You can blame Napoleon. Some 220 years ago, British Prime Minister William Pitt the Younger was forced to introduce a temporary tax on incomes to finance the wars against Napoleonic France. That was in 1799 – and since then, income tax has become a fact of life for most people living in the United Kingdom. The reality is that as much as we hate paying income tax – governments love it.
Today, money raised from income taxes pays approximately one third of government expenditure. If you choose to live or work in the United Kingdom, taxes are a part of life. Here’s a complete overview on paying taxes and the rules and rates that apply to you whether you are just working there temporarily, are returning home after working overseas, or are planning to make the UK your permanent home.
It's important to remember too that tax laws and regulations change regularly, and you should seek the advice of a professional depending on your individual situation.
An overview of the UK tax system
As you would expect for a nation that has had income taxes and other taxes in place for more than two centuries, the UK tax system is complex and has developed over the decades. When introduced first, only a small proportion of income earners paid tax. Fast forward to the end of the 19th century, and one in five Britons were paying income tax. Now, it is paid by most workers and the system has been simplified to a large extent. As a general rule, what you pay depends on how much you earn and whether you’re a resident or not of the country.
Since the end of January 2020, the United Kingdom is no longer part of the European Union. While many of the details of the future relationship between the UK and the EU still have to be worked out, Brexit will have little impact on most taxpayers. What you pay in tax depends on your tax residency status and individual circumstances. And if you choose to live in Scotland, your tax bill will also be affected.
As a general rule, you’ll pay taxes on what you earn – income tax; on what you use – consumer taxes; on where you live – property taxes; on what you spend – Value Added Tax; on your car, or on what you inherit. The general principle is that the more you earn or spend, the more you’ll pay.
And in any dealings with the UK government, when it comes to taxes or your finances, you will need to register your details. And the first thing you’ll need is a National Insurance number.
What is National Insurance?
National Insurance is a government scheme which requires those who are living or working in the UK to make regular payments towards benefits. These payments are known as National Insurance Contributions (NIC) and the amount you pay depends on how much you earn and whether you’re employed or self-employed. Paying National Insurance entitles you to state benefits, which vary depending on whether you’re employed, self-employed, or making voluntary contributions.
You must pay National Insurance if you are aged 16 and over and working in the UK, providing your earnings are more than a certain level.
If you’re employed, NICs are taken automatically from your monthly or weekly pay.
If you are registered as self-employed, you’ll have to arrange NICs yourself.
What’s a National Insurance number?
Your National Insurance number acts as your own personal account or tax number, allowing you to track the amount you have contributed and any benefits to which you are entitled.
You are legally required to apply for a NI number if you start work in the UK or claim any benefit.
You NI number will include two letters, six numbers and an additional letter, for example AA 000000 Z.
If you have children younger than 16 years living in the UK, each child will be registered for national insurance automatically and will receive a NI number before their 16th birthday. Parents with young children are also entitled to claim UK child benefit.
It also acts as a reference number for accessing any part of social security system, for example, healthcare.
The only people you should give your NI number to are:
- Her Majesty’s Revenue Commissioners
- Any Jobcentre Plus if you claim jobseeker’s allowance
- Your local council
For many benefits, your entitlement depends on your record of national insurance contributions.
How to get an NI number?
If you don’t already have a NI number, you must apply for one:
- As soon as you start work
- As soon as you or your partner claims any UK social security benefit
To apply for an NI number, you must be:
- Older than 16 years
- An official resident in Great Britain (England, Wales or Scotland)
You can apply for an NI number by calling the Jobcentre Plus NI Allocation Service Helpline on 0845 600 0643 when you are based in the UK. They will first check whether you need a number and then arrange for you to undertake an evidence of identity interview. Jobcentre Plus are located in most large towns and cities throughout the UK.
What’s an evidence of identity interview?
An evidence of identity interview is designed to prove that you are not acting under a false identity. The interview will usually be one-to-one – unless, for example, you need a translator. The interview will mostly consist of questions about your background and circumstances.
You will typically have to fill in an application form and show several forms of identification, such as your passport or identity card, residence permit, birth or adoption certificate, marriage or civil partnership certificate and driving licence.
