Personal Income Tax and Consumption Taxes in the United Kingdom
Reduced rate
The UK applies a reduced VAT of 5% to certain categories of goods and services, including child safety seats;
certain social housing; some social services; the supply of electricity, gas and heating (only for domestic use); the installation of some materials for energy saving; LPG and heating oil (only for domestic use);
some private home renovations and repairs; some medical equipment for the disabled, etc.
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In the face of the COVID-19 pandemic, for the period between July 15, 2020 and September 30, 2021, the reduced rate of 5% also applies to hotels and tourism, including restaurants, cafes, pubs (except alcohol);
lodging; Hotels; bed and breakfasts; lodging rental; mobile home and campsites; hot takeaway; theaters; circuses; amusement parks; concerts; museums; zoos; and exhibitions;
(in all cases, alcoholic beverages will not benefit from the tax cut). From September 30, 2021 to April 30, 2022, the rate will be 12.5%.
The 0% rate is applied to some goods and services: certain social housing; printed books (not e-books); newspapers and periodicals; private home renovations (Isle of Man only); domestic waste collection;
household water supply (except distilled and mineral water); provision of food and drinks (with some exceptions); takeaway food (if purchased from food outlets); cut flowers and plants for food production;
prescription pharmaceuticals; certain medical supplies for the disabled; local passenger transport; children’s clothing and footwear; diapers for children; live animals for human consumption;
seed supply; supply of animal feed; supply of mobile homes and residential boats; some construction works for new buildings; some new building supplies; sewage services; motorcycle and bicycle helmets;
boat shops and commercial flights; intra-community and international passenger transport; gold ingots, bars and coins, feminine sanitary products.
Those exempt from tax
Exempt goods and services include: insurance, finance and credit, education and training, charitable fundraising events, subscriptions to membership organizations;
sale and lease of commercial land and buildings (with conditions) ; betting and gambling.
Calculation and declaration modes
A company can only charge VAT if it is registered with the HMRC. VAT applies to “taxable supplies” such as the sale of products and the provision of services, the sale of business assets, commissions, donations, etc.
Different rules apply to imports, exports and charities. Registration is required for businesses whose taxable supplies exceed GBP85,000 in 2020/2021;
or where a business estimates that its taxable supplies will exceed this limit within 30 days (unregistration is possible if taxable supplies fall below GBP83,000).
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The VAT return is filed quarterly with HMRC (in some cases monthly).
For more information, consult the VAT Guide of the Inland Revenue, which also provides information on the VAT measures adopted by the UK government in response to the COVID-19 crisis.
In fact, since leaving the EU, the UK is free to adopt its own VAT rules, with the exception of Northern Ireland, which will operate on a dual/blended VAT regime and meanwhile follows the EU VAT rules.
EU for goods and UK VAT rules for services.
Other consumption taxes
Excise duties apply to most petroleum hydrocarbon products, alcoholic beverages, and tobacco products.
The tax on sugary drinks (Sugar Tax) is applied at two rates:
GBP 0.18 per liter of drinks if they contain between 5 and 8 grams of sugar per 100 millilitres; GBP 0.24 per liter of beverages if they contain 8 grams of azulcar per 100 milliliters or more.
There are different environmental taxes, among which: Tax on landfills, tax on climate change and tax on the use of aggregates.
Individuals leaving the UK by air are required to pay a fee which is, in practice, included in the price of the air ticket.
Personal income tax
Difference between resident and non-resident
To determine whether an individual is a UK resident or non-resident taxpayer, a legal residence test ( SRT ) is carried out, which includes a combination of physical presence and linking factors.
An individual will be resident in the UK for one tax year if they meet the “automatic residency test” or the “sufficient link test”.
Standard rate
Income tax 2021/22 Progressive rate up to 45%
0 – £12,570 0%
£12,570 – £37,700 20% (basic rate)
£37,701 – £150,000 40% (high rate)
Over £150,000 45% (additional fee)
dividend income
0 – £12,570 0%
£12,571 – £37,700 7.5%
£37,701 – £150,000 32.5%
Over £150,000 38.1%
Tax deductions and credits
Tax relief can be claimed for personal allowances (the normal amount is GBP 12,570 for tax year 2020-2021, which can be reduced for total income over GBP 100,000;
or increased in the case of a marriage allowance ), living expenses work or business and some contributions to pension plans, donations to charities;
maintenance payments and time spent working on board a vessel outside the UK. Contributions to pension plans can be deducted, subject to certain conditions.
Income tax breaks that are not subject to a specific restriction are limited to GBP 50,000 or 25% of an individual’s income (whichever is higher).
Necessary business expenses can be deducted from earned income, and are not taxable if paid or reimbursed by the employer.
Expenses that do not qualify for tax relief include: alimony, medical expenses, social security contributions, council tax and other UK taxes, most insurance premiums;
mortgage interest payments (with reductions for commercially rented properties ), fines and surcharges (except fines received during a business, such as a parking ticket), contingent liabilities.
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Special schemes for expatriates
If an individual is resident and domiciled in the UK, they are subject to UK income tax and capital gains tax on their worldwide income and gains.
If a participant is resident but not domiciled in the UK, they are subject to UK income tax on their worldwide income;
but may choose to pay tax on their overseas income and capital gains on a remittance basis, subject to an additional surcharge.
Non-resident individuals are taxed on their UK-sourced income and capital gains from the sale of residential property in the UK.
Residents who are not domiciled or considered domiciled in the UK can apply for the remittance tax basis for their overseas income;
in exchange for an additional tax liability of GBP 30,000 per year for former UK resident taxpayers for seven of the previous nine years, which rises to GBP 60,000 for being a resident for 12 of the previous 14 years.
Expatriate allowances are included in taxable income but may be available for exemptions for certain living expenses.
Wealth tax
An inheritance tax (IHT) is generally applied after death to the value of the property and gifts made during the previous seven years, subject to a reduction of the same between four and seven years before death.
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When the assets are worth more than GBP 325,000, the IHT is 40%. There is a family housing allowance for residential property left to descendants;
(tax-free up to GBP 1 million, gradually reduced for properties worth more than GBP 2 million).
The UK does not levy a wealth tax.
Capital gains are subject to different levels of taxation. For more information.
Local authorities apply a property-based tax, levied on the occupant of a domestic dwelling at a flat rate per dwelling (property owners are taxed on unoccupied dwellings).
Real Estate Stamp Duty (SDLT) is levied in England and Northern Ireland on transfers of real estate, with rates varying between 0% and 12% for residential properties ;
(15% if the property is assessed at more than GBP 500,000 ) and 0% to 5% for non-residential properties.
Similar taxes – the Land and Buildings Transaction Tax (LBTT) and the Land Transaction Tax (LTT) – are levied on property in Scotland and Wales, respectively.
