Taxes in the United Kingdom

Written by Lais Cattassini Moderated by Oleksandra Dosii

Lais Cattassini

Lais is a Brazilian journalist and copywriter with over 17 years of experience, writing about things she knows really well (travelling, cinema, social media trends) and things she loves learning about.

Oleksandra Dosii

Oleksandra is a dedicated marketer with a passion for growing HR-tech products. She believes content marketing is about delivering high-quality content that provides value—not just generating leads. Since 2016, Oleksandra has been involved in tech talent relocation.

Last update: September 14, 2024

Next update: Scheduled for February 1, 2025

The United Kingdom's tax system is primarily administered by Her Majesty’s Revenue and Customs (HMRC) and is divided into several categories of taxes, which can broadly be classified into income, consumption, corporate, and capital taxes.

UK residents are taxed on their worldwide income, while non-residents are taxed only on their UK-sourced income. The tax year runs from April 6 to April 5. Employed and self-employed individuals contribute towards state benefits, including pensions and healthcare. NICs are based on earnings and vary depending on income levels.

What is the income tax in the United Kingdom?

Income tax in the UK ranges from 0% to 45%, with the average person paying around 20%. Income tax is collected by Her Majesty's Revenue and Customs (HMRC), and both residents and non-residents are subject to income tax depending on their income sources and residency status.

Income tax in the UK applies to a range of income types, including salaries, bonuses, profits earned by those who run their own businesses, pension income, and investments. Certain state benefits (like Personal Independence Payment) and income from certain savings products (like ISAs) are tax-free.

Every individual who is eligible for income tax receives a personal allowance, which is the amount of income they can earn each year before they are required to pay any income tax. For the 2023/24 tax year, the standard personal allowance is £12,570.

Tax rates range from 20% to 45%, depending on your income band. Income tax bands for England, Wales, and Northern Ireland for 2024 are as follows:

In Scotland, the income tax bands differ, with additional bands and slightly different rates:

For employees, income tax is collected through the Pay As You Earn (PAYE) system. Under PAYE, employers deduct income tax and National Insurance Contributions (NICs) from an employee’s salary before paying them. The employer then sends this tax directly to HMRC on the employee’s behalf.

Employees receive a tax code that determines how much tax is deducted from their wages. The most common tax code for individuals receiving the full personal allowance is 1257L.

Self-employed individuals, company directors, and people with untaxed income must file a Self-Assessment tax return. Through this system, taxpayers report their total income, claim allowable expenses, and calculate how much tax they owe.

National Insurance Contributions (NICs)

National Insurance Contributions (NICs) help fund various state benefits, such as the National Health Service (NHS), the State Pension, and unemployment benefits. Both employees and employers pay National Insurance (NI), and there are different types of contributions depending on employment status.

Class 1 NICs (Employees and Employers)

Employees pay Class 1 NICs on earnings (wages or salary) over a certain threshold. For the 2023/24 tax year, the rates are 12% on earnings between £12,570 and £50,270 and 2% on earnings over £50,270.

Employers also pay NICs on their employees' wages. The employer rate is 13.8% on earnings above £9,100.

NICs are automatically deducted from an employee's paycheck through the Pay As You Earn (PAYE) system.

Class 2 NICs (Self-employed)

Class 2 NICs are paid by self-employed individuals with profits above a certain level. For 2023/24, Class 2 NICs are payable if profits exceed £12,570 and the contribution is a flat rate of £3.45 per week.

Class 4 NICs (Self-employed)

Class 4 NICs are paid by self-employed individuals on their annual profits. For the 2023/24 tax year, the rate is 9% on profits between £12,570 and £50,270 and 2% on profits over £50,270.

While Class 4 NICs are mandatory, they do not count toward eligibility for state benefits. They are an additional tax on profits, separate from Class 2 NICs.

Class 3 NICs (Voluntary Contributions)

Class 3 NICs are voluntary contributions made by individuals who want to fill gaps in their National Insurance records. These contributions are often made by those who have not paid enough NI to qualify for full state benefits, such as people who are unemployed, working abroad, or earning below the NI threshold.

For 2023/24, the rate is £17.45 per week.

Online tax calculator for taxes in the United Kingdom

The UK government provides a tool to calculate how much you will potentially pay in taxes for the upcoming year.

You can also calculate your UK net income here.

Annual tax returns in the United Kingdom

Most individuals in the UK have their taxes deducted automatically through the Pay As You Earn (PAYE) system, but certain taxpayers, particularly the self-employed, landlords, company directors, and high earners must file a Self-Assessment tax return.

You are required to complete a Self-Assessment tax return if you are running your own business, receive rental income from properties, are the director of a limited company, or have earnings over £100,000 per year. Even if you don’t fall into one of these categories, HMRC might send a notice to complete a tax return if they believe you need to file one.

There are strict deadlines for filing a Self-Assessment tax return and paying any tax owed. Missing these deadlines can result in penalties. The deadline for filing an online tax return (the most common method) and paying any tax owed for the previous tax year is 31 January, following the end of the tax year.

