Though many sources describe the Tax Systems In Uk as complicated – it is undoubtedly one of the world’s longest sets of tax rules — the British tax system for most expats is very simple from a macro perspective. You are usually required to pay UK taxes if you live and work in the UK, or if you have taken up UK retirement. What is taxed, however, is determined by your tax residence status and personal circumstances.
HM Revenue and Customs (HMRC) is in charge of tax administration and collection in the United Kingdom. In 2020/21, the UK’s tax collections were estimated to be at £584.5 billion, down 7.7% from the previous tax year. Income taxes, property taxes, capital gains taxes, UK inheritance taxes, and Value Added Tax are all examples of basic UK taxes (VAT).
Many of them are progressive taxes, which means that individuals with higher earnings pay more. England, Scotland (though there are some special distinctions due to Scotland’s distinctive legal system), Wales, Northern Ireland, and several of the smaller islands off the British coast are all covered by the British fiscal system. It also covers oil drilling platforms in British territorial seas, while the Channel Islands and the Isle of Man are excluded.
Here is all you need to know about Tax Systems in UK;
1. Income Tax
In the United Kingdom, income tax is imposed at progressive rates, with higher rates applied to higher income categories. After deductions and allowances, tax is levied on total income from all earned and investment sources. Most people are entitled to a personal allowance on which they are not required to pay tax. In 2022/23, this will be £12,570. On earnings of more than £125,000, there is no personal tax allowance. A tax on income is known as income tax. In the United Kingdom, around 29.5 million people pay income tax.
Not all income, however, is taxed. For many years, income tax has been the UK government’s primary source of revenue. Furthermore, each type of income tax has its own set of laws and procedures for determining how much income is taxed. Salaries from employment, rental income from properties, interest from banks and building societies, dividends from corporations, and self-employed gains are all subject to income tax.
2. Corporation Tax
Corporation tax is a tax levied on a company’s profit in the United Kingdom. Since 1965, corporation tax has been a distinct tax from the rest of the tax system. Corporation tax is only paid on profits earned in the United Kingdom by companies that are not based in the United Kingdom. Corporation tax earnings are derived through income trade, investment, and capital gains.
3. VAT(Value Added Tax)
Since 1973, VAT has been one of the most important sources of revenue for the UK government. VAT is a sales tax that must be paid on all purchases. In the fiscal year 2010/2011, the Treasury plans to raise £60.7 billion from VAT. VAT is charged at a normal rate of 17.5 percent (Lymer and Oats, 2010/11). The VAT registration barrier is £85,000, therefore if your yearly turnover surpasses that amount, you must register. This applies to sole proprietorships, partnerships, and limited liability entities.
In the United Kingdom, value-added taxes (VAT) are levied on practically all products and services. If you exceed the limitations, they may also apply to products you bring into the UK from overseas. If you import or purchase things online from outside the UK for a total of less than £135, you must pay VAT at the point of sale, according to new laws implemented in January 2021. Although certain goods and services are entitled to lower UK business tax rates, the basic commercial tax rate in the UK is 20%. Certain commodities, such as long-term medical supplies, are also eligible for VAT exemption.
4. Capital Taxes
They were first established in 1965, and they generated wealth by increasing capital value, but they were exempt from the development of capital gain tax. The tax levied when assets are sold for a profit is known as capital gains tax. When you dispose of an asset and sell or transfer it after a few years, for example (HMRC, 2010).
5. Taxes for short-term business visitors (STBV)
Anyone who works in the UK for less than a year in total and spends fewer than 183 days in the nation during the relevant tax year is considered a short-term business visitor for tax purposes. Even though the employer is based overseas, such persons are liable for UK tax on their income if the responsibilities were performed in the UK. In such circumstances, double-taxation treaties may be used to offset any taxes owed.
6. Tax Reliefs for Specific Groups
There are no particular income tax reliefs for handicapped persons in the United Kingdom. They may, however, be able to reduce their tax expenses by claiming reliefs for equipment services and facilities, travel from home to work, automobile and fuel supplies, and medical treatments. The Employment Income Manual published by HMRC has further information.
Unless you’re self-employed and pay Class 4 payments, if you’re a senior citizen, you won’t have to pay National Insurance after you reach State Pension age. When you attain State Pension age, you stop paying Class 4 payments at the conclusion of the tax year. You will be subject to UK income tax if your total state and private pensions exceed the personal allowance.
7. Trading Allowance
Self-employed enterprises can get a tax break of up to £1,000 in the shape of a trade allowance. If your yearly gross income is expected to be below the threshold, you do not need to notify HMRC unless you are unable to utilise the allowance or must register for Self Assessment. If your gross trade income reaches the £1,000 level, you must register.
8. UK is a tax haven
What’s more, why isn’t my money in one? “Tax havens are generally small island republics with very limited choices for raising revenue, and being a tax haven is one of them,” Russell explains. “They are available for everyone to utilize if they so want. It’s a free market, and all they’re doing is providing a service. The United Kingdom is a tax haven in and of itself, and we benefit much from it. The majority of people are unaware of this.”
9. The National Insurance
National Insurance is a type of social security in the United Kingdom, and the amount you pay is determined by your salary during the 2020/2021 tax year. Individuals and corporations are both affected. If your annual profits are between £6,365 and £8,631.99, you’ll be in Class 2. Contributions are a £3.00 weekly contribution that is collected as part of the self-assessment procedure.
If you are a low-income earner, you may be eligible for exemptions. If your profits are between £8,632 and £49,999, you will fall within Class 4’s Lower Profits Limit (LPL). The amount owed is based on the information you provided during self-assessment and is equal to 9% of your profit. If you earn more than £50,000, you’ll be subject to the Upper Gains Limit (UPL), which means your profits will be taxed at a rate of 2%.