How Taxation Works in the UK

The UK tax system is complex, particularly for newcomers navigating residency, domicile, and business structures. Whether you’re an individual, a business owner, or a non-resident, understanding your tax obligations is essential. This guide outlines the key features of UK taxation, covering individuals, companies, Limited Companies (LTDs), Limited Liability Partnerships (LLPs), and non-residents, with practical insights to help you comply with HM Revenue & Customs (HMRC) rules.

Understanding UK Tax Residency and Domicile

Tax Residency: Determined by the Statutory Residence Test (SRT), which considers days spent in the UK and ties like family, work, or accommodation. If you spend 183+ days in the UK in a tax year (6 April to 5 April), you’re automatically a UK tax resident, liable for tax on worldwide income and gains.

Domicile: A legal concept defining your permanent home, distinct from residency or nationality. You typically acquire a domicile of origin at birth (usually from your father or mother if unmarried) or choose a domicile later based on intent to settle permanently, evidenced by property ownership, family ties, or a will. UK residents with a UK domicile pay tax on worldwide income and gains, while non-domiciled residents may use the remittance basis to tax only UK income or foreign income brought into the UK.

Non-Domiciled Residents: If you’re UK-resident but non-domiciled, you can opt for the remittance basis, paying tax only on UK income or foreign income remitted to the UK. After 7+ years of UK residency, you may face a £30,000–£60,000 annual charge to maintain this basis, depending on residency duration.

Taxes for Individuals

Individuals in the UK, whether employed or self-employed, are taxed on income from various sources, with rates varying by income level and region (England/Wales/Northern Ireland vs. Scotland). The tax year runs from 6 April to 5 April.

Income Tax

Income Tax applies to:

• Wages and employment benefits

• Self-employment or business profits

• Pensions and certain benefits

• Bank interest

• Dividends

• Rental income

  
  

2025/26 Tax Rates:

• England, Wales, Northern Ireland:

  • £0–£12,570: 0% (Personal Allowance)

  • £12,571–£50,270: 20% (Basic Rate)

  • £50,271–£125,140: 40% (Higher Rate)

  • Over £125,140: 45% (Additional Rate)

    
    

• Scotland:

  • £0–£12,570: 0% (Personal Allowance)

  • £12,571–£14,876: 19% (Starter Rate)

  • £14,877–£26,561: 20% (Basic Rate)

  • £26,562–£43,662: 21% (Intermediate Rate)

  • £43,663–£75,000: 42% (Higher Rate)

  • £75,001–£125,140: 45% (Advanced Rate)

  • Over £125,140: 48% (Top Rate)

    
    

Note: The Personal Allowance reduces by £1 for every £2 of income above £100,000, disappearing at £125,140.

Other Taxes

• Capital Gains Tax (CGT): Applies to profits from selling assets (e.g., property, shares). Rates for 2025/26: 10% (Basic Rate) or 20% (Higher/Additional Rate) for most assets; 18% or 24% for residential property. Annual exemption: £3,000.

• Inheritance Tax (IHT): 40% on estates above £325,000 (2025/26 threshold), with reliefs for spouses or charities.

• Rental Income: Taxed at Income Tax rates (20%–45%), with allowances for expenses like repairs.

• Gifts: Potentially Exempt Transfers (PETs) may incur IHT if the giver dies within 7 years (40%, tapering after 3 years).

• Council Tax: Annual local levies (£200–£3,200, depending on property value and location).

  
  

Exemptions:

• Renting a room in your main home (up to £7,500 tax-free under Rent-a-Room Scheme).

• National Lottery winnings.

• Certain disability benefits.

  
  

National Insurance Contributions (NICs)

• Employed: Class 1 NICs at 12% on earnings between £12,570 and £50,270, 2% above £50,270.

• Self-Employed: Class 2 NICs (£3.45/week if profits exceed £6,725) and Class 4 NICs (6% on profits £12,570–£50,270, 2% above).

  
  

Corporate Taxes

Companies in the UK pay Corporation Tax on profits, with rates for 2025/26:

• 19% for profits up to £50,000.

• 25% for profits above £250,000, with marginal relief for profits between £50,000 and £250,000.

  
  

Other Corporate Taxes:

• VAT: Applies if taxable turnover exceeds £90,000 (2025/26 threshold). Rates: 20% (standard), 5% (e.g., domestic fuel), 0% (e.g., exports, education, food).

• Stamp Duty Land Tax (SDLT): 0%–15% on property purchases, depending on value and use.

• Annual Tax on Enveloped Dwellings (ATED): For high-value properties (£500,000+) owned by companies, ranging from £4,150 to £269,450 annually.

• Excise Duties: Apply to petrol, tobacco, alcohol, and gambling.

  
  

Taxation for Private Limited Companies (LTDs)

A Private Limited Company (LTD) is a separate legal entity, requiring at least one director and shareholder. Taxation includes:

• Corporation Tax: 19% or 25% on profits, filed annually via a Company Tax Return.

• Dividends: Shareholders pay Income Tax on dividends (8.75% Basic Rate, 33.75% Higher Rate, 39.35% Additional Rate for 2025/26). A £500 Dividend Allowance is tax-free.

• PAYE and NICs: If directors or employees are paid salaries, deduct Income Tax and Class 1 NICs.

• VAT: If registered, charge and file VAT returns quarterly.

  
  

Example: An LTD with £100,000 profit pays £19,000 Corporation Tax (19%). If £50,000 is distributed as dividends to a Basic Rate taxpayer, the shareholder pays £4,331.25 (8.75% on £49,500 after £500 allowance).

Taxation for Limited Liability Partnerships (LLPs)

An LLP combines partnership flexibility with limited liability. Partners (individuals or companies) are taxed individually, not the LLP itself:

• Income Tax: Partners pay 20%–45% (or 19%–48% in Scotland) on their share of profits, treated as self-employment income.

• NICs: Partners pay Class 2 and Class 4 NICs, as for self-employed individuals.

• VAT: LLPs register for VAT if turnover exceeds £90,000.

  
  

Example: An LLP with £80,000 profit split equally between two partners (each £40,000). Each partner pays Income Tax (£5,086 at 20% on £27,430 after Personal Allowance) and Class 4 NICs (£1,645.80 at 6% on £27,430), plus Class 2 NICs (£179.40/year).

Taxation for Non-Resident Companies

Non-resident companies (without a UK permanent establishment) pay Corporation Tax only on UK-sourced profits, not worldwide profits. For example:

• A non-resident LTD operating abroad pays no UK Corporation Tax unless it earns UK profits (e.g., from a UK branch).

• Capital Gains Tax applies to UK property sales (20% standard rate).

• No tax on selling 10%+ of shares in a trading company, subject to conditions.

Non-residents benefit from tax optimisation but must register with HMRC if they have UK taxable income.

Double Taxation Agreements (DTAs)

The UK has DTAs with many countries, including Russia and Eastern European nations, to prevent double taxation. DTAs specify:

• Which country taxes specific income.

• Eligibility for tax relief (exemption or credit).

• Processes for claiming relief, such as applying to HMRC or the foreign tax authority.

Example: A Russian resident with UK rental income may claim relief under the UK-Russia DTA, offsetting UK tax paid against Russian tax or seeking an exemption.

Need Help?

Navigating UK taxation, from residency rules to corporate obligations, requires expertise. Foundry Accounting’s qualified accountants can assist with tax planning, filing returns, expert VAT services for small businesses in London and leveraging DTAs for individuals, LTDs, and LLPs. Contact us at foundryaccounting.co.uk for tailored support.