If you don’t have any official documents, you must still apply for a NI number and attend the interview. In some cases, you may be able to prove your identity based on the information you provide during the interview, for example, by referring to people who can confirm facts about you, such as a community group in which you’re actively involved.
You can get any questions answered on the process of applying for a NI number, your NICs, or your NI benefits by visiting the UK government website at www.gov.uk, or more specifically at www.gov.uk/national-insurance.
How much in NICs will you pay?
This is highly complex and literally changes depending on your occupation, your employment status, whether you are paid weekly, monthly or make annual contributions, or how your individual situation varies. You can find information specific to your circumstances by checking the government website at www.gov.uk/national-insurance, or seeking professional help at a government Jobcentre Plus, located in most large towns and cities throughout the United Kingdom.
The UK tax year
The tax year dates are set from April 6 of one calendar year to April 5 of the subsequent year. This means that the tax year is notated as 2019/20 up to April 5, 2020, and then switches to 2020/21 on April 6, 2020, for example.
How long you’re living in the UK or when you started work can affect how much tax you’ll pay. And that is linked to your tax residency status.
Your tax residency status
In the UK, all individuals are subject to the same tax rate regardless of their residency status. However, residency status does dictate what sources of income must be included in your taxes. An individual who is a UK resident for tax purposes will be taxed on his or her worldwide income, with allowances given to prevent double taxation from certain countries. Non-UK residents, on the other hand, are taxed only on income earned within the UK.
So how do you determine your tax residency status?
According to the UK government, there are several ways to determine if you are resident of the UK for tax purposes.
• Automatic rule 1: Live in the UK for most of the year
The easiest automatic rule to determine residency is if you stay in the UK for at least 183 days during a tax year. If yes, then you are classed as a UK resident. If not, there are still other ways to be counted as a resident.
• Automatic rule 2: Buy a house in the UK
If you own a home and stay in it for at least 91 consecutive days – 30 of which must be in the tax year under consideration – then you may be classed as a tax resident for that year. For this rule to apply, the individual must also live in a non-UK home for fewer than 30 days in the tax year under consideration, which do not need to be consecutive to apply.
• Automatic rule 3: Work in the UK
If you work in the UK for 365 days with no significant break during this time, you may be a tax-resident of the UK. At least 274 of the days must be in the same tax year under consideration. A working day is considered to be one where you work for at least three hours per day.
There are, of course, ways you can automatically be discounted for the automatic rules two and three.
If you were a tax resident for at least one of the last three tax years and spent 16 or fewer days in the UK during the current tax year, you are not a UK resident regardless of the above rules. The same is true if you were not a tax resident for any of the last three years and spent fewer than 46 days in the UK. The window of allowable time is extended to 91 days if you worked full-time overseas.
If you don’t pass the automatic rules, you may still be a tax resident
One final way to be considered a tax resident of the UK is if you have sufficient ties. Ties are anything that forms a significant association between you and the UK, such as family, your accommodation, work, or a stay of at least 90 days.
If you are in the UK for 16–45 days and you have at least four demonstrable ties, you can be considered a UK tax resident. The number of needed ties goes down depending on the length of your stay.
What income is taxable?
Residency status determines what a person must include as income when determining his or her tax band. Non-UK residents are only taxed on income earned within the UK, including capital gains, rental income, and dividends. Individuals who are residents of the UK for tax purposes are taxed on their worldwide income, including foreign investments and savings interest, rental income on overseas properties, and income from foreign pensions or a UK pension for those retiring in the UK.
In the UK, many of the various taxes for which an individual will be liable – with the exception of Value Added Tax – will in some way be related to income taxes. National Insurance Contributions will be tied to tax bands, so too potential liabilities for Capital Gains Taxes.
The basic formula for taxes is to sum your personal income and benefits, subtract your personal allowance, and then pay the appropriate rate on the difference.
For the 2019/20 and 2020/21 tax years, all individuals are allowed a personal allowance of £12,500 (Dh59,300) making income below this level tax exempt. Income tax rates are stepped depending on your income – and where you live. Residents of Scotland pay different rates – more on that in a moment.
