Taxation in the United Kingdom
|Rate||Dividend income||Savings income||Employment and other income|| Income bracket|
(above tax-free allowance)
|Starting rate for savings||-||0%||-||£0 - £5,000|
|Basic rate||10%||20%||20%||£0 - £31,785|
|Higher rate||32.5%||40%||40%||£31,786 - £150,000|
|Additional rate||37.5%||45%||45%||Over £150,000|
For every £2 earned above £100,000, £1 of the personal allowance is lost. This means for incomes between £100,001 and £121,200 the marginal income tax rate is 60%.
The taxpayer's income is assessed for tax according to a prescribed order, with income from employment using up the personal allowance and being taxed first, followed by savings income (from interest or otherwise unearned) and then dividends.
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). Joint owners can decide how they divide income and expenses, as long as one does not make a profit and the other a loss. Losses can be brought forward to subsequent years.
The "starting rate" of income tax, set at 10%, was the lowest band from 1999 to 2008. It was introduced by Chancellor Gordon Brown in his 1999 budget, and mostly abolished in his last budget as Chancellor in 2007, since when it has only applied to savings income, and then only for people with very little other income.
The highest "additional rate" was introduced in April 2010 at 50%, and reduced to 45% in April 2013.
Certain investments carry a tax favoured status including:
While all income is taxable, gains are exempt for income tax purposes.
Certain investments via the state owned National Savings scheme are not subject to tax including Index linked Certificates (up to £15,000 per issue) and Premium Bonds, a scheme that issues monthly prizes in place of interest on individual holdings up to £40,000.
Interest is paid tax-free, no additional tax is payable on dividends and Capital Gains Tax is not paid, nor can capital losses be applied to other gains outside the ISA. There is no overall limit on how much a person can have invested in ISA accounts, but additional investments are currently limited to £15,240 per person per year: this can be split between cash funds and either to mutual funds (Units Trusts and OEICs) or individual self-selected shares and a broad range of other investments.
- Pension funds
These have the same tax treatment as ISAs in terms of growth. Full tax relief is also given at the individual's marginal rate on contributions or, in the case of an employer contributions, it is treated as an expense and is not taxed on the employee as a benefit in kind. Aside from a tax free lump sum of 25% of the fund, benefits taken from pension funds are taxable.
Investments in smaller companies or funds of holdings in such companies. These qualify for 30% Income Tax relief which must be repaid if the shares are sold within five years. Subject to Inheritance Tax. Dividends are not taxable and they are not subject to CGT but losses can be applied to other gains to reduce liability.
Investments into smaller company shares or funds holding them that qualify for 30% Income Tax relief. Not subject to CGT but losses can be applied to other gains or Income Tax to reduce liability. The facility also allows an individual to defer capital gains liabilities (these gains can be stripped out in future years using the annual CGT allowance.) Not subject to Inheritance Tax from two years after purchase. Dividends are taxable. Minimum three year holding period for most benefits. The related Seed Enterprise Investment Scheme offers 50% tax relief.
These include offshore and onshore investment bonds issued by insurance companies. The main difference between the two is that corporation tax paid by the onshore bond means that gains in the onshore bond are treated as if basic rate tax has been paid (this cannot be reclaimed by zero or starting rate tax payers). With both versions up to 5% for each complete year of investment can be taken without an immediate tax liability (subject to a maximum total of 100% of the original investment). On this basis, investors can plan an income stream while deferring any chargeable withdrawals until they are on a lower rate of tax, are no longer a United Kingdom resident, or their death.
- Offshore trusts and companies
Trusts can be offshore if all trustees are non-resident. Such trusts can own foreign-operated companies. Corporation tax rates can be lower in some countries and where we still have double taxation treaties. However, since anti-avoidance rules have been introduced for taxation of trusts, these structures are not advantageous for someone who will remain resident.
Many holdings and income from them are exempt for "historical reasons". These include:
- Special, low tax arrangements for the monarchy, such as the arrangement used by the British Royal Family to avoid inheritance taxation.
- Reduced income tax for special classes of person. For instance non-doms, who are resident in the United Kingdom but not "domiciled", are not subject to UK income tax on their non-UK income.
- An Act of Parliament to protect the Earl of Abingdon and his "heirs and assignees" from paying income tax on the tolls on the Swinford Toll Bridge.
- The income of charities is usually exempt from United Kingdom income tax.
