property, investment gains, as well as other chargeable gains.

If the company is based in the UK, it pays Corporation Tax on all its profits from the UK and abroad. If the company is based abroad but has an office or branch in the UK, it only pays Corporation Tax on profits from its UK activities.

In some cases, it can be more beneficial to register your business as a private limited company (Ltd) or a limited liability partnership (LLP) instead of trading as a self-employed professional. This may reduce the corporate tax rate: sole traders and freelancers pay personal income tax at progressive rates up to 45%. Limited companies, on the other hand, pay corporation tax at 19%. They may even be eligible for a lower rate of 10% if they can attribute profits to the exploitation of patents. Specific corporation taxes apply in four cases: for oil and gas regimes, life insurance companies, the banking sector, and companies that operate qualifying ships.

Here is what you need to do to work out, pay and report your tax.

1. Register for Corporation Tax. Unincorporated associations must write to HMRC.
2. Keep accounting records and prepare a Company Tax Return to work out how much Corporation Tax to pay.
3. Pay Corporation Tax or report if you have nothing to pay by your deadline (usually 9 months and 1 day after the end of your accounting period).
4. File your Company Tax Return by your deadline (usually 12 months after the end of your accounting period).