British taxes: understanding the UK tax system

The UK tax system may seem complicated to newcomers. However, once you know which taxes you may need to pay, the process becomes much simpler. Read on to learn about the different taxes you may come across when living in the UK, an explanation of each, and whether they will affect you. You’ll also find a brief overview of rates, refunds, and where to get advice.

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Tax system in the UK

There is a range of taxes in the UK that fund public spending. In 2022-23, the UK government raised around £1 trillion in taxes, most of which was sourced from income tax, national insurance, and value-added tax (VAT).

The government’s fiscal year runs from 1 April to 31 March – although most companies align their tax year with this, they may choose different dates. Meanwhile, the tax year for individuals is between 6 April and 5 April.

The following authorities oversee different taxes:

• HM Revenue and Customs (HMRC)
• Revenue Scotland
• Welsh Revenue Authority
• Land & Property Services (Northern Ireland)
• Local governments

Latest UK tax news – October 2024

In Rachel Reeves’s 2024 Autumn statement, she announced the following developments:

• Changes to National Insurance – Employers’ national insurance contributions will rise to 15% from April 2025. Read more in our article on income tax in the UK.
• Capital gains tax increase – The lower rate will increase from 10% to 18% and the higher rate from 20% to 24%.
• Draught duty – The cost of a pint of beer is expected to “fall by 1p” as draught duty is cut by 1.7%.
• VAT on private school fees – To be introduced in January 2025
• Stamp Duty Land Tax (SDLT) – The surcharge on second homes and buy-to-let properties will rise from 3% to 5%.

Other recent developments from Jeremy Hunt’s 2024 Spring budget include:

• Property tax changes – Multiple dwellings relief for Stamp Duty Land Tax was abolished in June 2024.
• Vaping, alcohol, and fuel – The Labour government plans to implement the previous government’s proposed levy on liquids for vapes. Meanwhile, fuel and alcohol duties will freeze for at least another year.

Who pays tax in the UK?

In the UK, individuals, companies, and trusts pay taxes. Residents are taxed on their worldwide earnings, while non-residents only pay taxes on what they earn in the UK.

You’re a resident in the UK for tax purposes if you are in the country for 183 days or more, or if your only home is the UK for longer than 30 days. The UK provides statutory residence tests so you can work out which tax regime applies to you.

How does tax work for expats?

For individual expat residents in the UK, taxes work mostly identically to those of British citizens. Furthermore, taxation treaties with other countries mean you’re unlikely to be taxed twice. Some foreign income is subject to certain rules – you can read more about this in our article on income tax in the UK.

If you do business abroad, make sure you’re up-to-date with rules on import and export taxes, and be aware that if your business is resident in the UK, you’ll need to pay taxes on its worldwide income. Our article on corporate tax in the UK goes into more detail.

The UK has bilateral automatic exchange of information agreements with numerous other countries – these allow tax authorities to provide information to each other to prevent tax avoidance and evasion.

Do I need a tax ID number in the UK?

You require a tax identification number (TIN) in the UK. Most people use their National Insurance number (NINO) for tax identification, which is also used for employment, benefits, and other services. You can get a NINO by applying to HMRC.

However, if you need to file a Self Assessment tax return in the UK, you’ll receive a Unique Taxpayer Reference (UTR). Businesses have a Company Registration Number, which they receive when incorporating their company. In addition, if you’re liable for VAT, you should register online with HMRC to get a VAT number.

Types of tax in the UK

You’ll encounter a variety of taxes when living in the UK. Some, like council tax, are charged at the local level, while others are paid centrally. Read on for an overview of each type.

Income tax

All UK residents pay income tax on their international earnings, while non-residents only pay it on their UK income. Earnings subject to income tax include:

• Salary from employment
• Business profits
• Pensions
• Rental income
• Interest on savings and investments
• Dividends
• Cryptoassets

Most workers pay their income tax through Pay As You Earn (PAYE), where the tax is taken from their salary before they receive it. However, those with more complex tax considerations must file a Self Assessment return.

