How Taxation Works in the UK in 2025: A Guide for Businesses and Investors

Introduction to UK Taxation in 2025

Despite not being a tax-free jurisdiction, the UK attracts thousands of foreign businesses and investors annually due to its robust financial infrastructure and strategic tax planning opportunities. The abolition of the non-domicile (non-dom) regime in April 2025 has introduced a new residence-based tax system, making it essential to understand the updated tax framework. This guide explains how taxation works in the UK in 2025, why it remains a top destination for business, and how to comply with tax laws when relocating a company.

Overview of the UK Tax System

The UK tax system is complex but offers legal avenues for tax optimisation, particularly for businesses and investors. Below are the main taxes and their key features in 2025:

1. Income Tax

Income tax is levied on personal earnings, including salaries, self-employment income, and investments. The UK uses a progressive tax scale, with rates increasing based on income levels. For 2025/26, rates typically range from 20% to 45%, depending on income thresholds. Visit HMRC’s Income Tax page for current rates.

2. National Insurance Contributions (NICs)

NICs fund the NHS and social security system, paid by both employees and employers. Rates vary based on earnings, with different classes for employees, self-employed individuals, and employers. Learn more on HMRC’s NICs page.

3. Value Added Tax (VAT)

VAT applies to most goods and services, with a standard rate of 20% and a reduced rate of 5% for specific items (e.g., energy bills). Businesses with a taxable turnover above £90,000 (2025 threshold) must register for VAT. Details are available on HMRC’s VAT page.

4. Corporation Tax

Corporation tax is levied on company profits, with rates varying by profit level (e.g., 19% for small profits, 25% for profits over £250,000 in 2025). Tax reliefs and incentives, such as R&D credits, can reduce the tax burden for eligible businesses.

5. Council Tax

Council tax funds local services like waste collection and road maintenance. It’s based on property value bands, with rates set by local councils. Check your local council’s website for specific rates.

6. Inheritance Tax (IHT)

IHT applies to estates above £325,000 (2025 threshold) at a 40% rate. Assets inherited are valued at market rates for tax purposes when sold, taxing only the gain. For example, an inherited property worth £1,000,000 sold for £1,200,000 incurs tax on the £200,000 gain.

7. Capital Gains Tax (CGT)

CGT taxes profits from selling assets like property or shares. Rates depend on income and asset type, typically 10–28% for individuals and 25% for companies in 2025. Exemptions may apply for certain assets.

Other Taxes

Additional taxes include Vehicle Excise Duty, excise duties on alcohol and tobacco, and gambling taxes. Notably, gifts are not taxed in the UK, but large gifts may require a deed of gift to prove legitimacy to HMRC.

The New Foreign Income and Gains (FIG) Regime

The non-dom regime was abolished on 6 April 2025, replaced by the residence-based Foreign Income and Gains (FIG) regime. This system taxes individuals based on UK residency rather than domicile, offering:

• Four-Year Tax Exemption: New UK residents (non-UK resident for 10 consecutive years prior) can claim a 100% exemption on foreign income and gains for their first four years of UK residency. No tax is charged even if funds are brought to the UK, but electing FIG forgoes personal allowances and CGT exemptions.

• Temporary Repatriation Facility (TRF): Former non-doms can remit pre-6 April 2025 foreign income and gains at reduced rates (12% in 2025/26 and 2026/27, 15% in 2027/28). This is a time-limited relief.

• IHT Changes: IHT now applies to worldwide assets for those resident in the UK for 10 out of 20 years, with a 10-year “tail” after leaving.

  
  

Consult a financial adviser like Foundry Accounting to assess eligibility and optimise your tax strategy under the FIG regime.

Tax Residency in 2025

Tax residency is determined by physical presence in the UK. You’re generally considered a UK tax resident if you spend 183 days or more in the UK during the tax year (6 April to 5 April). Other factors, like having a UK home or work, may establish residency in as little as 90 days. The FIG regime eliminates the non-dom distinction, taxing all residents’ worldwide income after the four-year exemption period.

Bringing Capital to the UK

Foreigners can bring pre-existing capital (“net capital”) into the UK tax-free before becoming tax resident, provided it’s held in a separate bank account. This capital must be documented to prove its legal origin. Mixing net capital with UK income is prohibited, as HMRC treats income as spent first, followed by capital, for tax purposes.

Corporate Taxation in the UK

The UK’s corporate tax system is straightforward, taxing profits (income minus expenses) at 19–25% based on profit levels. Unlike some jurisdictions, there’s no simplified tax system, but small businesses may qualify for simplified accounting. Key benefits include:

• No Tax on Overseas Dividends: Dividends received from foreign subsidiaries are typically tax-exempt.

• No Tax on Share Sales by Non-Residents: Non-UK tax residents face no tax on selling UK company shares.

• Tax Reliefs: Schemes like R&D tax credits and capital allowances reduce the tax burden.

  
  

Contact Foundry Accounting to explore legal tax optimisation strategies for your business.

Avoiding Double Taxation

The UK’s double taxation treaties prevent paying tax twice on the same income. If you pay tax abroad (e.g., 13% in Russia), you can offset it against UK tax (e.g., pay only 2% more if the UK rate is 15%). Some relief is available even without a treaty, depending on the jurisdiction. Businesses managed from the UK must register for tax to avoid penalties, even if incorporated abroad.

Relocating a Business to the UK

Relocating a business to the UK can be done via:

1. Redomiciliation: Transferring a company’s registration to the UK without liquidation, retaining its legal form and assets. This is common for companies from jurisdictions like the British Virgin Islands or Belize, provided the original country’s laws allow it.

   
   

2. New Registration: Setting up a new UK entity without liquidating the foreign company. This avoids taxes on asset liquidation but requires compliance with UK tax rules.

   
   

Redomiciliation is often preferred to avoid financial losses, but it’s not always possible if the original jurisdiction prohibits it. Sole traders relocate more easily, as their business moves with them.

Consequences of Tax Non-Compliance

Violating UK tax laws can lead to severe penalties:

• Unregistered Businesses: Companies operating in the UK without tax registration may face back taxes for up to 5 years, plus fines.

• Misreported Income: Transferring business income as a “gift” to evade tax (e.g., via a third party) can incur penalties up to 200% of the tax owed if deemed tax evasion.

• Cross-Jurisdictional Issues: Ensure compliance with both UK and foreign tax laws, especially for subsidiaries in low-tax jurisdictions, to avoid breaches.

Work with a financial adviser to ensure compliance across all relevant jurisdictions.

Why the UK Remains Attractive

The UK’s tax system, while complex, offers significant advantages:

• The FIG regime provides a four-year tax exemption for new residents.

• Double taxation treaties and corporate tax reliefs benefit international businesses.

• A practice-based legal system allows for flexible tax planning, despite the closure of the Office of Tax Simplification in 2024.

  
  

Conclusion

The UK’s tax system in 2025, with the new FIG regime and residence-based IHT, offers opportunities for businesses and investors to optimise their tax liabilities legally. By understanding key taxes, leveraging double taxation treaties, and planning business relocations carefully, you can thrive in the UK’s financial landscape. Contact Foundry Accounting for expert guidance on navigating UK taxation.

Ready to optimise your tax strategy in the UK? Contact Foundry Accounting today to ensure compliance and minimise your tax burden.