Taxation in the United Kingdom

This article is a brief overview of some aspects of UK taxes.

Overview

Taxation in the United Kingdom may involve payments to at least two different levels of government: local government and central government. Local government is financed by grants from central government funds, business rates and council tax. Central government revenues are mainly income tax, national insurance contributions, value added tax, excise duties, corporation tax, capital gains tax, inheritance tax and stamp duty.

Residence and domicile

All UK derived income and gains are subject to UK taxation no matter the citizenship nor the place of residence of the individual nor the place of registration of the company.

Individuals who are both resident and domiciled in the UK are additionally liable to taxation on their worldwide income and gains. For certain individuals, therefore, the UK is a tax haven: Being resident but not domiciled in the UK allows means that only income remitted to the UK is taxed, together with all capital gains.

Domicile is a concept not entirely unique but nevertheless peculiar to UK tax law. An individual is domiciled in the UK if (s)he has an abiding attachment to the country. In UK law one's country of residence is a matter of testable fact; one's country of domicile is a grey area in law and is also harder to change.

A company is resident in the UK if it is UK-incorporated or if its central management and control are in the UK. A company is domiciled in the UK if it is incorporated in the UK. A company's domicile has no effect on its tax position - it pays tax on its worldwide income and gains.

Double taxation of non-UK income and gains is avoided by a number of bilateral tax treaties.

See IR20 - Residents and non-residents.

Income tax

Income tax forms the bulk of revenues collected by the government. Depending on an individual's income, the rate of income tax ranges from nothing through 10% (starting rate) to 20% (basic rate for interest) to 22% (basic rate) to 32.5% (higher rate for UK dividends) to 40% (higher rate).

National insurance contributions

The second largest source of government revenues is national insurance contributions, payable by employees, employers and the self-employed.

Value added tax

The third largest source of government revenues is value added tax, charged at the standard rate of 17.5% on supplies of goods and services. Certain goods and services are exempt from VAT, and others are subject to VAT at lower rate of 5% (the lower rate) or 0% ("zero-rated").

Corporation tax

Main article: United Kingdom corporation tax

The fourth largest source of government revenues is corporation tax, charged on the profits and capital gains of companies. The highest rate is 30%, but lower rates apply to companies with levels of profits below Ł1.5 million.

Capital gains tax

Capital gains are subject to tax at the marginal rate of income tax (for individuals) or of corporation tax (for companies).

Excise duties

Excise duties are charged on, amongst other things, fuel, alcohol, tobacco, betting and vehicles.

Stamp duty

Stamp duty is charged on the transfer of certain partnership interests at rates of up to 4%, and of sharess and certain securities at a rate of 0.5%. Modernised versions of stamp duty, stamp duty land tax and stamp duty reserve tax, are charged respectively on the transfer of real estate and shares and securities, at rates respectively of up to 4% and 0.5%.

Inheritance tax

Inheritance tax is levied on certain gifts and the estates of deceased persons at a rate of 40%, although the first slice (the "nil rate band") is free of tax. This threshold is currently set at Ł263,000 and, although it is raised from time to time, it has never kept up with house price inflation with the result that some 6 million households currently fall within its scope. Any inheritance tax must be paid by the administrators of estate (the burden falling upon the beneficiaries) before probate is granted.

Local taxation

Council tax

Uniform business rates