In England, Wales, and Northern Ireland, tax rates vary from 0% to 45%, but in Scotland, this can reach 47%.

National Insurance

Most workers also make National Insurance contributions, which fund benefits and pensions. If you are an employee, these payments are taken out of your salary at the same time as your income tax. In 2024, employees contribute up to 10% of their wages, while employers pay up to 13.8%. From 2025, the employer rate will raise to 15%.

However, there are several National Insurance classes. Employees fall under Class 1, but the system depends on how much you make from your business:

• More than £12,570 a year – pay Class 2 and Class 4 contributions.
• £6,725–12,570 – you do not need to make payments, as the government considers your Class 2 contributions as having been made.
• Less than £6,725 – you do not need to pay anything, but making voluntary Class 2 contributions will mean avoiding gaps in your National Insurance record.

Class 2 contributions are currently set at £3.45 per week, but these payments will no longer be mandatory for those earning over £12,570 per year from 2024. Meanwhile, the 2024-25 rate for Class 4 contributions stands at 8% on profits over £12,570 and 2% on those over £50,270.

Council tax

If you live in the UK and are over 18, you’ll almost certainly need to pay council tax, a fee that goes to the local government. It pays for local services, including trash collection, emergency services, road maintenance, and libraries.

How much you pay depends on the value of the property you live in and where it is located. Each council sets out different brackets according to property values, and there may be different rates depending on the parish or town. The amount of council tax that each household owes is usually between £1,000 and £4,000 per year.

In some situations, people living in a household are ‘disregarded’ for council tax. That means that the household can apply for a discount or exemption. In addition, people living alone get 25% off their council tax bill. Contact your council to find out how to apply.

It’s usually possible to pay your council tax bill online or at post offices, banks, newsagents, and convenience stores. Your bill should include information on payment methods.

Business rates

If you use a property for non-domestic purposes, such as a shop, office, warehouse, or rental holiday home, you’ll pay business rates. The council will send you your bill for this in February or March each year for the following tax year.

Your bill depends on your property’s ‘rateable value’ – how much it would cost to rent for a year. The rates and thresholds are as follows for 2024/25 in England:

Rateable value	Rating multiplier (how much per £1 of rateable value)
Under £51,000	Small business multiplier (49.9p per £1)
Over £51,000	Non-domestic rating multiplier (54.6p per £1)

Scotland has three rates: Basic, Intermediate, and Higher. These are set at 49.8p/£1, 54.5p/£1, and 55.9p/£1. Wales, meanwhile, will have a single rate of 56.2p/£1 in 2024-25. Northern Ireland has different multipliers for its various regions and districts, which you can view on the Department of Finance website.

The UK Government provides a calculator that can help you estimate your business rates online. Some businesses are eligible for relief on their business rates. These include:

• Rural properties providing vital services (100%)
• Retail, hospitality and leisure (75% up to £110,000)

In certain cases, you may receive a rebate or refund on your business rates. For example, if your rates have been reduced but you’ve been charged the wrong amount or your payment wasn’t canceled after moving business. Request refunds through your local council.

Corporation tax

If you run a company in the UK, you’ll need to pay business taxes. In addition to business rates and National Insurance contributions, you must consider corporation tax and VAT (discussed later in the article). Entities that must pay corporation tax include:

• Limited companies
• Foreign companies with UK branches
• Clubs
• Co-operatives
• Other unincorporated associations

Corporation tax is charged on your trading profits, investments, and chargeable gains (what you get from making a profit on assets). Businesses based in the UK pay it on their global profits, but those based outside the country only pay it on what they make in the UK.

The main corporation tax rate in the UK is 25%, but businesses that make a profit of less than £50,000 in their accounting period pay a ‘small profits rate’ of 19%. Meanwhile, companies that make £50,000–250,000 can apply for marginal relief.

Like other taxes, it’s possible to file and pay your corporation tax bill online. If you overpay, HMRC will pay you back, plus any applicable interest.

