Tax in the United Kingdom

Tax in the United Kingdom
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Updated 2021-09-14 12:36

Whether you are a UK resident or not, and depending on your personal circumstances, you will most likely have to pay a tax in the UK on income and capital gains earned in the UK. The average UK citizen pays income tax between 20% and 40% depending on their earnings — which is relatively low compared to other countries in northern Europe, such as France and Denmark. Overall, the British income tax system follows the PAYE system (Pay As You Earn), meaning employers deduct income tax every month from wages or salaries. Every expat's situation is slightly different, but some general rules apply, which are presented in this informative article. However, if your case is somewhat complicated, it's advisable to seek professional help from an accountant. 

UK residence status and tax

If you are a non-resident in the UK, you will pay tax on your UK income, so you won't pay tax on your foreign income. UK income may come from a pension, rental property, savings interest, or wages. On the other hand, if you are a UK resident and your permanent home (aka domicile) is also in the UK, you pay tax on all your income from the UK and abroad. Here, it's worth pointing out that if you are a UK resident but your permanent home is outside the UK, you may not have to pay tax in the UK on income from abroad (e.g. income from selling shares, selling a second home, etc.).

Attention:

An individual cannot have more than one domicile (aka permanent home) simultaneously.

Usually, it is straightforward to establish whether you are a UK resident or not, depending on the number of days you spend in the UK during the tax year, running from 6 April to 5 April the following year. For example, if you spend 183 or more days in the UK in one tax year, you are a UK resident. However, you are not a UK resident if you work abroad full-time and spend fewer than 91 days in the UK. Formally, your residence status will be determined by the Statutory Residence Test (SRT), which is made of three steps in order to be able to cover even the most unique cases. Last but not least, one should look into double taxation relief to avoid being taxed on the same income or gains by two or more countries. Double taxation is most common among individuals who have dual residency. However, if the two countries have a double tax treaty, this should be enough to prevent double taxation. Gladly, most countries in the world have a double taxation treaty with the UK, including Australia, Brazil, China, Japan, Mauritius, Mexico, Nigeria, Singapore, South Africa, the UAE, and the US.

Important:

You may be eligible for a split-year treatment if you move in or out of the UK before the end of the tax year. This means that you will still pay tax in the UK, but only for income earned while you were living in the UK.

Useful links:

Official UK Tax site

Get help with tax

Get in touch with HMRC

Information about Statutory Residence Test

Income tax rates and tax return

UK and non-UK residents are fully taxed on UK employment income irrespectively of whether their permanent home is in the UK or outside the UK. Employment and investment income from abroad is only taxable among UK residents. According to the UK government, an income up to £12,570 is not taxable. However, an income between £12,571 and £50,270 is taxed at 20%, and an income between £50,271 and £150,000 is taxed at 40%. Anything above £150,000 is taxed at 45%. These rates apply to

Attention:

Report your income to HMRC through an online or paper self-assessment tax return if you rent out property in the UK, are self-employed in the UK, you were a UK resident but now earn a pension from abroad, or you have untaxed income.

If you have reasons to believe that you have overpaid tax, you can apply for a refund. People usually overpay tax when tax is deducted automatically from their bank account and their income has been below their personal allowance. The standard personal allowance is £12,570, which is the amount of income you do not have to pay tax on. Non-UK residents can claim a tax repayment by filling an R43 form. If HMRC approves your eligibility for a refund, it will send you a cheque or refund the money to your bank account provided you have volunteered your bank account details (i.e. account number and sort code). Note that the deadline for tax returns is 31 January of the following year. For example, for the tax year 6 April 2020 to 5 April 2021, the tax return is due 31 January 2022.

Important:

Make sure to always inform HMRC of any changes in your status or situation, such as change of employer, marriage or divorce, expatriation, property purchase or sell, etc. If you are leaving the UK, you should submit a P85 form to HMRC or file a UK tax return for the same year of your departure.

In conclusion, if you receive a tax return form (SA100) from HMRC, you should fill it and return it to HMRC to avoid penalties. However, generally speaking, your tax is calculated based on the PAYE (Pay As You Earn) tax coding, meaning that you don't have to complete the tax return every year, as long as your income circumstances don't change. However, an annual tax return may be required for people earning income that falls under the bandwidth of £150,000 or more.

Exceptional circumstances due to COVID-19

Non-UK residents who could not leave the UK due to the COVID-19 restrictions and health and safety measures won't pay UK income tax on earnings that occurred between their intended date of departure and the actual date of departure, as long as the income tax is paid in their home country. However, they should still file a Self Assessment SA109 form and clearly state the days they overstayed in the UK, the income they obtained during this period, and proof that the tax on this income has been paid or will be paid in their home or another country. Also, HMRC may ask you to submit a confirmation from the NHS that it was not possible for you to leave the UK on the original departure date and that you left the country as soon as it became possible (e.g. isolation dates were completed, you fully recovered from COVID-19, etc.).

Getting started as a UK resident

First of all, you need to apply for the National Insurance (NI) number to be allowed to work, receive a pension, pay tax, or benefit from public health services in the United Kingdom. Once you arrive in the UK, it is best to immediately apply for the NI number, which will be issued within a couple of weeks. Many employers in the UK will not allow you to start working unless you produce evidence that your NI number request is being processed. Upon finding a job in the UK, your employer will have to apply for a unique tax code in accordance with your income level and situation at the HM Revenue & Customs (HMRC). To do so, they will have to provide your personal details, including your national insurance number. Each tax code contains a letter that defines your fiscal status, for example, 'L' for those aged 65 and above, 'NT' for non-taxable individuals, etc. The tax collected from your payroll includes social contributions such as national insurance. Each deduction is stated clearly on your payslip. At the end of the fiscal year, your tax return file will be sent to the HMRC.

Important:

If you are self-employed and are earning either from a website or app or in other forms, you will have to fill in a self-assessment tax return online at the end of the fiscal year. All invoices and receipts must be kept to help carry this assessment out correctly and help reduce your yearly tax bills through business expenses which you can claim.

Attention:

When UK employers discuss salaries, they often talk about gross profits, that is, income before tax deductions. Hence, it would be best if you considered your monthly net salary before you accept a job offer.

Useful links:

Apply for National Insurance number

Self-assessment tax returns

Expenses for self-employed

How much will you receive monthly or yearly after-tax 

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