Social Security & Taxation
Taxes in the UK
A Word of Caution
As in most places around the world, taxes in the UK are a complex topic. The intricacies of taxation become even trickier when you take the aspect of residence for tax purposes into account. Entire books have been written about the subject of doing your taxes in the UK. For obvious reasons, we cannot give such in-depth information here. Nor can our brief introduction to taxes in the UK replace the professional advice of a tax consultant.
We do, however, provide you with an overview of the UK tax system. We introduce you to some basic facts, as well as explain some key terms of particular relevance for foreign residents. With some general guidance to taxes in the UK, you can then decide if you’d better call upon a tax advisor for help.
Furthermore, when we talk about “taxes in the UK”, we refer to personal income tax for workers, employees, and self-employed residents. Inheritance tax and corporate taxation are different matters, which we don’t cover. If you have any questions on such taxes in the UK, please call a specialist for advice.
Basic Info on UK Taxation
Second, the British tax year runs from April 6 to April 5 of the following year. Unlike in other countries, the fiscal year is not identical with the calendar year. This may be important for people moving to or departing from the UK in the middle of the tax year. If you have to file your taxes in the UK, your tax return is either due on October 31 after the end of the fiscal year (paper claim), or by January 31 (online form).
NI Registration and Tax Code
When you arrive in the UK and take up employment, you need to obtain a so-called National Insurance number first. The NI number is mostly used for purposes concerning social security in the UK. It also indicates if you are gainfully employed or a self-employed person. As such, you may have to pay taxes in the UK, depending on your actual income.
Moreover, when you are an employee and have never worked in the UK before, your new company’s HR department should give you a form to fill in. This will contain information essential for paying taxes in the UK (e.g. to work out which personal allowance you are entitled to). With the help of this information, your employer – or their tax consultant – can assign you a personal tax code.
The tax code consists of a four-digit combination of various figures and letters, e.g. 117L or K497. It shows up on the payslips you receive, and it implies how many taxes in the UK are due. Your tax is deducted directly from your salary every month on a PAYE (pay-as-you-earn) basis. If you don’t have any other kind of income, you don’t even have to file a tax return. However, you need to inform the HR department and/or HMRC of all changes in income or personal circumstances. Then you will receive a new tax code as needed.
Taxable Income in the UK
In addition to your wages or salary, there are several other kinds of income subject to taxes in the UK. They includes, for example:
- company benefits (e.g. cash bonuses, inducement payments, severance payments, company cars, medical insurance, schools fees for children, company housing, etc.)
- income from self-employed work
- interest from savings
- dividends on company shares
- income from rental property
- some UK state benefits (e.g. Jobseeker’s Allowance)
Other forms of income may be exempt from taxes in the UK, e.g.
- government benefits like Disability Allowance or Maternity Allowance
- rental income of less than £ 4,250 per year if it arises from having a lodger in the family home
- interest on specific savings certificates
- tax credit for UK families (Child Tax Credit, Working Tax Credit)
Broadly speaking, income subject to taxes in the UK means all your income worldwide. In reality, this does not always apply: Please check the section on residence and taxation for further details.
The Self-Assessment Tax Return
In addition to the geographical source of your income, other aspects determine whether or not you have to file your taxes in the UK. The latter is called a Self-Assessment tax return, or Self-Assessment for short. Whether you are required to complete one depends on factors such as the total amount of your income, what kinds of income you earn, your profession or position within the company, etc.
Here are some of the most common cases in which a Self-Assessment becomes necessary:
- You earn more than £100,000 a year.
- You are a company director.
- You are a religious minister of any faith.
- You draw income from savings, investment, and property.
- You have income from settlement, estates, or trusts.
- You need to pay Capital Gains Tax. For instance, this sort of taxes in the UK is due on gains from selling valuable artwork or jewelry, or any property that is not the family home.
- You want to claim annual expenses of more than £2,500 a year.
- You have foreign income subject to taxes in the UK.
- You are not counted as “resident” or “ordinarily resident” for tax purposes.
- You are not “domiciled” in the UK and want to claim remittance.
We will clarify on the last page of this overview what “residence”, “domicile”, or “remittance basis” means. For now, we will dive into topics like tax rates and tax deductions, as well as more tips on doing your taxes in the UK when you are self-employed.
We do our best to keep this article up to date. However, we cannot guarantee that the information provided is always current or complete.