Income tax in England, Wales and Northern Ireland
There are three rates of income tax for those who live and work in England, Wales and Northern Ireland in 2020/21:
• Basic rate
This is the lowest rate of income tax paid above the personal allowance of £12,500 (Dh59,300). It is set at 20 per cent on income earned between £12,501 (Dh59,313) and £50,000 (Dh237,235) – meaning you’ll pay tax on £37,500 (Dh177,290).
• Higher rate
This is the middle tier of income tax. It is set at 40 per cent of income earned between £50,001 (Dh237,238) and £150,000 (Dh711,688).
• Additional rate
This is the top rate of income tax paid by high earners. It is set at 45 per cent on income earned above £150,000 (Dh711,702)
Income tax in Scotland
Since the 2018/19 tax year, the Scottish government has operated a different income tax regime. It has different rates, different bands and different thresholds. The following rates apply for the 2020/21 tax year for residents of Scotland:
• Starter rate
This is set at 19 per cent and applies on income earned between £12,501 (Dh59,303) and £14,585 (Dh69,168).
• Basic rate
This is set at 20 per cent and applies on income earned between £14,586 (Dh69,172) and £25,158 (Dh119,361).
• Intermediate rate
This is set at 21 per cent and applies on income earned between £25,159 (Dh119,365) and £43,430 (Dh206,115).
• Higher rate
This is set at 41 per cent and applies on income earned between £43,431 (Dh206,119) and £150,000 (Dh711,702).
• Additional rate
This is set at 46 per cent and applies on income earned above £150,000 (Dh711,702).
Other tax liabilities in the UK
If you thought that income tax and National Insurance Contributions were your only tax responsibilities due as a resident of the UK, then you’ll quickly come to realise that most activities in the UK come with a tax burden.
Council Tax is an annual fee you pay to your local council and varies on where you live. It is commonly called “poll tax” or “rates”, and the money raised is used by your council or local government to fund local services – policing, fire and community care costs, some social services, roads, some school costs and services such as libraries and protecting the environment or rubbish collection.
It is an annual fee and is usually paid in 10 monthly installments, followed by two months of not making any payments.
How much Council Tax you pay depends on:
- Your personal circumstances
- How much the property you’re living in is worth
- How much the council needs to fund its services
- Even if you are only renting property, you must still pay Council Tax.
You can find out more information by visiting www.gov.uk/find-local-council, www.mygov.scot, or www.ndirect.gov.uk.
Can you get a reduction on Council Tax?
You might be able to get a reduction on your Council Tax if:
- You’re on a low income
- You’re a student or you live with students
- You live alone or are the only adult in your home
- You get certain benefits, such as Jobseekers Allowance, Income Support, Pension Credit, Employment and Support Allowance and Universal Credit.
- You or someone you live with has a disability and as a result needs to live in a larger home
- You’re severely mentally impaired or living with someone who is mentally impaired
- You’re a caregiver in Scotland, where you’ll be exempt from Council Tax between the ages of 18 until you turn 26
- You live in certain counties in England and Wales and are a caregiver
- You’re a member of the armed forces, depending on your circumstances
- You’ve moved into a care home or hospital
- You're in prison
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.
Other taxes on property
If you intend to purchase a property in the UK, you will also face other taxes and duties – things like Stamp Duty or Land Transaction Tax, depending on where you are buying.
Stamp Duty is collected on a pro-rata scale – the more expensive the property, the higher the stamp duty. It’s at 1 per cent for properties above £125,000 (Dh597,600). In properties where the sale price is up to £250,000 (Dh1,195,000), stamp duty is 2 per cent of the purchase price. It then rises to 5 per cent on properties worth £925,000 (Dh4,423,000); 10 per cent for properties valued at £1,500,000 (Dh7,175,000), and 12 per cent on the remainder.