Inheritance tax is levied on "transfers of value", meaning:
- the estates of deceased persons;
- gifts made within seven years of death (known as Potentially Exempt Transfers or "PETs");
- "lifetime chargeable transfers", meaning transfers into certain types of trust. See Taxation of trusts (United Kingdom).
The first slice of cumulative transfers of value (known as the "nil rate band") is free of tax. This threshold is currently set at £325,000 (tax year 2015-16) and has recently failed to keep up with house price inflation[neutrality is disputed] with the result that some 6 million households currently fall within the scope of inheritance tax. Over this threshold the rate is 40% on death or 36 per cent if the estate qualifies for a reduced rate as a result of a charitable donation. Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies - to as much as £650,000 in 2015-16. Their executors or personal representatives must transfer the first spouse or civil partner's unused Inheritance Tax threshold or 'nil rate band' to the second spouse or civil partner when they die.
Transfers of value between United Kingdom-domiciled spouses are exempt from tax. Recent changes to the tax brought in by the Finance Act 2008 mean that nil-rate bands are transferable between spouses to reduce this burden - something which previously could only be done by setting up complex trusts.
Gifts made more than seven years prior to death are not taxed; if they are made between three and seven years before death a tapered inheritance tax rate applies. There are some important exceptions to this treatment: the most important is the "reservation of benefit rule", which says that a gift is ineffective for inheritance tax purposes if the giver benefits from the asset in any way after the gift (for example, by gifting a house but continuing to live in it).
Council tax is the system of local taxation used in England, Scotland and Wales to part fund the services provided by local government in each country. It was introduced in 1993 by the Local Government Finance Act 1992, as a successor to the unpopular Community Charge ("poll tax"), which had (briefly) replaced the Rates system. The basis for the tax is residential property, with discounts for single people. As of 2008, the average annual levy on a property in England was £1,146. In 2006/2007 council tax in England amounted to £22.4 billion and an additional £10.8 billion in sales, fees and charges,
Sales taxes and duties
Value added tax
The third largest source of government revenues is value added tax (VAT), charged at 20% on supplies of goods and services. It is therefore a tax on consumer expenditure.
Certain goods and services are exempt from VAT, and others are subject to VAT at a lower rate of 5% (the reduced rate, such as domestic gas supplies) or 0% ("zero-rated", such as most food and children's clothing). Exemptions are intended to relieve the tax burden on essentials while placing the full tax on luxuries, but disputes based on fine distinctions arise, such as the notorious "Jaffa Cake Case" which hinged on whether Jaffa Cakes were classed as (zero-rated) cakes—as was eventually decided—or (fully taxed) chocolate-covered biscuits. Until 2001, VAT was charged at the full rate on unused sanitary towels.
It was introduced in 1973, in consequence of Britain's entry to the European Economic Community, at a standard rate of 10%. In July 1974, the standard rate became 8%, and from October that year petrol was taxed at a new higher rate of 25%. In the budget of April 1975 the higher rate was extended to a wide range of "luxury" goods. In the budget of April 1976 the 25% higher rate was reduced to 12.5%. On 18 June 1979, the higher rate was scrapped and VAT set at a single rate of 15%. In 1991 this became 17.5%, though when domestic fuel and power was added to the scheme in 1994, it was charged at a new, lower rate of 8%. In September 1997 this lower rate was reduced to 5%, and was extended to cover various energy-saving materials (from 1 July 1998), sanitary protection (from 1 January 2001), children's car seats (from 1 April 2001), conversion and renovation of certain residential properties (from 12 May 2001), contraceptives (from 1 July 2006) and smoking cessation products (from 1 July 2007).
On 1 January 2010 VAT returned to 17.5%.
On 4 January 2011 VAT was raised to 20% by Chancellor George Osborne, where it remains.
Stamp duty is charged on the transfer of shares and certain securities at a rate of 0.5%. Modernised versions of stamp duty, stamp duty land tax and stamp duty reserve tax, are charged respectively on the transfer of real property and shares and securities, at rates of up to 4% and 0.5% respectively.
Motoring taxes include: fuel duty (which itself also attracts VAT), and vehicle excise duty. Other fees and charges include the London congestion charge, various statutory fees including that for the compulsory vehicle test and that for vehicle registration, and in some areas on-street parking (as well as associated charges for violations).
Corporation tax is a tax levied in the United Kingdom on the profits made by companies and on the profits of permanent establishments of non-UK resident companies and associations that trade in the EU.
