How much tax do you pay in the U.K.?
It may be hard to understand the topic if you’re just learning about Income Tax. But knowing how Income Tax and Personal Allowance work will help you budget and ensure you’re paying the right amount of tax.
Taxes on personal income
If you’re a resident and domiciled in the U.K., you will have to pay income and capital gains tax on worldwide income.
If you’re not a U.K. tax resident, you will typically pay tax on your U.K.-based income. But generally, you won’t pay any capital gains tax, apart from U.K. property or gained interest.
Non-residents who own residential property in the U.K. pay a 28% capital gains tax. Any property sold by foreign residents, including any shares in ‘property-rich’ non-U.K. businesses, is subject to capital gains tax. This rule came into effect in April 2019.
If you use the asset intending to do business in the U.K. through an agency, any revenue is subject to U.K. capital gains tax. You may also be subject to capital gains tax if you become a non-U.K. resident but return within five years. This is the temporary non-residence rule.
When you are a resident but not domiciled in the U.K., you may be eligible for the remittance basis of taxation. This way, your non-UK investment income and capital gains are only taxed if you remit to or use it in the U.K.
Personal income tax rates
There are three tax bands. If you are in the highest tax band, you will pay a higher income tax than someone in the basic-rate tax band. Your earned income and investment earnings will be taxed after deducting your personal allowance.
You can calculate the taxable income by subtracting your personal allowance from your earned income. The personal allowance is £12,570 tax-free. Most people can use this allowance unless they use a remittance basis or their income is more than £125,000.
I want to know more about US taxes abroad
The remittance basis of taxation
The key points of the remittance basis of taxation are as follows:
Since 6 April 2017, people who’ve resided in the U.K. longer than 15 of the last 20 tax years will pay all taxes. After this period, you can no longer use the remittance basis. You will pay tax on worldwide income and be charged U.K. inheritance tax. Your child will be deemed domiciled once they reach adulthood.
Formerly domiciled residents (FDRs)
If you’ve left the U.K. but want to return after choosing a domicile elsewhere, you have a one-year grace period to become a U.K. resident before your worldwide assets are hit with inheritance tax.
To be recognized as a non-U.K. domicile, you must prove your intent to leave the U.K. to HMRC.
Anyone domiciled outside of the U.K. can choose to pay tax on investment income outside the U.K., non-U.K. capital gains, and offshore income only if they’re remitted to the U.K. Any income that isn’t sent to the U.K. will not be taxed. You should seek professional advice if you plan to use overseas funds as collateral for loans taken to the U.K.
You must meet the following criteria to be eligible for the remittance basis of taxation:
- If you are a U.K. resident but not domiciled and pay the annual remittance charge, you must submit a claim to use the remittance basis.
- The remittance basis automatically becomes effective if you’ve unremitted overseas assets of less than £2,000 in one year.
- The same applies if you’ve been a U.K. resident for less than seven out of the previous nine years, or you’re under 18, without U.K. income and gains, and don’t remit any foreign payment.
If you claim the first category outlined above, you will no longer be eligible for the tax-free personal allowance and the capital gains tax annual exemption.
In the second and third categories, you will be taxed on a remittance basis but won’t lose your personal allowance or pay the remittance basis charge.
Remittance basis charge
The remittance basis charge is suitable if you want to claim the remittance basis but have resided in the U.K. for at least seven out of the past nine years and are over 18.
To claim this, you will need to pay £30,000 each tax year to be eligible for the remittance basis of taxation. But if you’ve been non-domiciled and resided for 12 out of the previous 14 years, you will have to pay £60,000.
Your foreign income and gains will be taxed if you send them to the U.K. Statutory rules apply to decide how income is treated from a mixed fund (income from a variety of capital/foreign income/gains and/or from different tax years).
You may also face tax charges for any assets you bring to the U.K. funded with foreign income.
But there may be exemptions for personal assets worth less than £1,000 and assets brought for repair or public display.
Business investment relief
A business investment relief is available for any U.K. resident and non-domiciled persons wanting to conduct business. It allows you to make non-taxable remittances to finance a company in the U.K.
This rule also applies to investments. They can include commercial property, shares, securities, or loans.
Currently, the U.K. is favored by non-doms to both begin and continue to build a business. You should be careful when you remit any money to use toward this because you have to meet strict criteria to be eligible for the relief.
Alternative minimum tax
Currently, there are no other options for minimum tax in the U.K.
Taxation of children
Any child under 18 faces taxes on their income unless they’re gifts. If the amount exceeds £100, then the parent will be taxed.
As a parent, you may be eligible for a child tax credit if you’re the primary carer. A child tax credit is not taxed and is separate from the claimant’s income tax liability.
How much tax will I pay?
There are three tax bands in England, Wales, and Northern Ireland.
The basic rate is 20% for earnings between £12,571 and £50,270. From April 2023, this will be reduced to 19%. The higher tax rate is 40% for income between £50,271 to £150,000. The last rate called the additional rate, is 45% for earning above £150,000.
This means as you earn more, your income tax also increases.
Is there a local income tax in the U.K.?
No, in the U.K., local taxes don’t apply.