In Benjamin Franklin’s words: “In this world, nothing is certain but death and taxes.” So, it does not determine whether you’re a resident or non-resident of a particular nation. You must plan your tax accordingly, especially if you’re in Europe. This will help you avoid undesired penalties against their tax laws.
If you’re a resident of the UK, this article is for you. Even as a non-resident of the UK, this article is, as well for you if you’re planning or have a business there. The UK tax includes the direct and indirect tax. The authority that collects these taxes in the UK is HM Revenue & Customs (HMRC).
The UK uses progressive tax policies. This means the more income you earn, the more your tax levy. But don’t be scared; this article is a guide – it’ll help you plan your taxes in the UK. So, fasten your belt, and let’s get started.
How to Determine Your Tax Residence Status in the UK
The UK’s tax residence status is based on the ‘Statutory Residence Test’ (SRT). Sounds complicated? Don’t worry; let’s do the breakdown analysis. This analysis is backed by the KPMG Statutory Residence Test Flowchart for Finance Act 2013. These include:
Automatic Overseas Test
The automatic overseas test considers you as a non-resident if:
- You’ve lived in the UK during the last three tax years and stayed for less than 16 days this year.
- You haven’t been a UK resident for the last seven tax years and are in the UK for less than 46 days this year.
- You’re working abroad full-time, spend less than 91 days in the UK, and less than 31 working days.
If you pass this test, you’re a non-resident. Easy? Let’s move to the next test, the “Automatic UK Test.”
Automatic UK Test
The automatic UK test makes you a UK resident if:
- You live in the UK for over 183 days in a tax year.
- You only have one home, and it’s in the UK. You’ve owned, rented, or lived in it for at least 91 days. Also, you spent at least 30 days there in the tax year.
- You’re working full-time in the UK. And during this working period, you work steadily for 31 days without going on break.
If any of these apply to you, congrats, you’re a UK resident.
Sufficient Ties Test
The HMRC will conduct the sufficient ties test if an individual does not fall into the above categories. Hence, they look at connections you have in the UK to find a resolution. These include:
- Family: If you have your spouse or kids under 18 here in the UK. That’s a family connection. Moreover, if you spend more than 20 days in the country during the tax year, you’ll receive a UK-resident treatment.
- Property: You own or rent a property in the UK where you can stay for 91 days. Also, you’ll be considered a UK resident if you spend a single night there during the tax year.
- Work: They’ll also determine your UK residency if you worked for at least 40 days in the tax year. This does not even have to be in a row.
- Time Spend in the UK Versus Elsewhere: The time you spend in the UK will be compared to elsewhere. You’ll be considered a UK resident if you spend more days in the UK during the tax year.
How to Report and Pay Your Income Tax in the UK
Income tax is the type of levy governments impose on income or profits earned by individuals or business entities. In the UK, some incomes are free, while others are taxable. Those that are taxable occur in three forms; 20%, 40%, and 45%. Let’s look at how these taxable incomes compare respectively to their bands.
|Up to £12,570
|£12,571 to £50,270
|£50,271 to £125,140
|£125,141 and above
When reporting your tax in the UK, you must know what income is taxable and what is not. With the understanding of these, you’ll be filing your tax expertly. So, let’s break this down.
Taxable Income And How To Report:
If you work in a private or public establishment, your employer handles most of the tax payment. They’ll subtract income tax and National Insurance contributions from your salary. That also covers benefits like sick pay and maternity leave.
If you’re your own boss, things are different. You’ll need to sign up for Self Assessment with HMRC. You’ll submit a tax return with your income and business expenses each year. The profit left after your business expenses is what’s taxable.
Pension income is taxed too, but only if it’s over your Personal Allowance. This covers everything – state pensions, private pensions, the works. Usually, your pension provider will take off tax before paying you.
Interest on Savings
If you have savings, the interest is likely tax-free up to £1,000 if you’re a basic-rate taxpayer or £500 if you’re a higher-rate taxpayer. However, if you’re an additional rate taxpayer, sorry, you miss out here.
The first £2,000 of dividends is tax-free each year if you own a share. Anything over that gets taxed – the rate depends on your overall income.
Income on Rental Property
If you’re a landlord, you’ll need to report rental income on your tax return. You get a £1,000 property allowance, but anything over that is taxable. You can subtract expenses like mortgage interest or maintenance costs from this.
Grants and Support Payments
Some grants and support payments are taxable; some aren’t. It’s tricky, so best to check with HMRC or a tax professional. However, to list one or more, some include the Self-Employment Income Support Scheme, the Small Business Grant Fund, or the Retail.
Benefits from your Job
Benefits like a company car or private medical insurance are taxable. Your employer will handle this, usually by adjusting your tax code.
Income from a Trust
If you get income from a trust, it is usually taxed before receiving it. You’ll need to report it to HMRC.
Test and Trace Support Payment
Test and Trace Support payments are for employees and the self-employed, and they’re taxable. You’ll need to include them in your Self Assessment tax return if you submit one.
Some State Benefits
Certain state benefits are taxable. These include Jobseeker’s Allowance, Carer’s Allowance, Employment and Support Allowance (contribution-based), State Pension, Widowed Parent’s Allowance, Bereavement Allowance, and Incapacity Benefit (after the first 28 weeks). These are usually paid with tax already deducted.