Value Added Tax (VAT)

Value Added Tax (VAT) applies to most goods and services. In the UK, the standard rate is 20%, but a reduced rate of 5% applies to some goods, like energy-saving building materials, mobility aids, children’s car seats, and other useful items.

Meanwhile, a zero rate applies to some goods and services, such as children’s clothes, charity advertising, and sanitary items.

Can I get a refund on VAT?

Visitors from outside Northern Ireland and the EU can sometimes get refunds on VAT on goods they buy in Northern Ireland. However, tax-free shopping is no longer available in England, Scotland, and Wales.

To use the scheme, you must be an overseas visitor living outside Northern Ireland and the EU, and you must take your goods with you by the last day of the third month after the month you bought them. The UK Government provides more information about claiming your VAT refund.

Elsewhere in the UK, you can still buy tax-free items, but they must be shipped to an address outside Great Britain (England, Scotland, and Wales) immediately. Bear in mind that some items are ineligible for a VAT refund, so check your items against the list on the UK Government pages.

Does my business need to pay VAT?

If your business has a taxable turnover of £85,000 or more, you must register for VAT. Companies earning under this amount can choose whether to register.

You must include VAT in the price of your goods and services, so make sure you’re aware of the applicable rates.

Most businesses send a VAT return to HMRC every three months, usually within a month and seven days of the end of their accounting period. The return shows:

• Your total sales and purchases
• How much VAT you owe
• How much VAT you can reclaim
• The amount of VAT that HMRC owes you

You or your accountant can submit your VAT return online, and you can pay it in several ways, including by Direct Debit or online. If you have charged more VAT than you have paid on goods or services you have purchased, you pay the difference. Otherwise, HMRC will refund you the difference within 30 days.

Capital Gains Tax

Capital Gains Tax is what you pay when you sell, give away, or get compensation for something that has increased in value since you obtained it.

You pay it on the following items:

• Personal possessions worth over £6,000 (other than cars)
• Property other than your main home
• Your main home if you’ve been renting it out, used it for business, or it’s over 5,000 square meters
• Some shares and other investments
• Business assets

Internationals should be aware that they may also need to pay Capital Gains Tax if their asset is abroad.

How much you pay depends on your tax bracket. If you’re a higher or additional rate taxpayer (taxable income over £50,271), you’ll pay 28% on your gains from residential property and 20% on those from other chargeable assets.

However, Capital Gains Tax becomes slightly more complicated for basic rate taxpayers. First, work out your taxable income – your income minus your personal allowance and other reliefs. Take the tax-free allowance of £6,000 from your total taxable gain and add the result to your taxable income. You’ll then pay the following:

Taxable income + taxable gain = within basic income tax bracket	10% on gains 18% on residential property
Taxable income + taxable gain = above basic income tax bracket	20% on gains above the basic tax rate 28% on residential property above the basic tax rate*

You must report and pay capital gains tax on property sales within 60 days. For other gains, record these in your Self Assessment tax return or the ‘real-time Capital Gains Tax service‘ by 31 December in the tax year after the sale.

Inheritance tax

After someone’s death in the UK, inheritance tax must be paid on their money, property, and possessions.

However, it’s only payable if the inheritance value is over £325,000 unless anything over this threshold is left to:

• A spouse or civil partner
• A charity
• A community amateur sports club.

In addition, if the deceased leaves a home to their children, the allowance goes up to £500,000. The standard inheritance tax rate in the UK is 40%, and it must be paid by the end of the sixth month after the death.

Stamp Duty Land Tax

When buying a property in the UK, you may need to pay additional tax. This has different names according to where you live:

• England and Northern Ireland: Stamp Duty Land Tax (SDLT)
• Scotland: Land and Buildings Transaction Tax
• Wales: Land Transaction Tax

There are thresholds at which these taxes become applicable. For SDLT, they are as follows:

First-time buyers buying a residential property worth £625,000 or less	£425,000
Other buyers buying residential properties	£250,000
Non-residential land and properties	£150,000

Above these amounts, you will pay the following amount of tax:

• (First-time buyers only) Up to £625,000: 5%
• Up to £925,000: 5%
• Up to £1,500,000: 10%
• Over £1,500,000: 12%

The rates differ in Scotland and Wales – you can read more about each country in the links above.

