How the British Tax System is Organised

The UK tax system, while extensive, is structured logically to fund public services at central, devolved, and local government levels. Administered by HM Revenue and Customs (HMRC), an independent body, it encompasses a range of taxes that are often progressive, meaning higher earners pay higher rates. This article outlines the main taxes, their features, and key deadlines for the 2024/25 tax year.

General Provisions and Key Concepts

The UK tax system operates across three levels:

·        Central Government: Funded primarily by Income Tax, National Insurance Contributions (NICs), Value Added Tax (VAT), Corporation Tax, and fuel duties.

·        Devolved Governments: Scotland, Wales, and Northern Ireland have varying powers to set certain taxes, such as Income Tax rates in Scotland or Land Transaction Tax in Wales.

·        Local Authorities: Supported by government grants, Council Tax, and local charges (e.g., parking fees).

Tax revenues for the 2023/24 tax year reached approximately £827 billion, a significant increase from £633.4 billion in 2019/20, reflecting economic recovery and policy changes post-COVID.

Taxation depends on residency and domicile status:

·        Residents: Taxed on worldwide income and gains, determined by the Statutory Residence Test (SRT), which assesses ties to the UK.

·        Non-Residents: Taxed only on UK-sourced income.

·        Domicile: Affects Inheritance Tax and Capital Gains Tax. UK-domiciled residents pay tax on global income and gains, while non-UK-domiciled residents may claim the remittance basis for foreign income, subject to specific conditions.

Income Tax

Income Tax accounts for approximately 30% of UK tax revenue and is progressive, with rates increasing based on income levels. For the 2024/25 tax year in England, Wales, and Northern Ireland:

·        Personal Allowance: £12,570 (tax-free).

·        Basic Rate: 20% on income from £12,571 to £50,270.

·        Higher Rate: 40% on income from £50,271 to £125,140.

·        Additional Rate: 45% on income above £125,140.

Scotland sets its own rates, with a more graduated structure, including an Intermediate Rate (21%) and a Top Rate(48%) for 2024/25, as set by the Scottish Parliament. Details are available on GOV.UK.

National Insurance Contributions (NICs)

NICs are the second-largest revenue source, funding social security benefits like pensions. They are paid by employees, employers, and the self-employed, based on income and employment type:

·        Class 1 (Employees): For 2024/25, employees under State Pension age pay 8% on weekly earnings between £242 and £967, and 2% above £967.

·        Class 2 (Self-Employed): Abolished from 6 April 2024; self-employed individuals no longer pay a flat rate but may need to make voluntary contributions for benefit eligibility.

·        Class 4 (Self-Employed): 6% on profits between £12,570 and £50,270, and 2% above £50,270 for 2024/25.

Rates and thresholds are detailed on GOV.UK.

Property Taxes

Property taxes contribute significantly, accounting for around 12.5% of UK tax revenue, per OECD data. The UK has two main property taxes:

·        Stamp Duty Land Tax (SDLT): Applies in England and Northern Ireland to property purchases. For 2024/25:

o   Residential properties: 0% up to £250,000, with progressive rates up to 12% above £1.5 million. First-time buyers get relief up to £425,000.

o   Non-residential properties: 0% up to £150,000, with rates up to 5% above £250,000.

o   Scotland uses Land and Buildings Transaction Tax (LBTT), and Wales uses Land Transaction Tax (LTT), with different thresholds and rates.

·        Council Tax: Levied by local authorities based on property valuation bands, funding services like waste collection. Rates vary by council and property band, with discounts for low-income households.

Calculators for SDLT, LBTT, and LTT are available on GOV.UK.

Wealth Taxes

Wealth taxes, including Capital Gains Tax (CGT) and Inheritance Tax (IHT), contribute around 4% of GDP:

·        Capital Gains Tax: Levied on profits from selling assets (e.g., property, shares). For 2024/25, rates are 10% (basic rate taxpayers) or 20% (higher/additional rate taxpayers) for most assets, and 18% or 24% for residential property. The annual exempt amount is £3,000 for individuals and £1,500 for trusts.

·        Inheritance Tax: Charged at 40% on estates above £325,000, with reliefs for charitable donations (reduced to 36% if 10% or more of the estate is donated) or spousal/civil partner transfers (tax-free). Additional reliefs, like the residence nil-rate band (£175,000 for 2024/25), may apply.

Value Added Tax (VAT)

VAT is applied to most goods and services at a standard rate of 20%, with reduced rates (e.g., 5% for domestic energy, child car seats) or zero rates (e.g., certain foods, books). Businesses with a taxable turnover exceeding £90,000 must register for VAT. A full list of rates and taxable items is available on GOV.UK.

Tax Return Deadlines

The UK tax year for individuals runs from 6 April to 5 April, while companies typically use 1 April to 31 March. Key deadlines for 2024/25:

·        Paper Tax Returns: 31 October 2025.

·        Online Tax Returns: 31 January 2026.

·        Notify HMRC of Tax Status Changes: By 5 October 2025 for the 2024/25 tax year.

Individuals and businesses need a Unique Taxpayer Reference (UTR), obtainable via HMRC. Late filing incurs penalties:

·        £100 for up to 3 months late.

·        £10 per day thereafter, up to 90 days.

·        After 6 months, an additional £300 or 5% of tax due (whichever is greater).

·        After 12 months, further penalties up to 200% of tax liability in severe cases.

Professional Support

Navigating the UK tax system requires precision to ensure compliance and avoid penalties. Engaging a qualified accountant can streamline tax return preparation, optimise liabilities, and manage regulatory requirements. Our firm, Foundry Accounting, provides expert accountancy services to businesses and individuals across the UK. Contact us to ensure your tax obligations are met efficiently.

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