United Kingdom Tax System

Income tax is the single largest source of government revenue in the United Kingdom, making up about 30 percent of the total, followed by National Insurance contributions at around 20 percent.

More than 25% of all income tax revenue is paid by the top 1% of taxpayers, i.e., taxpayers with the highest incomes, and 90% of all income tax revenue is paid by the top 50% of taxpayers with the highest incomes. The Scottish Parliament has full control over income tax rates and thresholds on all nonsavings and non-dividend income liable for tax by taxpayers resident in Scotland.

The tax year start from April 6 to following April 5. The tax year 2019/20 runs from 6 April, 2019 to 5 April, 2020. Therefore, each source of taxable income requires its own basis of assessment to determine how much of that income is to be assessed to tax in each such tax year.

Each person has an income tax personal allowance, and income up to this amount in each tax year is free of tax. For the 2019-20 tax year, the tax-free allowance for under-65s with income less than £100,000 is £12,500.

Any income above the personal allowance is taxed using a number of bands

Foreign income of United Kingdom residents is taxed as United Kingdom income, but to prevent double taxation the United Kingdom has agreements with many countries to allow offset against United Kingdom tax what is deemed paid abroad. These deemed amounts paid abroad are not necessarily as much as actually paid.

Rental income on a property investment business (such as a buy to let property) is taxed as other savings income, after allowing deductions including mortgage interest. The mortgage does not need to be secured against the property receiving the rent, subject to a maximum of the purchase prices of the property investment business properties (or the market value at the time they transferred into the business).

How much can you earn before you need to pay Income Tax?

In the UK, the tax system is based on marginal tax rates. That means it’s worked out as a percentage of income you earn inside certain thresholds you don’t pay the same amount of tax on everything you earn.

Basic rate £1 – £37,500 20% 7.5%
Higher rate £37,501 – £150,000 40% 32.5%
Additional rate £150,001 and over 45% 38.1%

✓ Residence in UK

  • Spending at least 183 days in the United Kingdom in the year. An individual will be present if they were in the United Kingdom at the end of the day unless they were only in the United Kingdom for either exceptional circumstances or they were between arrival and departure. These exceptions are subject to an additional ‘deeming rule’ that looks at the individual’s presence in the United Kingdom, their ties to the United Kingdom, and their UK residency position in the prior three tax years. Where the deeming rule applies, any of these days in excess of 30 days will be treated as days in the United Kingdom for the 183 count.
  • The individual’s only home is in the United Kingdom for at least 91 days in the year.
  • Working full-time in the United Kingdom for a period of 365 days, and, during that period, there are no significant breaks from UK work and all or part of that period falls within the year; where full-time work is on average 35 hours or more per week over the period.
  • Dying in a tax year when you were previously automatically resident for the previous three tax years and where the individual had a home in the United Kingdom.
  • The savings income nil rate bands are £1,000 for a basic rate taxpayer and £500 for a higher rate taxpayer A starting rate of 0% applies to taxable savings income where it falls within the first £5,000 of taxable income the dividend income nil rate band is £2,000.
  • Exempt Income The following are the main examples of sources of income that are exempt from income tax

(a) Interest or bonuses on National Savings & Investment Certificates
(b) Interest and dividends within an Individual Savings Account [ISA]
(c) Gaming, lottery and premium bond winnings

  • Where income is between £50,000 and £60,000, the charge is 1% of the amount of child benefit received for every £100 of income over £50,000

For example, if you earn £,000 a year, you pay:

  • Nothing on the first £12,500
  • 20% (£7,500.00) on the next £37,500
  • 40% (£4000) on the next £10,000.

Business income

If an individual carries on a trade in their own name (i.e., a sole trader), not using a company or partnership to trade through, they are said to be self employed.

Each year a sole trader will prepare a set of accounts. In computing this accounting profit, the sole trader could have deducted expenditure that HMRC does not allow for taxation purposes. Consequently, a number of adjustments are required to arrive at the trader’s taxable profit.

To calculate a trader’s taxable profits, it’s necessary to start with the profit per the accounts. Certain expenditure that is disallowable for tax purposes is then added back. Receipts in the accounts that are not taxable as trading income are then deducted. Finally, capital allowances must be deducted, which are HMRC’s equivalent of depreciation. This gives the ‘tax adjusted profit’, which is acceptable to HMRC.

Taxable profit is then taxed at income tax rates in the tax year in which the accounting year ends. Specialist advice should be sought for further detail.

For more detail on allowable deductions, see Business deductions in the Deductions section.

Certain smaller unincorporated businesses (self-employed individuals and partnerships) have the option of calculating their trading profit on a simple cash receipts and payments basis, which is essentially a charge to tax on cashflow.

The option is available to eligible businesses with receipts of up to GBP 150,000, and they must leave the scheme when receipts reach GBP 300,000.

All expenses must be incurred wholly and exclusively for business purposes and exclude the costs of entertaining, the purchase of property, and investments. The measures come alongside the introduction of simplified expenses for vehicles, use of home for business purposes, and use of premises for home and business. These measures are optional, and the taxpayer can claim a proportion.

This regime has some restrictions, in particular losses can only be carried forward to set against future trade. Certain trades are excluded from the regime. Those running more than one business are only eligible if all receipts from all businesses fall below the threshold. Interest relief is limited to GBP 500. On the whole, this regime makes the administrative burden of starting a
business much more straightforward; expenses are taxed on the basis of cashflow, leaving individuals free to concentrate on growing their business and not having to worry about paying tax on earnings before payment.

✓ Other Details

Tax returns must be filed, and all outstanding tax paid, by 31 January following the end of the tax year. This filing deadline is brought forward to the 31 October after the end of the tax year for individuals who would like HMRC to calculate their tax due for them (although the tax is still due on 31 January). The UK SA system is moving towards being fully online, and paper returns are now only accepted in limited circumstances.

HMRC have recently issued a consultation document on the simplification of the personal tax system, with ideas such as online tax accounts and pre-filled returns.

The deadline for a non-UK resident notifying HMRC of a disposal of UK property or an interest in a property-rich company is 30 days after the completion of the sale. Penalties will be charged if this deadline is missed, even if no tax was due. A similar provision was introduced for UK residents disposing of UK properties not covered by CGT main residence relief from 6 April 2020.

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