If you are buying an additional property (so that you will own more than one), you must pay an extra 5% unless you sell your previous main home within 36 months. In addition, there is a 2% surcharge for non-residents who buy residential properties in the UK.

Import/Export taxes

All goods imported from outside the UK are subject to tariffs and customs duties, with a few exceptions. You can use an online tool to check the tariff and VAT rates on various imported goods.

However, if you’re moving to the UK, you might wonder whether you have to pay tax on the items you bring. There is no tax or duty on goods for personal use or gifts worth £390 or less (or £270 if you’re arriving by private plane or boat). You must declare commercial goods and anything over the personal allowance for alcohol, cigarettes, and other excise goods.

Border Target Operating Model (BTOM)

If you run a business that engages in UK-international trade, ensure you’re aware of new import and export rules beginning 2024. These form the Border Target Operating Model (BTOM).

This model takes a phased approach, with crucial changes taking place in January, April, and October 2024. The changes impact animal and plant products and foods from the European Union (EU) and include:

• New health certification requirements
• Implementation of checks and physical inspections
• Relocation of checks that used to happen at the destination to the UK border
• Simplification of datasets for imports

You can read more about the BTOM on the UK Government’s web pages.

Car, road, and airport taxes in the UK

If you drive in the UK, you must pay car and road tax, including when you register your car with the DVLA (Driver and Vehicle Licensing Agency). The amount varies per vehicle type, depending on factors such as engine size, type of fuel, and CO² emissions.

You can consult a table of UK car and road tax rates, where you’ll see payment rates for alternative fuel cars (TC59) are £10 lower than for petrol (TC48) and diesel cars (TC49).

You can pay your car and road tax online. It should be noted that electric cars are exempt from certain UK car taxes based on their low-emission output.

Individuals leaving the UK by air must also pay a duty, which is typically part of your airfare.

Tax avoidance and evasion

Tax avoidance, or rearranging your financial affairs to pay less tax, is not necessarily illegal, but it can have severe repercussions. If you enter into a scheme that HMRC has a reference number for, you must disclose it. Otherwise, you could receive a fine of up to £5,000. In addition, HMRC will investigate your tax affairs. They could also demand that you pay the tax owed upfront, take legal action against you, and treat you as a high-risk taxpayer.

On the other hand, tax evasion – misrepresenting your financial affairs to pay less tax – is illegal. HMRC publishes a list of deliberate tax defaulters, and you could face hefty fines. For the tax year 2021-22, HMRC estimated a £35.8 billion tax gap or 4.8% of tax. This gap represents missing tax due to errors, tax avoidance, evasion, and criminal attacks.

In 2024, the UK introduced tougher measures against promoters of tax avoidance. Anyone who continues to promote tax avoidance schemes after receiving a stop notice from HMRC could face criminal charges. In addition, HMRC can disqualify directors of companies encouraging tax avoidance.

Tax advice

The materials reviewed in this article are for informational purposes only and should not be taken as tax advice for your individual situation. Therefore, you should always consult your own tax expert with your specific tax issues or questions.

You can find trustworthy accountants and financial advisers on platforms like Unbiased.

Useful resources

• HMRC – website for information on British taxes, social security contributions, and other related questions for the constituent countries of the United Kingdom. The authority also runs a self-assessment helpline.
• Land & Property Services – Northern Irish authority for tax
• Revenue Scotland – body responsible for collecting and managing Scottish taxes
• Settlement Scheme – This applies to EEA citizens living in the UK before 1 January 2021.
• TaxAid – charity which advises people on low incomes whose problems cannot be resolved with HMRC
• Welsh Tax Authority