Some tax-free income include;
- The first £1,000 you earn from self-employment. This is called your ‘trading allowance.’
- The first £1,000 you earn from renting out a property, unless you’re using the Rent a Room Scheme.
- Money from certain accounts, like Individual Savings Accounts (ISAs) and National Savings Certificates.
- If you have company shares, your income from them is tax-free up to your Dividend Allowance.
- Some state benefits are free from the taxman’s grasp. Check with HMRC for the specific ones.
- You have a premium bond, or National Lottery wins.
- If you have a lodger at home, the Rent a Room Scheme will let you earn a certain amount before paying tax.
For taxable income, you need to register an account and pay your tax bill online or by other methods. So, how do you do this?
You’ll need to create a Government Gateway account on the HMRC website. To do this, enter personal details and pick a User ID and password. You’ll receive an activation code by mail, so watch your postbox.
Registering for Self Assessment is a must if you’re self-employed, a business partner, or have rental income. After you register, a letter with your Unique Taxpayer Reference (UTR) will be on its way to you. Don’t lose it; you’ll need it to pay your tax later. Also, you’ll get another activation code by mail to kickstart your Self Assessment service.
Filing Your Tax Return
To fill out your tax return, log into your HMRC account, head to ‘Self Assessment,’ and get started. You’ll need details on your income, expenses, and any tax breaks you’re eligible for. Once done, submit the form and check out your tax calculation.
Paying Your Tax
You can pay your tax online through your HMRC account, using the method that works best for you – Direct Debit, bank transfer, debit or credit card, you name it. Just remember to have your UTR handy.
How to Report and Pay Your Capital Gains Tax (CGT) in the UK
Capital gains are profits from selling assets like stocks, bonds, and real estate. To calculate capital gains, you subtract the asset sales value from its purchase; this gives you the gain. If the sales value of the asset is below its acquisition, it becomes a capital loss.
The UK landscape has thresholds for different types of assets and gains. The table below is a typical representation of the UK capital gains tax and assets.
|Type of Asset
For example, if you’re a Basic Rates Taxpayer that makes capital gains on cryptocurrency assets worth £30,000. With that, you can pay 10% of the gains as tax. In short, you’ll be paying £3,000 as a tax levy.
Now, let’s compare the different tax brackets, income rates, capital gain asset rates, and capital property rates. We can make inferences from the table below:
|CGT Asset Rates
|CGT Property Rates
|Basic Rate Taxpayer
|£12,571 to £50,270
|Higher Rate Taxpayer
|£50,270 to £125,139
|Additional Rate Taxpayer
|£125,140 and above
For example, you’re a higher rate taxpayer, bought a residential property for £80,000, and sold for £105,000. This gives you a profit of £25,000, with a CGT of 28% to be paid. That’s £7,000 required on pay as capital gains tax.
How to Report and Pay Your Inheritance Tax in the UK
Inheritance tax is the tax you pay when someone dies, and their estate (property, money, and possessions) is worth more than the inheritance tax threshold. Inheritance tax is calculated when the property is worth more than the threshold, and in the UK, the threshold is above £325,000.
For instance, if the inheritance property is £400,000, the inheritance rate is £75,000. That’s £400,000 minus £75,000. The tax rate for inheritance is 40%, regardless of the value, as much the property is valued above the threshold.
Regardless of whether tax is owed, you’ll still need to report the estate’s value to HMRC. You do this by submitting the relevant inheritance tax forms within a year of the person’s death. However, these are the cases where you do not pay inheritance tax:
- If the estate’s worth less than the £325,000 threshold.
- Leaving everything to your UK-based spouse or civil partner.
- Leave everything to a charity, an amateur sports club, or a political party, and Inheritance Tax gives you a miss.
- If someone doesn’t use their whole £325,000 threshold, the remainder can be handed over to their spouse or civil partner.
- Passing your home to your kids or grandkids can bump your Inheritance Tax threshold to £500,000.
- Gifts given over seven years before you die are usually exempt from Inheritance Tax.
- Some businesses, farms, or woodlands might qualify for Inheritance Tax relief.
Who Pays Inheritance Tax?
In the UK, the executor of the will or the estate administrator is usually responsible for paying Inheritance Tax. Here’s a quick rundown:
Estate Heads: Usually, it’s the executor if there’s a will or the administrator if there isn’t. They take care of the bill using the estate’s funds.
Gift Recipients: If the deceased gave you something in the last seven years and those gifts attract Inheritance Tax, you’re responsible for footing the bill. If you can’t pay or won’t, it goes back to the estate to cover the cost.
Trust Managers: When the person’s assets are tucked away in a trust, the trustees pick up the tab for any Inheritance Tax due.
The Certainty of Tax and Death
The tax structure in the UK is progressive. Individuals or business entities are taxed the more they earn. Moreover, three tax brackets represent basic, higher, and additional rate taxpayers.
They’re taxed differently based on assets or residential property. With diligent tax planning, you’ll find out the amount required to pay in tax and how to reduce your tax bill. If you want additional support, contact the HMRC helpline.