Tax law is part of virtually all personal, corporate, and commercial financial transactions, and taxes represent an important source of revenue for government. Tax law is highly complex, to the point where tax law itself is split into multiple different complicated fields.
Basic UK Taxes
The core taxes in the UK consist of income tax, property tax, capital gains tax, value added tax (VAT) and inheritance tax. Most of these are stratified taxes, meaning that the tax rates are based on the payer’s ability to pay, with higher-income individuals paying higher rates of tax.
The UK tax system applies throughout England, Wales, Northern Island, and Scotland, with some specific differences in the Scottish system that result from core differences in that country’s legal system.
The UK tax year starts on April 6 of the calendar year and runs until April 5 of the following year.
Who is a UK Tax Resident?
In the UK tax rates aren’t subject to residency status. If someone is a resident, they pay tax based on their income level. However, residency does determine what sources of income a person must include when they complete their annual tax return.
For instance, a UK resident is taxed on all of the income they earn both in the UK and in other countries. This includes income such as foreign investments, rental income on properties located overseas, and income from foreign pensions. Non-UK residents are taxed only on the income they earn within the UK. Residency can depend on various factors such as time spent in the UK in a tax year, property ownership, or working in the UK.
Note that for legal and tax purposes, residency and citizenship are not the same thing. Someone may be a UK citizen but not a resident, and vice versa.
Income tax is a stratified tax, with a personal allowance and three tax brackets.
The personal allowance is £11,850 for the 2018/2019 tax year. Income below this level is exempt from paying taxes, meaning if someone earns below £11,850 in the 2018/2019 tax year they don’t have to pay income tax. The basic tax rate for income between £11,851 and £46,350 is 20%. Income between £46,351 and £150,000 is taxed at a rate of 45%. Income over £150,000 is taxed at 45%.
The UK has two kinds of property tax.
The first is stamp duty land tax, which applies to the purchase of residential properties with a value of more than £125,000, and the purchase of non-residential properties and land with a value of more than £150,000. This applies all over the UK, except for Scotland, which has a land and buildings transaction tax.
The second property tax is council tax, which is paid annually by the owner of a property. The tax is paid to the local authority, and the amount of tax payable is based on the property’s value.
Capital Gains Tax
This tax is payable when assets are sold for a profit. The amount of tax paid is based on the amount of profit made. The types of assets that incur capital gains tax include investment real estate, personal possessions valued at more than £6,000, shares that are not in a PEP or ISA, and business assets.
Capital gains tax is added to other taxable income, which means it influences the amount of income tax a person pays for the year in which
the asset was sold.
This tax is a one-off payment, paid on any deceased person’s estate if that estate is worth more than £325,000. Above this value, the estate is taxed at a rate of 40%. The rate is reduced to 36% if more than 10% of the estate is given to charity.
There are multiple ways a person can reduce the amount of inheritance tax owing on an estate. For instance, the partner of the deceased can inherit an estate of any value without owing inheritance tax.
This is a sales tax applied to all goods and services. Everyone pays VAT at the same rate regardless of their personal income. The standard VAT rate in the UK is 20%. Some goods and services are taxed at a lower rate of 5%, while some are exempt altogether. For instance, food and children’s clothing are exempt from VAT.
Late Tax Returns and Tax Avoidance
Submitting a UK tax return late incurs a fine of £100, while failure to pay taxes incurs a penalty of up to 100% of the unpaid sum.