Corporation tax forms the fourth-largest source of government revenue (after income, NIC, and VAT). Prior to the tax's enactment on 1 April 1965, companies and individuals paid the same income tax, with an additional profits tax levied on companies. The Finance Act 1965 replaced this structure for companies and associations with a single corporate tax, which borrowed its basic structure and rules from the income tax system. Since 1997, the United Kingdom's Tax Law Rewrite Project has been modernising the United Kingdom's tax legislation, starting with income tax, while the legislation imposing corporation tax has itself been amended; the rules governing income tax and corporation tax have thus diverged.
Business rates is the commonly used name of non-domestic rates, a United Kingdom rate or tax charged to occupiers of non-domestic property. Business rates form part of the funding for local government, and are collected by them, but rather than receipts being retained directly they are pooled centrally and then redistributed. In 2005/06, £20 billion was collected in business rates, representing 4.4% of the total United Kingdom tax income.
Business rates are a property tax, where each non-domestic property is assessed with a rateable value, expressed in pounds. The rateable value broadly represents the annual rent the property could have been let for on a particular valuation date according to a set of assumptions. The actual bill payable is then calculated using a multiplier set by central government, and applying any reliefs.
Business and personal taxes
Some taxes are, depending on the circumstances, paid by both individuals and companies and government
National Insurance contributions
The second largest source of government revenues is National Insurance contributions (NICs). NICs are payable by employees, employers and the self-employed and in the 2010-2011 tax year £96.5 billion was raised, 21.5% of the total collected by HMRC.
Employees and employers pay contributions according to a complex classification based on employment type and income. Class 1 (employed persons) NIC is charged at several rates depending on various income thresholds and a number of other factors including age, the type of occupational pension scheme contributed to by the employee and/or employer and whether or not the employee is an ocean-going mariner. Certain married women who opted to pay reduced contributions (in return for reduced benefits) prior to 1977 retain this right for historical reasons.
Employers also pay contributions on many benefits in kind provided to employees (such as company cars), and on tax liabilities met on behalf of employees via a "PAYE Settlement Agreement".
There are separate arrangements for self-employed persons, who are normally liable to Class 2 flat rate NIC and Class 4 earnings-related NIC, and for some voluntary sector workers.
Capital gains tax
Capital gains are subject to tax at 18 or 28% (for individuals) or at the applicable marginal rate of corporation tax (for companies).
The basic principle is the same for individuals and companies - the tax applies only on the disposal of a capital asset, and the amount of the gain is calculated as the difference between the disposal proceeds and the "base cost", being the original purchase price plus allowable related expenditure. However, from 6 April 2008, the rate and reliefs applicable to the chargeable gain differ between individuals and companies. Companies apply "indexation relief" to the base cost, increasing it in accordance with the Retail Price Index so that (broadly speaking) the gain is calculated on a post-inflation basis (with different rules apply for gains accrued prior to March 1982). The gain is then subject to tax at the applicable marginal rate of corporation tax.
Individuals are taxed at a flat rate of 18% (or since 22 June 2010, 28% for higher rate taxpayers) with no indexation relief. However, if claiming Entrepreneurs' Relief the rate remains 10%. Capital losses from prior years can be brought forward.
Expenditure on a business (such as a property business) made by an individual can be claimed as an allowance against Capital Gains. Whether expenditure is claimable against income (potentially reducing income tax) or capital (potentially reducing capital gains tax) depends on whether there was improvement of the property: if there was none, it is against income; if there was some, then it is against capital.
Transfers between spouses or between civil partners do not crystallise a capital gain, but instead transfer the purchase price (book cost). Otherwise, transfers made as gifts are treated for CGT purposes as being made at the market value at the date of transfer.
- Chartered Institute of Taxation
- Government spending in the United Kingdom
- Institute of Indirect Taxation
- Income in the United Kingdom
- Local income tax
- Starting rate of UK income tax
- Tax credit
- Tax law
- Income Tax Act 2007, regarding taxation of income, such as from work or dividends
- Corporation Tax Act 2010 (c 4), regarding taxation of corporations' income
- Value Added Tax Act 1994
- "A brief history of HM Customs and Excise".
- Land Tax Act 1834
- managed by Board of Inland Revenue
- Stamp Act 1694 (5 & 6 Will. & Mar. c. 21)
- Inland Revenue Board Act 1849
- "A brief history of income tax".
- Commissioners for Revenue and Customs Act 2005
- managed by Board of Customs and Excise
- replacing Purchase Tax, managed by Board of Customs and Excise
- "Public Finances Databank". HM Treasury. 2008-08-21. pp. C1. Retrieved 2008-08-23.
