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Taxes in the UK
- When taking up employment in the UK, your tax is directly deducted from your salary on a pay-as-you-earn basis. If this is your only source of income, you don’t even need to file a tax return.
- It’s important to keep all your records, especially when you’re self-employed. In the latter case, you have to keep your business records for at least five years.
- UK taxation knows many different concepts from “residence” to “ordinary residence” over to “domicile”. It’s important to know the difference between these as you can claim remittance basis if you’re not an ordinary resident or domiciled 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. For obvious reasons, we cannot give you information on every aspect of the UK taxation system. 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.
To Start Off: Basic Information on Taxation in the UK
Second, unlike in many other countries, the British fiscal year is not identical with the calendar year, but rather runs from 6 April to 5 April of the following 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 31 October after the end of the fiscal year (paper claim), or by 31 January (online form).
Acquiring Your NI and Personal 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.
If 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 (for example to work out the 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 much tax is 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.
What Counts as 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 include, 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
- income from rental property
- some UK state benefits (e.g. Jobseeker’s Allowance, Carer’s Allowance)
Other forms of income may be exempt from taxes in the UK, such as:
- the first 5,000 GBP of dividends from company shares (as of 2016)
- interest from savings under your savings allowance
- government benefits like Disability Allowance or Maternity Allowance
- rental income of less than 7,500 GBP 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 on the last page of this article for further details.
Do You Need to File a 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 are self-employed.
- You earn more than 100,000 GBP a year.
- You are a company director.
- You are a religious minister of any faith.
- You draw an annual income of 2,500 GBP or more from savings, investment, or property.
- You have income from settlement, estates, or trusts.
- You need to pay Capital Gains Tax. This sort of taxes in the UK is levied on the profits of selling valuable artwork or jewelry, or any property that is not the family home (such as inherited property, land, and business premises).
- You want to claim annual expenses of more than 2,500 GBP.
- 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.