Filing a self-assessment tax return

Before filing a tax return, you need to register with HMRC if you haven't done so previously. You can do this online, and HMRC will provide a Unique Taxpayer Reference (UTR) number. This is a 10-digit number that identifies you for tax purposes.

For the self-employed, you must register by 5 October following the end of the tax year in which you started your business.

Once registered, you can complete your tax return online or by paper. When filling in the return, you'll need to report your income, claim allowances, and report any gains.

The HMRC's online system provides guidance as you fill out the return, ensuring you complete all relevant sections. Once completed, the return is submitted electronically through the HMRC website or via post for paper returns. After submission, HMRC will calculate your tax liability and notify you of any payments that are due.

How to pay less taxes

Personal allowance

The Personal Allowance is the amount of income an individual can earn before paying income tax. For the 2023/24 tax year, the standard personal allowance is £12,570. However, individuals earning more than £100,00 a year see their personal allowance reduced by £1 for every £2 earned over this limit.

By ensuring that your taxable income is below £100,000, you can retain the full personal allowance. This can be achieved through pension contributions or charitable donations.

Marriage allowance

The Marriage Allowance allows individuals to transfer up to 10% of their personal allowance to their spouse or civil partner, provided the lower-earning spouse earns less than £12,570 and does not use their full personal allowance and the higher-earning spouse is a basic-rate taxpayer.

Pension contributions

Making contributions to a pension scheme is one of the most effective ways to reduce taxable income. Pension contributions receive tax relief at an individual’s marginal rate of tax:

• Basic rate taxpayers (20%): For every £80 contributed, the government adds £20, making the total £100.
• Higher rate taxpayers (40%): These individuals can claim additional tax relief through their Self-Assessment tax return, reducing their tax bill further. For example, a £100 contribution costs only £60 after all reliefs.
• Additional rate taxpayers (45%): Can claim even more relief, making pension contributions a very efficient way to save on taxes.

Gift aid

Gift Aid is a tax relief on donations made to UK charities. When you donate to a charity under Gift Aid, the charity can reclaim 25p for every £1 donated by HMRC. If you're a higher or additional rate taxpayer, you can claim back the difference between the basic rate of tax (20%) and the higher/additional rate on your donations through your Self-Assessment return.

ISA (Individual Savings Account)

ISAs allow individuals to save or invest money tax-free. The key advantage of ISAs is that any income or capital gains generated within the account are not subject to tax.

Rent-a-room relief

If you rent out a room in your home, you can claim up to £7,500 in tax-free income each year under the Rent-a-Room Scheme. If the property is jointly owned, the allowance is split between both owners.

Talk to a tax advisor

Advisors and accountants can help you pay taxes and ensure you collect benefits, allowances, and deductions correctly.

For expats, services like these can be even more beneficial, as they help foreigners overcome language barriers and the complicated tax regulations of a new country.

Other taxes in the United Kingdom

In the UK, residents are subject to several taxes beyond income tax. These taxes apply to different types of transactions, property ownership, and specific goods and services.

Value added tax (VAT)

Value Added Tax (VAT) is a consumption tax applied to most goods and services in the UK. The standard VAT rate is 20%, but some items are charged at a reduced rate (5%) or are exempt from VAT altogether.

Businesses with a turnover of more than £85,000 must register for VAT and charge it on taxable supplies.

Council tax

Council Tax is a local tax that helps fund local services like rubbish collection, police, and schools. It’s charged based on the value of your property, and each property is placed into a Council Tax band (A to H) depending on its value as of 1991. The amount payable depends on the local council’s rate and the property band.

Capital gains tax (CGT)

Capital Gains Tax (CGT) is a tax on the profit you make when you sell or dispose of certain assets, such as property (other than your primary residence), shares, or valuable items like art. CGT is paid on the gain you make, not the total sale value.

Stamp duty land tax (SDLT)

Stamp Duty Land Tax (SDLT) is payable when you buy property or land in England and Northern Ireland (different taxes apply in Scotland and Wales). The amount of SDLT depends on the purchase price and whether you're a first-time buyer, buying a primary residence, or purchasing additional properties.

Inheritance tax (IHT)

Inheritance Tax (IHT) is charged on the value of a deceased person’s estate (property, money, and possessions) if the estate exceeds a certain threshold. The nil-rate band for inheritance tax is £325,000.

Above this threshold, IHT is charged at 40%. However, there are reliefs and exemptions, such as the Residence Nil-Rate Band (RNRB), which allows a further £175,000 exemption for passing on the family home to direct descendants.

Corporation tax

Corporation Tax is a tax on the profits of companies, including foreign companies with branches or offices in the UK. For the 2023/24 tax year, the corporation tax rate is 25% for companies with profits over £250,000, and a reduced rate of 19% for companies with profits under £50,000.

Tax treaties with the United Kingdom

The UK has multilateral agreements with several countries to avoid double taxation and encourage foreign investments. You can find out more about these agreements and what they entail here.