- Stephen Dowell, History of Taxation and Taxes in England (Routledge, 2013)
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- "A tax to beat Napoleon". HM Revenue & Customs. Retrieved 2007-01-24.
- Allen Horstman, "'Taxation in the Zenith': Taxes and Classes in the United Kingdom, 1816-1842," Journal of European Economic History (2003) 32#1 pp 111-137.
- IFS: Long-Term trends in British Taxation and Spending
- Thatcher Economics
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- "Economy: 1988 Budget (Lawson 5)". margaretthatcher.org.
- Winnett, Robert (12 December 2012). "Two-thirds of millionaires disappeared from official statistics to avoid 50p tax rate". The Daily Telegraph (London).
- REV BN 40: Tax Treatment Of Pre-Owned Assets
- "Tax on foreign income". hmrc.gov.uk.
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- "Why does the British tax year start on 6th April?". The Guardian (London).
- "HM Revenue & Customs: Class1NICs-Session Ended". hmrc.gov.uk.
- "Rates and allowances: Income Tax". HM Revenue & Customs. Retrieved 2015-04-06.
- "UK Tax Rates 2015". scopulus.co.uk.
- "BBC News Arcticle Covering 2011 Budget including UK Marginal Tax rates". BBC. 2011-01-31.
- "Tax treaties". hmrc.gov.uk.
- "Budget 1999: budget report:Chapter 4 - Increasing Employment Opportunity". HM Treasury.
- "Budget 2007: report". HM Treasury.
- "Q&A: Return of the 50p top rate of income tax?". BBC News.
- Kay, Richard (19 April 2014). "Palace fear over Queen's tax bill". Daily Mail (London).
- Wintour, Patrick (1 December 2009). "David Cameron tells Zac Goldsmith to end 'non-dom' tax status". The Guardian (London). Retrieved 24 May 2010.
- Taxation of Charities and Non-profit Organisations, James Kessler QC and Oliver Marre, 9th edition (2013)
- "Inheritance Tax". www.gov.uk.
- Communities and Local Government - Council Tax: The Facts
- Council Tax in Scotland Scottish Government publications
- Council Tax a guide Valuation Office Agency
- Average council tax and % change 1999-00 to 2008-09 Communities and local government - figures released 27 March 2008
- Office of the Deputy Prime Minister, Statistical Release: Levels of council tax set by local authorities in England 2006/07, 2006 cited by.
- Communities and Local Government in Local Government Finance Statistics: Revenue Outturn Service Expenditure Summary 2006/07. cited by
- "Introduction to VAT". HM Revenue & Customs. Retrieved 2008-11-23.
- "VAT Notice 701/18: women's sanitary protection products". hmrc.gov.uk.
- Peter Victor (30 July 1995). "A brief history of VAT". The Independent (London). Retrieved 13 January 2011.
- "Stamp Duty Land Tax Rates From 23/03/06 including archived Budget and Finance Bill information". HM Revenue & Customs. 2006-03-23. Retrieved 2007-01-24.
- "Finance Act 1965 (c. 25), from UK Statute Law Database". UK Statutory Publications Office, Ministry of Justice. Retrieved 2007-05-09.
- "[ARCHIVED CONTENT] HM Revenue & Customs: Tax Law Rewrite". hmrc.gov.uk.
- Public Finances Databank (Section C4), HM Treasury - Percentage based on Net taxes & NICs conts.
- The rates bill - How is it calculated?, mybusinessrates.gov.uk
- "HM Revenue and Customs receipts" (PDF). hmrc.gov.uk. Retrieved 2011-11-11.
- Stephen Dowell, History of Taxation and Taxes in England (Routledge, 2013)
- James Kessler QC, Taxation of Non-Residents and Foreign Domiciliaries (12th edition Key Haven Publications 2013) - discusses taxation of individuals who are United Kingdom resident but not United Kingdom domiciled. Accessible www.foreigndomiciliaries.co.uk
- James Kessler QC and Oliver Marre, Taxation of Charities and Non-Profit Organisations (9th edition Key Haven Publications 2013) - discusses taxation of charities and the many exemptions from tax for charities. Accessible www.taxationofcharities.co.uk
- Guide to personal taxation, from United Kingdom government site Directgov (Doesn't link to correct file, website redirects to index)
- Tax Help and Information, Documents with information about capital allowances and tax in the UK
- UK Tax Rates, Last 8 Years.
- Tax Office UK, Business Tax, Property Tax, UK Taxes
- Tax calculator
- VAT Calculator
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