What Taxes Individuals Pay in the UK

Income Tax

Income tax is imposed on:

1.     All income earned by UK tax residents, whether in the UK or abroad.

2.     Income earned in the UK by non-tax residents.

Income tax follows a progressive scale, with higher rates applying to higher income levels in a tax year (6 April to 5 April). The rate depends on the income source and available allowances. For 2024/25, the personal allowance is £12,570 (tax-free), with rates of 20% (basic), 40% (higher), and 45% (additional) applying above this threshold, depending on total income.

Tax on Savings Income

Savings income is taxed at the same rates as other income. However, a tax-free savings allowance applies: £1,000 for basic rate taxpayers, £500 for higher rate taxpayers, and £0 for additional rate taxpayers. This is in addition to the personal allowance (£12,570 for 2024/25). If your total income exceeds the personal allowance, each pound above it reduces the personal allowance by £1, potentially eliminating the tax-free savings allowance if income is high enough.

Dividend Tax

Dividends from UK companies are taxed at specific rates for 2024/25: 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate). A tax-free dividend allowance of £500 applies. Dividends from foreign companies are taxed as regular income under the income tax rates, unless covered by a double taxation treaty.

Capital Gains Tax (CGT)

CGT applies to gains from selling assets like shares, bonds, or property. For 2024/25, the tax-free annual exempt amount is £3,000. Above this:

·        Basic rate taxpayers pay 10% on most gains.

·        Higher and additional rate taxpayers pay 20% on most gains.

·        Gains on residential property (not your main home) are taxed at 18% (basic rate) or 24% (higher/additional rate, updated from 28% as of April 2024).

·        Carried interest (e.g., for investment fund managers) is taxed at 28%.

Annual Tax on Enveloped Dwellings (ATED)

ATED applies to residential properties valued over £500,000 owned by non-individuals (e.g., companies, partnerships, or investment funds) and not used for commercial purposes (e.g., renting). The tax is charged annually based on a progressive scale, adjusted for inflation using the Consumer Price Index. For 2024/25, rates range from £4,150 to £394,250, depending on property value.

Inheritance Tax

Inheritance tax is charged at 40% on estates valued over £325,000 (the nil-rate band for 2024/25) upon the death of a UK tax resident or domiciled individual. No tax is due if assets pass to a spouse or civil partner, provided both are UK-domiciled. If a UK-domiciled individual transfers assets to a non-domiciled spouse or civil partner, only the first £325,000 is exempt. An additional residence nil-rate band (up to £175,000 for 2024/25) may apply for passing a main home to direct descendants.

Gift Tax

Under UK law, receiving a gift does not generally trigger a tax liability. However, gifts may be subject to inheritance tax under the Potentially Exempt Transfer (PET) rules if the donor dies within 7 years. Gifts include money, property, securities, or selling assets below market value (the difference is treated as a gift).

Key rules for 2024/25:

·        UK tax residents can gift up to £3,000 per tax year tax-free (the annual exemption). Unused amounts can be carried forward one year.

·        Gifts between UK-domiciled spouses or civil partners are tax-free, provided the marriage or partnership is legally recognised.

·        Wedding gifts are exempt up to £5,000 for children, £2,500 for grandchildren, or £1,000 for others.

·        Gifts to charities, political parties, or certain institutions are tax-free.

·        If the donor dies within 7 years of a gift exceeding the annual exemption, it may be taxed at 40%, with taper relief reducing the rate for gifts made 3–7 years before death.

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