In Wales, you will need to pay Land Transaction Tax on properties over £180,000 (Dh860,000). This is calculated on a sliding scale based on 3 per cent for the first £180,000 (Dh854,275) if the property is for buy to let, otherwise, that portion is free of tax. It then rises to 3.5 per cent on the balance up to £250,000 (Dh1,186,000) – or 6.5 per cent on buy-to-let properties; then 5 per cent up to the £400,000 (Dh1,898,000) threshold – or 8 per cent on buy-to-let properties, with the rate rising to 7.5 per cent on the balance above that – or 10.5 per cent on buy-to-let properties. Buy-to-let properties are considered to be second or additional properties purchased in Wales.
Capital gains tax in the UK
Capital Gains Tax (CGT) is charged on the difference between the sale price and purchase price on chargeable assets. CGT is payable on the profitable sale of a range of assets, whether you sell a business, shares, an heirloom or a property.
Chargeable assets include
- Personal possessions valued at £6,000 (Dh22,040 or more, excluding vehicles)
- Real estate that is not your main home
- A main home if you let it out or used it for business or it’s very large
- Shares that are not in a registered savings of pensions plan
- Business assets
CGT must be paid 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 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 £46,350 (Dh219,964) – that is, you are still in the basic band – your capital gains rate is 10 per cent on most chargeable assets and 18 per cent on your home.
If your capital gains takes you into the next highest band, then you pay 20 per cent on most of your chargeable assets and 28 per cent on your home – but only on a portion of your capital gains that pushes your taxable income into the next band.
UK inheritance tax
Inheritance tax in the UK is a one-time payment paid on the value of a deceased’s estate if above a set threshold, currently £325,000 (Dh1,543,108). Any value higher than the threshold is taxed at 40 per cent. If you give more than 10 per cent of your inheritance to charity, however, the rate is reduced to 36 per cent.
Inheritance tax on the estate of a deceased if it is worth over £325,000
There are other ways to reduce your inheritance tax liability. If you are married or in a civil partnership, your partner can inherit your entire estate without facing an inheritance tax bill. Should you wish to pass on your assets before you die, you can gift them to your partner.
Car and road tax in the UK
If you drive in the UK, you will need to pay car and road tax, including when you register your car with the Driver and Vehicle Licensing Agency. You can check its website at www.gov.uk/driving-and-transport. 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.
UK self-employment tax and corporation tax
Individuals who are self-employed must register with Her Majesty’s Revenue Commissioners. Most corporations in the UK are taxed a 20 per cent rate on their net profits, and in most cases must file a separate company tax return. Allowable expenses include normal business operation expenses, office supplies and if operated from a designated space in a person’s home, expenses may include a prorated portion of household expenses. Individuals are also allowed a prorated amount of vehicle expenses (but not commuting expenses) if they use their personal vehicle for work purposes.
Tax levied on corporations' net profits
One benefit of operating certain business structures, such as a Limited Company, is the ability to take money out of the company in the form of dividends. Though certain rules apply, the tax rate for dividends are generally lower than the typical band rates for income tax.
The applicable UK corporate tax rate depends on the level of company profit, applicable to profits from doing business as a limited company, as a foreign company with a UK branch or office, or if you are a club, co-operative or other unincorporated associate (sports club or community group).
Value Added Tax
VAT (Value Added Tax) or sales tax applies to almost all goods and services.
The standard commercial tax rate in the UK is 20 per cent, although certain goods and services are subject to lower UK commercial tax rates. VAT exemptions are also offered on certain goods such as long-term medical supplies.
Filing your UK tax declaration
If you are an employee in the UK, your employer will make regular contributions for your income tax liability and National Insurance contributions. However, if you are a resident of the UK and need to declare worldwide income, you will need to file a self-assessment form.
Most tax is automatically deducted from your salary, however, if you have any additional sources of income, including foreign earnings, you’ll need to report it at the end of the tax year (5 April).
Self-assessment tax in the UK
You will need to file a self-assessment if you have any sources of income not subject to employer PAYE (Pay As You Earn) contributions – for example, rental income from a property you own, or if you are in the higher or additional rate income tax bands.
Tax refunds in the UK
You can be entitled to UK tax refunds – a rebate – 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. If you claimed personal expenses on your tax return, you may also receive a tax refund.
Once you submit your UK tax return application, you should receive the money within five to six weeks.